An Investor’s Guide To The Russia-Ukraine Crisis

Carl Hazeley

4 months ago5:08 mins

An Investor’s Guide To The Russia-Ukraine Crisis

The Russia-Ukraine crisis is on a knife’s edge: every day brings with it fresh news about whether tensions are escalating or easing. So with geopolitics at risk of waylaying your portfolio’s performance, economists at investment manager abrdn have shared how they think things might play out over the next year and beyond – and what it might mean for your investments.

Scenario 1: A diplomatic fix

A watershed agreement that resets NATO-Russia relations is still possible, given that communication lines are still open. A deal could involve “the West” offering Russia some assurance on its future sphere of influence, and NATO promising to curb its expansion. Then again, such an agreement could set the organization down a slippery slope of concessions and compromises…

How likely is it?

Not particularly: abrdn’s economists give a full diplomatic fix less than a 10% probability. But if there is a fix, expect Russian and Ukrainian assets to rally: abrdn reckons Russian stocks could jump 10-15%, while prices of oil and natural gas – which seem to have risen in lockstep with the tensions – will probably take a well-earned breather.

Russian stocks have underperformed other emerging markets. Source: aRI.
Russian stocks have underperformed other emerging markets. Source: aRI.

Scenario 2: All-out war

A war would see Russia launch a full-scale invasion of Ukraine and be marked by an increase in the number of Russian troops at and around the Ukraine border. Of course, an invasion would bring severe sanctions from Europe and the US, so it’d be an attack with significant costs – both financial and personal.

abrdn reckons those sanctions could include asset freezes, a block on Russian banks from accessing global infrastructure and converting the ruble into other currencies, the cancellation of the Nord Stream 2 pipeline, and restrictions on trading Russian government bonds and physical goods.

How likely is it?

abrdn’s economists think there’s a less than 10% chance this will actually happen. But a full-scale invasion would obviously have hugely negative consequences for Russian and Ukrainian economies and assets: sanctions would hit Russian economic activity in the short term, while also cutting the country off from future technologies and risking its long-term prospects.

The effects would spill far and wide too. For one, Russian and Ukrainian companies and governments would be more at risk of defaulting on their bonds. And for another, Russia would probably take countermeasures that lead to energy shortages in Europe, which depends on Russia for around 40% of its gas imports. That would push up commodity prices – and by extension inflation – at a time when people are already struggling with high prices.

As for what to buy, your best bet would probably be “safe havens” like the US dollar, Japanese yen, and Swiss franc, as well as those countries’ government bonds. If you’re looking for an option in stocks, try defensive sectors like consumer staples and telecoms.

Scenario 3: Another Crimea

In 2014, Russia annexed the Ukrainian territory of Crimea. If Russia annexes or occupies another part of eastern Ukraine, it’d potentially limit the scope of the conflict. It’d also probably cause a less severe set of sanctions from the West, sparing Russia’s systemically important banks.

How likely is it?

This is one of the more likely scenarios identified by abrdn’s economists, with a 20-30% probability – one that’s probably just gone up since recent news updates suggest we’re rapidly approaching this outcome. Annexation would probably lead to more pressure on Russian and Ukrainian assets, while sanctions would limit the cash coming into Russia. That said, Russia’s large current account, budget surpluses, and currency reserves mean it would probably be well placed to weather the loss of international cash.

Source: aRI
Source: aRI

Despite a mostly localized issue, there’d still be some global fallout: abrdn reckons energy prices would rise given Western reliance on Russian gas, while investors’ appetite for risk might drop off too. That would hit stocks overall – and potentially the riskiest and most cyclical the hardest, in light of the negative effects of conflict on global economic growth.

Scenarios 4, 5, 6…

All the other potential outcomes land somewhere on the spectrum between war and peace. Light-touch diplomacy, for instance, is more likely than a peaceful resolution, but it’s only ever likely to be a short-term solution. And a 2008-style Georgian conflict falls short of a full-scale invasion, but it attracts almost as much risk.

It’s possible that some combination of fragile diplomacy and Russian “grey-zone activity” – a.k.a. cyber warfare – rumbles on for a while yet. Sooner or later, though, abrdn’s expecting Russia to accelerate through its military gears. And even if later rather than sooner (think three to five years), it thinks the chances of military action are more likely to rise than fall.

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