The war against COVID-19 isn’t the top news story anymore. Today, all eyes are turned towards Ukraine, which is at war with its much larger neighbor, Russia. In recent weeks, Russia had military forces poised for an invasion, and on February 23, they struck when the first bombs rocked Kyiv.
Much of the world has condemned Russia’s position that Ukraine doesn’t have the right to exist as an independent state, but Russia still has a few key allies. For example, China has defended Russia and criticized the economic sanctions recently imposed by the US and many European nations.
The prospect of war in any part of the world impacts all parts of the world. However, depending on the players, some conflicts have more global economic consequences than others. Investors are on edge as events unfold along the Russia/Ukraine border. Do they have reason to be concerned? What would a Russian invasion do to the stock market? How will a Russian war with Ukraine affect oil and gas prices?
What Will Russia Do Next?
Russia surrounded Ukraine on three sides with a robust military presence. By some estimates, more than 150,000 Russian troops are already on the frontlines and ready for battle. On February 21, 2022, the President of Russia, Vladimir Putin, made a speech that essentially rejected Ukraine’s sovereignty. He also sent Russian troops into two areas of Ukraine, Luhansk and Donetsk, declaring them independent republics.
In the early hours of February 24th local time, Russia made another move, announcing what was referred to as “special military action.” World leaders have responded that this appears to be the start of an all-out invasion of Ukraine – essentially, a declaration of war.
Ultimately, the invasion might unfold in a variety of ways, but the most likely strategy will be the targeting of Ukraine’s capital city, Kyiv, as well as other major cities throughout the country, including Kharkiv. If successful, Russia is expected to take control of Ukraine’s government, effectively uniting the two nations.
How Will Russian Invasion Affect Stock Markets?
The first wave of sanctions ordered in response to the events of February 21st included action against Russian sovereign debt, as well as some of its financial institutions, lawmakers, and oligarchs.
Perhaps the biggest blow to Russia was Germany’s announcement that it would not certify the Nord Stream 2 natural gas pipeline built under the Baltic Sea to connect Russia and Germany.
These sanctions – and any that follow – have a direct impact on Russia’s economy. Already, the Russian ruble has fallen dramatically against the US dollar, and on February 21st, the Russian MOEX stock index dropped more than ten percent. In just a few days, Russian stocks lost tens of billions of dollars in value.
The Ukraine/Russia conflict and sanctions against Russia don’t impact the US stock market directly, but there is an impact nonetheless. Investors were already a bit skittish as a result of increasing inflation, and the news out of Ukraine added to the pessimism. All in all, the S&P 500 has lost ten percent from its most recent peak, which meets the criteria for a correction.
How Will Russia Invasion Affect Gas Prices?
Though sanctions are intended to put financial pressure on Russia exclusively, the fact is that major economies are interconnected in the age of globalization. Russia exports large amounts of oil and natural gas – 12 percent and 17 percent of the world supply, respectively. If that supply becomes unavailable, oil prices – which recently surged to nearly $100 per barrel – could reach between $110 and $120 per barrel. Perhaps more.
It is unlikely that any nation will place direct sanctions on Russian energy exports, but Russia may choose to withhold its supply in response to other sanctions.
Even if that doesn’t happen, other types of sanctions may indirectly affect Russia’s ability to produce and export oil and natural gas. For example, there is some talk of suspending Russia’s access to the global financial system, which would make exporting anything more difficult.
The basic rules of supply and demand will drive energy and gas prices up if there is any change in the amount of oil and natural gas Russia contributes to the global market. That, in turn, means higher prices for all goods and services, including non-discretionary purchases like food and clothing.
Industries that are negatively correlated with energy prices like airlines will see lower profits, which typically leads to lower stock prices.
What Goes Up When Oil Prices Go Up?
There are entire industries that are negatively correlated with oil prices, but fortunately, the converse is also true. A variety of companies have a positive correlation with oil prices. In other words, their stocks go up when oil prices go up, making this a good time to buy. Examples include companies like Halliburton, Schlumberger, and Occidental Petroleum.
This may also be the right time to buy ETFs that concentrate on energy stocks, such as the Energy Select SPDR Fund, the Vanguard Energy ETF, the Invesco Dynamic Energy Exploration & Production ETF, or the First Trust Natural Gas ETF.
Will A Russian Invasion Affect Stocks?
While many stocks – and the market as a whole – will be affected by a Russian invasion, there are only a handful of large companies with significant direct exposure to Russia and Ukraine. These include Boeing, Carnival, McDonald’s, Pepsi, and Philip Morris International.
Investors currently holding shares in these companies may see stock prices fall in the coming months. That could mean the best time to make a decision is now. Either sell before prices fall or plan to hold shares long-term – at least until the economic fallout from the Russia/Ukraine conflict stabilizes.
Do Stocks Go Up In War Times?
Uncertainty is never a plus for the stock market, which is why stocks have struggled as tensions between Russia and Ukraine escalated. However, historically, after an initial drop, stocks don’t lose their value during war times.
Whether and how much they have gained during previous wars depended in large part on the duration of the war. Though events leading up to war and the initial period after war begins are quite volatile, the stock market eventually normalizes.
Over time, even if it is wartime, investors grow accustomed to the situation, and the market returns to its standard patterns.
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