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Economic Impacts of a Russian Invasion of the Ukraine

Economic Impacts of a Russian Invasion of the Ukraine

By: Adeola Omole

February 19, 2022

Oil and Natural Gas

 There would be material impacts on world economies if Russia invades the Ukraine. Most notably, the Oil and Natural gas markets would be directly affected in the event of a war. Russia is the number one source of natural gas in Europe, and also a large provider of oil to European nations. If a war were to ensue, it is highly likely that the U.S. and Europe would impose sanctions on Russia, which would lead to major shocks in the price of commodities such as oil and gas.

Since Europe is highly dependent on Russian energy, it’s unlikely that oil and gas would make the list of any sanctions imposed upon Russia. Likewise, since Russia would need the revenues generated from energy sales to fund a war effort, there would likely not be a drop of shipment of energy from Russia to Europe. However, if Russia decides to strategically withhold some energy shipments to Europe, or in a worse-case scenario completely stop supplying energy to Europe, then this will have a damaging effect on the GDP of all European nations. Europe gets around one third of its natural gas supply from Russia and would experience skyrocketing prices and possibly rationing if Russia decides to cut off natural gas supplies. Europe would scramble and have to find natural gas from other nations, such as the U.S. If Russia withholds energy supplies to Europe, this would lead to an immediate spike in oil and gas prices, which in turn would shock the energy market and the equity markets alike.

The Stock Market

In the event of a full on military attack by Russia, the equity markets would witness the flow of money from risky assets to perceived safe haven assets. Stock market investors would flock to U.S. Treasuries, gold, and oil and gas assets to weather the effects of a full on Russian-Ukraine war.

An invasion would likely add a couple more percentage points to the rate of inflation, which is already at 40 year highs. In the month of January, inflation clocked in at 7.5% in the U.S., 5.1% in Canada, 8.4% in the United Kingdom, and 5.1% across Europe. Low oil and gas inventories, coupled with a freeze on new drilling projects in the sector have led to record breaking cash-flow in the coffers of oil and gas companies. In fact, many Canadian oil and gas companies have begun to raise dividends and offer special dividends to investors as a way to distribute the wealth, and incentivize new investors. It is time to seriously look at investing in Canadian oil and gas companies that are sitting on huge piles of cash, and are ready and willing to share that stockpile of cash with investors.

The time to protect your portfolio from the impacts of impending military conflict and the inflationary effects that may show up as a result, is now. The longer you wait, the harder it will be to protect your portfolio.

Summary

In a matter of days we will discover whether Russia decides to invade the Ukraine. However, in the meantime we can take precautionary measures to protect our investment portfolios from the real or perceived threats that a Russian invasion would have on equity markets. We can de-risk our investment portfolios by unloading high beta technology stocks, purchasing dividend paying oil and gas stocks, purchasing gold mining stocks, and carrying more cash in the portfolio. Holding more cash in your portfolio will allow you to take advantage of buying opportunities that may come about once the military incursion is resolved, either diplomatically or otherwise.

 

 

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