Though we are most concerned with the effects on human lives from Russia’s invasion into Ukraine, the situation has become an increasingly financial war as western countries have fought back with economic sanctions.
The current instability and unprecedented economic measures merit special attention to our portfolios and the risks they carry. We recently talked about different ways to hedge a portfolio against geopolitical risk, but what are the impacts of having direct exposure to Ukraine, Russia, or both? Moreover, what are the foundational elements of these two economies and how will they be impacted?
Below, we look at the GDPs and major indices of Russia and Ukraine, see where they lay among the global economic hierarchy, as well as examine how much their economies are truly correlated with the oil and gas industry. While both countries are known as energy producers, you may be less aware that Ukraine boasts a booming tech sector and Russia a growing services industry.
Russia’s invasion of Ukraine has not paid dividends for Russian equities specifically. In the span of just one week, shares of five Russia-concentrated ETFs plummeted by over one-third, on average, which included:
Historic Performance of Russian Ruble to US Dollar and Euro
The US Dollar to Russian Ruble exchange rate often has big swings when the price of oil fluctuates. When oil goes up, the Ruble tends to strengthen against the Dollar. This trend is most notable in 2007 to early 2008, as well as between 2016 and 2018. When oil falls, the Ruble usually weakens against the Dollar. In the seven months between June 2014 and January 2015, the price of WTI crude went from a high of $108 to a low of $44. As for the Ruble, 1 US dollar translated to 34 Russian Rubles in June 2014, but the exchange rate skyrocketed at 1 USD to 71 Russian Rubles just seven months later. The current USD to Russian Ruble exchange rate is north of 100 rubles.
Similar trends can be seen in the Euro to Ruble relationship. Interestingly enough, the Ruble didn’t weaken as much in March 2020 when the coronavirus pandemic sent oil sharply into negative territory. Nor has the Ruble strengthened back to its early 2010s levels when oil prices were in the $80-$110 range, as is the case with oil now.
The current situation in Ukraine is heartbreaking, and troubling at a minimum. But, it’s always interesting to take a step back and appreciate the ramifications for the global economy. Though smaller in comparison to the rest of the European Union, let alone the United States, attacks on Ukraine and its economy are felt around global financial markets.