All I know is random facts about Russia and Ukraine–so basically nothing of much value. Therefore, as an investor my main goal should be not to let my ignorance persuade me to do some stupid Ukraine-related thing to my portfolio that will lead to losses.
What do I know? …or, better, what do I think I know about the situation?
Russia is run by former KGB people who seized control after the 1991 collapse of the former Soviet Union and its dissolution into 15 different states. It retains nuclear weapons and a very large army.
The country is an economic mess. It’s Third World-ish, with a large land mass, an aging and relatively static population of about 145 million (less than half as many people as the US) and an overall economy about the size of Pennsylvania’s + Ohio’s. Oil and gas production are its principal industry, at about a third of its GDP; hydrocarbon exports generate about 2/3 of its hard currency.
Oil and gas are the main economic issue here. Russia, the US and Saudi Arabia each produce about 10% of the 100 million or so barrels of petroleum the world uses each day. Because there are no easy substitutes for oil, even tiny changes in supply or demand can cause dramatic changes in price. This gives Russia and Saudi Arabia tremendous economic power. The US would have the same, were we not also the world’s most profligate consumer of oil, with our 4% of the globe’s population using close to 20% of the world’s oil output.
Russia also supplies the energy-deficient EU with enormous amounts of natural gas by pipeline. This last is the area that stands to be most affected by a potential boycott of Russian energy exports that would likely result from an invasion of Ukraine.
Why would Russia invade Ukraine? I have no idea. Success, which seems highly likely, would increase Russia’s population by about 30%, giving it greater economic heft. There may be internal political reasons, as well.
If this happens, presumably NATO nations would boycott Russian oil and gas exports. Past oil boycotts have not really restricted the flow of oil that much. Barrels get relabeled and sold to less fastidious parties. In this case, maybe China and India. Presumably, other oil-producing nations would be happy to increase their output to replace lost Russian barrels. The oil price would likely rise despite this, however. Of course, oil stocks are already rising in anticipation–even though we are now entering the seasonally weakest part of the year for demand.
For natural gas, on the other hand, a boycott would likely be highly effective. In this case, the target would be exports to the EU, the area most worried about Russian aggression., as well as the region least able to replace lost supplies.
In addition, the US/EU appear to be threatening to exclude Russia from the world banking system and to scrutinize more closely dubious international business dealings of Putin’s prominent domestic supporters.
my guess about the stock market:
if Russia invades,
–energy prices will rise and stocks will continue to do well. At some point, however, investors will begin to realize that higher prices will accelerate the trend toward electric vehicles. The big question is how quickly–although arguably the worst possible thing NATO can do to Russia is to accelerate this process. Although energy earnings will continue to rise, the multiple applied to them will begin to shrink.
–ex oil, the rest of the world other than perhaps eastern Europe, will probably not experience significant negative long-term economic effects because of Russian aggression. If so, the prospects for future profits will be more or less unaffected
–the shock/surprise of military action in Europe would likely have a greater negative effect on US-traded stocks than, say, conflict between India and China, or Pakistan and Afganistan. If the past is any indicator, a selloff triggered by an invasion would be at least partly the occasion to do selling that basically has nothing to do with the military action. Such downward movements have also tended to be short-lived. At times, like when the US invaded Iraq, the markets go up as fighting begins (not this time, though, I think).
what I’ve been doing
I’ve combed though my portfolio and raised about 10% cash on the idea that if an invasion happens (I can’t help thinking that it will end up being bad for Russia, so I don’t get why Putin is doing this) markets will be depressed for a short while and I can put the money back to work. The stocks I got rid of were mostly things like TGT, which has had a great run, and mistakes that somehow managed to hide themselves when I’ve looked down my list of holdings (my experience in supervising other portfolio managers is that everybody had detritus like this).