Market Perspectives: Our Latest Thoughts on Ukraine

The Ukraine conflict has escalated rapidly, creating a massive humanitarian crisis and increasing volatility across financial markets. In this piece we review the major economic implications of the war and discuss the steps we are taking to manage the impact on portfolios.

Clearly the situation in Ukraine has taken a turn for the worse and does not appear to have a short-term resolution. Invading and occupying a country of over 40 million people is a monumental task and so far, we don’t believe it has gone as planned for Russia. The intensity of economic sanctions has risen substantially, and President Biden has announced that the U.S. will stop importing Russian oil. Without an offsetting increase in supply either from other sources and/or a loosening of drilling restrictions in the U.S., we will likely see further increases in the cost of energy, which has already gone up significantly since the war began. Russia and Ukraine are also very large exporters of wheat. It does not take a geopolitical expert to see that the price of flour and in turn, bread, could also be rising. Most of Russia’s wheat exports go to the Middle East and Africa, and as you may recall this was one of the drivers of the Arab spring uprisings.

While we cannot forecast what will happen, we do know that people are incredibly adaptable and creative when dealing with hardships. This is a humanitarian disaster, but globally there appears to be ample supply of most essential raw materials – although we would not be surprised to see price spikes in those, too, as commodities have been getting more expensive since the fighting started. We have seen many predictions in the past about shortages causing the end of things like oil, coffee, and chocolate, only to have higher prices motivate producers to increase production and farmers to shift crops, bringing supply and demand back in balance. We think this time is no different, but timing is the big question.