The 24 hour news cycle loves to keep us all aware of strife and potential conflicts around the world, but this past week’s news has been significant. As of February 23, Russia sent military forces into what the international community recognizes as Ukrainian sovereign territory. This is the most aggressive action Russia has taken in quite some time, standing in stark contrast from their annexation of Crimea in 2014.
We’re not geopolitical scientists, so we won’t get into the nuance of what is happening. We do believe, however, that thinking through the financial impact of this situation is important, especially about how it may affect your client’s portfolios. Typically there’s almost no scenario where war will be immediately completely good for the global markets. What we have seen and likely will continue to see is the implementation of sanctions, a form of economic punishment, that will have ripple effects. These sanctions are intended to hurt the Russian economy and ultimately bring around a reform in both policy and military action.
It’s important to get context on the conflict that will surely impact our markets so that you can have honest conversations with your clients about what’s happening and what they can do to weather the storm, including showing them within your financial advisor tools how they can review and understand their accounts on a holistic level.
Russia, the Market, and Sanctions
Sanctions in the past have often been used against countries that don’t really matter in terms of global economics. Small authoritarian countries that have marginal GDPs and won’t make a major splash by penalizing them have shouldered sanctions for decades. Russia, the 11th largest, will very likely cause a significant market dip, especially if strategic Russian allies, like China, get involved.
It’s important to communicate to your clients that there is no scenario where the market will remain unaffected by continued escalation. The question is how much they will be affected and for how long. Europe is a major trading partner with the U.S. and they are likely to be the first to feel any pain from inflamed diplomacy. Likewise, China could very well decide to back Russia in territorial claims, thus creating an even more tumultuous economic outlook.
While there are reasons to be concerned, there are reasons to be optimistic as well. Markets have always bounced back and the most prosperous countries, sans China, back Ukraine along with the United States, meaning wealth will likely continue to flow to these places.
In fact, this may be the catalyst western countries need to shore up their supply chains and internalize manufacturing, that could lead to more stable growth in the future. Germany committed a one-time increase of 100 billion euros ($113 billion) for defense spending around this crisis. He has also pledged to spend more than 2 percent of Germany’s economic output annually on defense. That kind of money flowing into the market is significant.
Spending time worrying about a potential U.S. conflict with Russia is something we recommend against for your own mental health and when it comes to the markets. This, much like the cold war, will be “fought” through non-traditional means and likely have marginal impacts on the domestic market. Any uncertainty, however, gives a great opportunity to talk to your clients about diversifying their funds and looking for emerging markets to maximize their ROI.