Russian Stock Market Loses 1/3 Of Its Value Following Attack On Ukraine

Russian President Vladimir Putin’s calculated intentional attack on the sovereign nation of the Ukraine has sent the Russian stock market tumbling by more than 35% in today’s trading. With most of the world opposing his actions, additional heavy sanctions are expected to be levied very soon as world leaders consider how best to deal with the situation. Stocks around the world are also down, but to a much lesser extent, shedding 5.0% or less in most cases. The yield on the 10-year Treasury has fallen from near 2.0% to 1.91% as investors seek safety. Oil prices have soared on the news approaching $100 a barrel. Russia’s actions, coupled with rising inflation, are also pushing gold and silver prices higher. The VIX or “fear index” as it is called, rose to 34 on the news. For perspective, the VIX hit 82 in the early days of the pandemic and 80 during the financial crisis of 2008. The long-term average for the VIX is around 19.

Vladimir Putin’s End Game?

Many experts on the region believe President Putin is on a mission to restore Russia’s glory days. In February-March of 2014, Russia invaded Crimea and quickly annexed the country. This brief conflict was no more than a blip on the screen in terms of causing widespread financial distress. Thus, the extent to which the current invasion causes widespread damage is contingent on the duration of the conflict. If it is short, markets should calm down. If Ukrainian forces muster an adequate resistance – despite being heavily outnumbered – and the conflict drags on, there could be major disruptions in oil, natural gas, and other areas. There will also be economic fallout, but that should be contained in the region. Russia stands to lose the most as the U.S. and its allies levy greater sanctions on the country. However, Putin may be personally insulated from any financial fallout.

The U.S. and some of its allies levied sanctions against five Russian banks and a few oligarchs yesterday. The idea is to make it difficult for Russia to do business with the west. Moreover, these actions are designed to, “…begin the process of dismantling the Kremlin’s financial network and its ability to fund destabilizing activity in Ukraine and around the world,” according to Treasury Secretary Janet Yellen. The sanctions are expected to have a severe impact on the Russian economy, raising inflation and restricting outside investment – an important ingredient in any economy.

Which Countries Will be Most Affected?

According to the Observatory of Economic Complexity or O.E.C., in 2019, Russia’s top exports were Crude Petroleum ($123B), Refined Petroleum ($66.2B), Petroleum Gas ($26.3B), Coal ($17.6B) and Wheat ($8.14B), exporting mostly to China ($58.1B), Netherlands ($41.7B), Belarus ($20.5B), Germany ($18.9B), and Italy ($16.7B). More recently, in September 2021, Russia’s top exports were Crude Petroleum ($10.3B), Refined Petroleum ($7.1B), Coal ($1.87B), Gold ($1.44B), and Wheat ($1.26B), exporting mostly to China ($5.92B), Netherlands ($3.39B), Belarus ($1.44B), South Korea ($1.75B), and United Kingdom ($1.71B). Russia imported mostly from China ($6.94B), Germany ($2.23B), Belarus ($1.44B), United States ($988M), and Italy ($902M). Apart from China and Belarus, I expect the other countries on the list will cease trading with Russia, at least for a while.

As I finish this writing, U.S. stocks have risen from their lows, with the tech-heavy NASDAQ attempting to turn positive. European stocks closed down 3.0% with Germany losing 4.0% on the day. I believe U.S. stocks will be fine and this is another overaction. Stay tuned.