The Russian invasion of Ukraine has been a focus of investment markets over recent weeks. The invasion is a humanitarian tragedy and a major geopolitical event. Western countries have been swift to condemn Russia but have thus far avoided direct military conflict. Instead, the United States, the European Union and some of their allies have opted to impose significant economic sanctions on Russia. The sanctions will likely result in an extremely deep recession and high inflation in Russia.
The impact of the Russian invasion on the rest of the world is likely to be higher commodity prices, moderately higher inflation and moderately weaker growth but will depend on factors such as the length and breadth of the conflict. Outside of Russia and Ukraine, the impact will be greatest on European countries and companies. Our central case is that the invasion will not derail the global recovery with reasonable growth likely this year.
Some of the sanctions recently imposed on Russia include:
- Not allowing Russia’s central bank to access some of its foreign reserves, which are in aggregate worth around USD600bln.
- Removing select Russian banks from the Swift system (a financial messaging system). This action will make it more difficult for Russia to transfer money internationally.
- Revoking its “most favoured nation” trading status, which can lead to higher tariffs on Russian exports.
Many global companies have also responded to the Russian invasion by suspending or reducing Russian operations. Government sanctions along with the responses of companies have resulted in the Russian Rouble collapsing and the Russian stock exchange falling sharply before trading was suspended. Russian citizens have rushed to withdraw cash in foreign currency. In response to the falling Rouble, the Russian government has raised its policy interest rate to 20% as shown in the chart below.
Although Russia and Ukraine are relatively small economies, they contribute significantly to a range of important commodity markets. Some examples include:
- Energy: Russia is the third-largest oil producer and largest exporter. It supplies about a quarter of the EU’s oil imported. The EU also relies on Russia for around 40% of its natural gas.
- Food: Russia and Ukraine are major exporters of wheat, barley, corn, and sunflower oil.
- Materials: Russia and Ukraine produce many materials such as nickel, copper, iron, neon, palladium and platinum. These are used across a wide range of industries. For example, manufacturing, building, mobile phones and microchips.
As shown in Chart 2, energy prices have spiked since the invasion. With an already high inflation rate, the world has been reluctant to impose energy-related sanctions. Nevertheless, given energy exports provide Russia access to foreign currency, this stance is changing. The US has recently banned all imports of Russian oil and gas, whereas the UK and the EU have pledged to phase out or reduce reliance on Russian energy by the end of 2022. The EU is the economic zone which is most dependent on Russian energy supplies.
Vision Super’s Russian Exposure
We are monitoring the situation in the Ukraine closely. The Fund currently holds one Russian asset (a government bond) that has a zero valuation. We have recently considered the investability of Russian assets. Reflecting this, we are asking our managers to not make any new Russian investments until further notice. This is within the context of our overriding regulatory requirement to act in the members’ best financial interest.
This information is general advice which does not take into account your personal financial objectives, situation or needs. Before making a decision about Vision Super, you should think about your financial requirements and consider the relevant Product Disclosure Statement and Target Market Determination issued by Vision Super Pty Ltd ABN 50 082 924 561 AFSL 225054 at www.visionsuper.com.au