The recent ratcheting up of Russian aggression into Ukraine has prompted a dusting off of the term “geopolitical risk.” Beyond accepting the massive uncertainty surrounding this situation, what does the conflict mean for you and your money?
In the largest sense, there could far-reaching economic consequences associated with the hostilities, which could halt or slow down the broad, post-COVID economic progress the world and the U.S. have seen over the past two years.
Economists are busy trying to predict by how much growth could slow down overall, but the immediate impact of the Russian action, along with Western sanctions, would be most severe for Ukraine and Russia. Unfortunately, as we have learned over the past two years, snags in one part of the world can disrupt the globe.
Russia is a big exporter of everything from petroleum products to wheat, to aluminum, especially to Europe—Russia supplies about 40 percent of natural gas and 25 percent of oil to the continent. That means that worldwide supply chains could slow down, either due to material shortages, potential disruption to production, logistics route and capacity constraints, or potential cybersecurity breaches. Taken together, this could cause companies to temporarily slow down the pace of their capital spending and more importantly, will add to inflation pressures this year.
“The biggest impact is likely to come through commodity prices,” according to Neil Shearing, Group Chief Economist at Capital Economics. Although the U.S. does not rely on Russia for oil, energy markets are global, so any disruption to one part of the world would be felt here. Crude oil prices were already soaring towards $100 per barrel on a surge in demand, which caused prices at the gas pump to rise by 40 percent from a year ago. Shearing warns “In a worst-case scenario, we estimate that oil prices could rise to $120-140 per barrel,” which could add around “two percentage points to headline inflation in advanced economies this year, with Europe being hit particularly hard.”
There had been some hope that American frackers could step in and increase their production to alleviate the strain, but that would require a big change of strategy for many players in the industry. Experts say that the time and logistics of getting U.S. product to Europe amid the afore-mentioned supply chain clogs could be problematic. Similarly, there has also some talk that a renewed nuclear deal with Iran could help ease the strain, because that country is sitting on about 80 million barrels of oil in storage. Again, this would take time, so no quick fixes.
Beyond the impact on gas prices, which no doubt will hurt Americans, the inflationary effect of the conflict means that the Federal Reserve is still on track to raise short-term interest rates at its March meeting, as previously telegraphed. Investors had already been concerned about higher rates, but the Ukrainian situation adds another level of worry to the picture. That means that we are going to see more volatility in financial markets.
You can help yourself by taking a deep breath and getting some perspective. Thankfully, the economy and labor market are coming into this period with strength and while it is undoubtedly tough to endure gyrating account values, investors have just enjoyed three phenomenal years of market performance (the S&P 500 was up nearly 27 percent last year, 16 percent in 2020 and 29 percent in 2019).
Before you scratch the itch of trying to “do something” to prepare your portfolio for the Russia-Ukraine conflict, a stern warning/friendly reminder: When you see big moves in the market, sit still and comfort yourself with your diversified portfolio.