Historically Ukraine was one of the founding parts of the Soviet Union before gaining independence in 1991 with parts still subject to Russian influence. Russian President Putin still appears to believe that Ukraine is historically part of Russia and yesterday morning we saw the escalation of military intervention with Russia invading from the east and, Russia’s ally, Belarus invading from the north. More progress has been achieved overnight with the capital Kyiv now under immediate threat.
The eastern regions of Ukraine, Donetsk, and Luhansk, collectively known as the Donbas, were the epicentre of the current conflict. These regions have a significant Russian expat presence, and large numbers of Russian passports have been given out to their inhabitants in recent years. Since 2014, when Russia annexed Crimea, these regions have experienced ongoing unrest, and parts are largely rebel-held (thus under de facto Russian control). Around one third of the Donbas bordering Russia was held by the separatists and a demarcation line split the region with the rest of Ukraine. The separatists were seeking to reclaim the whole of the Donbas region and its leaders appeared on television with Putin as he recognised their region’s independence.
President Putin’s demands for a roll back of NATO's influence, and a commitment that Ukraine will not join have now been superseded by the invasion - claiming to seek the “demilitarisation and denazification” of Ukraine.
At the very least, we will now see the strongest of sanctions applied against Russia by the rest of the western world. This would likely be painful for Russia, but not painless for the rest of Europe. Energy prices are already high, and Russia is a major supplier. Curtailed Russian exports of oil and natural gas would be expected to cause an upward pressure to elevated western European inflation rates. Russia providing around 10% of the world’s energy – and nearly 50% of the energy consumed in continental Europe. We have already seen oil prices jump to more than $100 a barrel for the first time in seven years.
Western markets initially fell but they had already factored in much of the effects of these heightened tensions. The conflict will certainly increase short-term market volatility. History shows that whilst geopolitical crises such as the one between Russia and Ukraine can temporarily upset markets, they do not typically have long-term consequences for investors.
Looking back to March 2020, we witnessed a dramatic 30% fall in market values over one month as the outbreak of COVID-19 took its toll. Twelve months later many markets had returned to pre-COVID-19 values. The following line graph demonstrates market changes across four major indices (UK, US, German, and World) due to COVID-19, surging inflation, rising interest rates, and the recent downturn by the Ukrainian conflict. The date period captured is March 2019 to present day:
Turning our attention back to March 2020, our message to investors at the time remains as pertinent today, with the latest wave of market volatility:
- Investing is considered a medium to long-term approach – generally 5 years and beyond.
- A diverse investment solution is of paramount importance in protecting investors against volatility.
- Selling assets because of short-term movement in the markets is something to avoid, if possible. You could limit the longer-term growth potential.
We would reaffirm these messages in light of the recent events unfolding between Ukraine and Russia.