Russia-Ukraine tension is all over the news headlines recently, and it is only natural to ask if war is really looming? And how will it affect the financial market and our lives?
I always say that you can’t invest successfully if you don’t understand history, and you won’t understand history if you don’t understand finance. Most human activities are driven by two things: wealth creation and wealth distribution. So today, I will give you my view about the Russia-Ukraine situation and investment opportunities.
What happened between Russia and Ukraine?
Ukraine may not be a familiar name to you, but they are the second-largest country in Europe, while Russia is the largest.
Ukraine gained independence in 1991 following the dissolution of the Soviet Union, where Russia was the “big brother” back then.
Just like Mainland China and Taiwan, a ‘love-hate’ relationship was always there after the separation, but the tension has escalated since the 2014 Ukrainian Revolution, which led to Russia “annexing” the Crimea Peninsula in March 2014.
If you think about it, 2014 was not too long ago, but it hardly rang any bells to most investors. You don’t recall any big news about the “war” back then, correct?
Why? Because the news you read has always been filtered. Since the western media has such dominance in the global news coverage, especially for the English readers, most of the time you only hear one side of the story.
Anyway, I wrote an article about the aftermath of the “Russo-Ukrainian War” in 2014, I discussed the Ruble (Russia’s currency) crisis and the Oil crisis at that time, which could be an interesting read. What happened in the financial markets at that time could be a huge surprise to you.
Additional Reading: Why is Russia’s problem your problem? (2014 Dec)
Will there be another Russia-Ukraine War?
Now you know that it is not the first Russia-Ukraine war, but will the situation become worse?
In 2020 June, the global stock market started to recover from the unprecedented sell-off in March. I wrote an article titled “Who Is Manipulating The Stock Market, here is how I started,
If you were to look only at the stock market and nothing else, you’d probably have no clue that we are still in the worst economic crisis in decades due to a global coronavirus pandemic…
To understand these questions, you need to realize that geopolitics plays a major role today in the investing world and it will continue to affect your investment returns in the years to come.
Geopolitical risks create uncertainty for sure and it affects the financial market. But people often overlook the fact that the root of most geopolitical risks is caused by the financial market itself.
If you understand this, you will see that the geopolitical risks are often escalated to serve the financial interest of someone. If you read the recent news again with this sense of curiosity, you will find something very interesting.
For example, the latest news is titled “Biden says Putin has decided to invade Ukraine and will target Kyiv”. But the questions to ask are:
- How would Biden know when Putin is going to invade?
- Why is the news neither from Russia nor Ukraine?
- Why does the US care about Ukraine? What is it in it for them?
If you start asking yourself these questions and dig deeper, you will see that the US stands the most to gain if the situation becomes worse. With the controlling power of media, the US is escalating the tension and hoping that the war will start as soon as possible!
Why? Like many other past tensions between regions, from China-Taiwan to North-South Korea, from the Middle East crisis to Hong Kong protests, the US needs constant geopolitical tensions everywhere else except their homeland, so that
- They can maintain their “global policeman” status.
- They can sell weapons to their “allies” and make a lot of money.
- They can divide and conquer, and weaken the external political and military powers.
- They can reinvigorate some US industries such as industrial or military contractors.
But most importantly, the US government needs a diversion from the media attention, with the tension of rising interest rates and inflation fears. As the world starts losing faith in the US dollar and US Treasuries, they need a reason for the money to flow back to the US as a safe haven.
If you are in Eastern Europe and the war is at your door, wouldn’t you transfer your wealth to somewhere safe?
If you want to know why Putin was so pissed, you can read a bit of history about the military alliance NATO (North Atlantic Treaty Organization) and their religious schism. but Russia is not stupid enough to get into a war for the benefit of the US, yet he needs to show strength.
Ukraine, on the other hand, is not also naive enough to believe that the US will lift a finger for them except selling them weapons.
You will soon see that neither Russia nor Ukraine wants there to be a war. In fact, Europe has their reason to stay at peace too, that is why French President Emmanuel Macron has been lobbying among all the parties.
China, which has been relatively quiet about the situation, stands the most to gain. Because as I discussed in this article, China has opened the door and is waiting for the money to flow in. This is the least popular outcome that the US wants.
There is also a piece of small news from just two days ago that most people didn’t notice, China just sanctioned Lockheed, Raytheon (US top military contractors) again over Taiwan arms sales. “Sanction” has always been what the US does to other countries, but China sanctions the US at this particular date? It is worth pondering.
So if you can connect all the dots, you will see that there is a balance of power behind the events happening.
In my personal opinion, I feel that the so-called Russia-Ukraine war has little chance to materialize and even if it does, the global impact will be negligible.
Russian President Vladimir Putin has just signed a presidential decree recognising the independence of Ukraine’s breakaway regions, but the financial market is completely mute about it. If you still recall, Hong Kong protests were all over the news a few years ago and the US had “vowed” to “intervene”. And it is already a forgotten story.
I am almost 100% sure that the US will do nothing material should Russia take action. They can send troops to Afghanistan or Liberia, but nobody wants to get into a fight with Russia.
The stock market has voted the outcome with the money in their hands.
How will Russia-Ukraine’s tension affect the financial market?
Events like this typically have impacts on major assets such as bonds and commodities. Stock markets are very diversified so the impact will be non-uniform across different sectors. Le’s examine some of the various sectors.
The first thing that comes to people’s minds is energy. The price of oil has recently risen to US$95 and the news started saying that it will go up to $125. But where were these news reporters when the oil price was only $50?
I had positioned energy stocks for my clients’ portfolio when the oil price was still hovering at $50 and it has made handsome profits now. But if you are betting oil prices continue going up, I think the risk is higher.
First of all, the market is always forward-looking. What is happening today is already priced by the market, so you can’t trade using the information while everybody is talking about it.
Second, oil prices went up not just due to the Russia-Ukraine tension, there were many other forces, too. This is similar to the rapid increase in the number of Covid cases due to the Omicron. Sometimes, when the situation is in a dire stage, it may be the end of the tunnel.
In fact, you can see from the chart below that oil prices collapsed more than 70% after Russia annexed Crimea in 2014 March and caused a global oil crisis as I discussed in this article.
Trading oil prices at this level is a very speculative trade. You need to be extremely careful.
Conventional wisdom tells us that when a crisis happens, money will flow into bonds. However, we are in a very different environment where an interest rate hike is imminent. A higher interest rate means a lower bond price. It is mathematics.
The US wants to leverage the Russia-Ukraine crisis to regain the status for the US treasuries, but it is not happening. Why? Because contrary to the US, China is doing the opposite by cutting key rates. From the chart below, you can see that China government bonds are going up while US bonds are going down now.
Lastly, I want to touch on gold. When cryptocurrency was a hot topic, many people argued that Cryptocurrency would replace gold as a safe haven during a crisis.
The Russia-Ukraine crisis pours cold water on their face. Instead of going up, cryptocurrencies crashed as the market is moving to “risk-off”. It proves cryptocurrency is still speculative at best now and nobody really takes it seriously as an investment asset.
Additional reading: Is Bitcoin a good long term investment?
On the other hand, gold, which has been tested thousands of years in human history, proved again its worth. The gold price has hit $1,900 and broke out from the previous consolidation zone. So it is worth watching.
Let me summarize
The situation of Russia-Ukraine tension has occupied the news lately and definitely created volatilities in the financial market, but I don’t think it will have much impact on the stock market.
However, we need to recognize that Russia-Ukraine issues are similar to China-Taiwan issues. It will haunt the market from time to time. Given the special status of Russia, this will have a long term impact on the influence sphere among the US, China and Europe.
There is a Chinese saying “大炮一响，黄金万两”, it means “when the cannon goes off, tons of gold will be spent” to support the war. That translates to government spending, industry rejuvenation and job creation.
Let’s not forget that the reason that the US is the dominant power in the world today was due to the fortune they made during World War II. War is a big business and it will reset the world order and redistribute the wealth. So there are always people who want wars for their own financial gains.
We should count our blessings that we are in this part of the world where we still have peace.
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Additional Readings: How I use moomoo for my stock research.
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Energy prices have skyrocketed and doesn’t seem to be coming down soon. This has exacerbated the inflation problem, especially when energy is one of the key basic components of the economy. We are seeing producers increase prices everywhere. Airlines and transport companies are starting to have fuel taxes or surcharges. What do you think are the chances this will lead to a global recession? Especially if the Ukraine war drags on.
Hi, Kok SL
I think the risk of recession is high but the magnitude will not be uniform across the globe. Recent history has shown that the US recession may be short-lived at the expense of other regions.