Russia/Ukraine – A complex and evolving situation
We have all watched as Russian armed forces invaded Ukraine. The images and subsequent war are part of the history of the 21st century and the pain inflicted on the civilian population is there for everyone to witness.
The humanitarian cost has been significant and continues to rise, the United Nations estimate more than 2m people have been displaced. There has been heartfelt concern for the people of Ukraine and the hope that peace comes quickly. Evidence shows that Putin does not listen to Western voices. Perhaps Chinese diplomacy might be more effective in shortening this damaging conflict.
The severity of the military onslaught has resulted in condemnation and reaction. The result, Russia is now isolated economically and socially from the Western World. Sanctions applied so far will have severe consequences, Russia in effect is cut off from the global financial system outside of energy. This too is subject to a dramatic squeeze as sanctions bite.
Energy and commodity markets have been subject to very significant price moves, and we wanted to provide context. Prior to the invasion global energy markets had been challenged with limited incremental new supply, at a time, in which the demand environment, post covid recovery, has been exceptionally strong. Added to this there has been limited if any spare capacity in the system for either oil or natural gas. Despite the progress that has been made on renewables, fossil fuels continue to account for most of our energy requirements.
Sanctions have had a significant impact on markets. Despite Russian oil being available on the market, several energy market participants do not want to purchase. The potential for further sanctions on Russian oil production accelerated the movement higher in energy prices, as the US mulled a complete import ban, over the weekend.
Oil prices at one point touched $139/bl, their highest level in 14 years. It is not just oil, as you can see on the charts below, natural gas prices have increased materially. Rising energy costs will affect economies differently, but Europe appears the most exposed, given a high dependency on imported natural gas.
The importance of both Russia and Ukraine to various commodity markets, should not be underestimated. The impact of which is evident in the strength that we are seeing across the commodity complex.
The most evident impact on consumption is through fuel prices, electricity and heating bills, increasing costs on industry, the consumer and as a direct result global growth has sparked additional volatility in asset markets.
We have been in daily contact with our investment partners and thought you would appreciate hearing some of the thoughts expressed.
- European activity is likely to face a stiffer challenge due to the potential for higher costs of imported energy and potential interruptions to supply.
- The sanctions response and potential counter response will be very important in weighing the impact on both the growth and inflation outlook.
- The allocation to commodities and gold will remain meaningful, significant factor and asset class diversification is the right approach.
The Russian people are also experiencing hardship, although nowhere near that of the desperation faced by the Ukrainian population. This could apply domestic pressure on Putin, however laws passed in recent days and arrests over the weekend, make it very difficult for Russian citizens to object. Interest rates have doubled to 20% this move is to encourage people to leave money in banks but has a huge implication for borrowers and the financial system.
The funds within our portfolios are all actively managed, this means they are monitored around the clock and adjusted as events unfold. This approach has successfully navigated through very extreme geopolitical related events and delivered returns required to help clients to meet their financial goals. As always, we are vigilant and take the responsibility very seriously in the management of your investment with us.