Mind on Money: War in Ukraine presents multiple levels of risk

Mind on Money: War in Ukraine presents multiple levels of risk

Cable news has become all Ukraine, all the time. I know the topic is onerous, but I am getting enough questions every day that I felt I should address the crisis in the column.

It's important to remember, this is a finance and investing column. While sometimes those subjects drag us into the realm of the political and geopolitical, I always try to maintain a money focus when I write. So, I will approach the Ukraine crisis from my perspective as an investor. In case it doesn’t come through when evaluating the situation from the money point of view, the war in Ukraine both saddens and angers me. The idea that people living in a modern western society could be subject to military invasion in 2022 is beyond belief.

From an investment perspective, the war on the ground in Ukraine primarily represents risk. The risks I see are on multiple levels and I will attempt to address each as I can.

The first level is oil and natural gas prices. The disruption of Russia to deliver oil to global markets has driven the price of oil above the dreaded $100 a barrel level. As we head into the spring and summer driving season and gasoline formulations change over, I expect trips to the gas station to become absolutely brutal in the U.S. From an economic perspective, however, I am less concerned about the short-term pain at the pump, and more concerned about persistent high oil prices. Or in other words, oil has already gone to $100, now I am more worried about how long it stays at that level.

A combination of rising demand coming out of the pandemic, federal policy gestures and ESG investment activism related to carbon dioxide emissions had already put oil prices into an upward trend. Regardless of how anyone thinks about climate change, global economies are simply just not ready to move beyond fossil fuels. With climate change as a primary policy initiative, the political Left had turned to forcible government and activist tactics in an attempt to restrict fossil fuel production and drive carbon energy prices higher to encourage adoption of alternative energy technologies, the Russia/Ukraine crisis is illustrating the immense danger in this approach.

Perhaps, the threat from energy supply disruption and high oil prices will encourage both government and business activists in the West to take a more patient and balanced approach to carbon dioxide emissions, and U.S. energy exploration production will continue to expand and price levels will decline. Time will tell, but the longer oil stays over $100, the more risk to our economy and markets.

The next risk I will be watching is further Russian destabilization. I’ve always found Russian President Putin to be an intriguing character. Ruthless, calculating and relentlessly focused on his perception of his and Russia’s interests. Which frankly, makes the Russian invasion of Ukraine even more baffling. It's hard to see any scenario where the invasion of Ukraine is in the best interest of Russia or its president. 

Anyone who has ever led a business, organization, board or, heck, a camping trip, can see that Vladimir Putin is “all in” on this escapade. When a decision of this scope goes poorly, and I can’t see how it won’t, the blame inside Russia seems fated to fall on Putin and his regime. If this happens, and the destabilization of Russia (and mainly the control of its nuclear weapons) develops, I expect markets to become very skittish. The situation will need to be watched closely.

My next concern is obviously if the conflict spreads beyond Ukraine. I am perceiving this crisis as the first “social media” war. My college kids are sending me Tik Tok videos of Ukrainian young people filled with bravado and courage, and my wife is constantly talking about the young Ukrainian mother holding her baby while being interviewed in a bomb shelter on cable news. These are powerful, real-time images, leaving all of us with the desire to “do something.” Governments are not immune to these emotions, and if other European nations or the U.S. enter the conflict with heavily armed Russia, then a whole new situation emerges. I believe contagion will start with declared no fly zones, and if this happens, I expect markets to immediately take notice.

I do not think the Ukraine conflict will be a primary driver of financial markets during the next few months, as issues such as interest rates, inflation and corporate profits are much more pertinent to investors. The crisis will provide a high level of background noise and potential “tail” risk that merits watching from an investment perspective, even as our hearts are heavy on the human level.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.