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The tension between Russia and Ukraine has been ongoing for more than a month now. There’s been a constant fear of war in the Ukraine region led by Russian troops. According to reports, Russia has amassed 90,000 soldiers near its border, and there’s a possibility of invasion at any time.
Ukraine was a part of the Soviet Union until 1991, and it was the second most powerful nation after Russia. Consequently, it was important strategically, economically, and culturally to Russia. Post the split, both Russia and the West are fighting to keep Ukraine on their side to balance power in their favor and attain more significant influence over the region.
Moreover, Ukraine is a crucial buffer between Russia and the West. Therefore, the US and the EU are taking action to keep Ukraine away from Russian control.
North Atlantic Treaty Organization or NATO was set up in 1949 to counter aggression by the Soviets.
As per the treaty, all members will join to defend the NATO nation if its attacked or invaded by any third party. Kremlin wants to ensure that Ukraine and Georgia, previously invaded countries in 2008 by Russia, won’t join NATO.
There’s been an ongoing effort for Ukraine to join NATO and recently picked up the pace. Russia sees this as a threat and calls such a move a ‘red line’ to strengthen US power and allow US military expansion in Ukraine.
Putin believes that Ukraine has been a part of Russia and Kiev needs to Return to Russia. However, Ukraine views Russia as an invader which has occupied some parts of its territory in the past. Kremlin wants to end the expansion of NATO and wants Belarus, Ukraine, and Georgia to only be a part of economic and military bloc controlled by Moscow, prevailing Russian influence.
Origin of Conflict
Conflicts have been observed between Russia and Ukraine in the past as well. As a result, Ukraine wasn’t able to gather support from either Russia or the European Union. It has affected the economic growth and democratic situation of the region.
In November 2013, President Viktor Yanukovych rejected the plan for economic integration of Ukraine with the European Union, which caused protests in the capital city of Kiev. In the crisis, Russia backed Yanukovych while the US and Europe favored protestors.
The crisis worsened in February 2014 after state security forces crackdown, leading President Yanukovych to flee the country.
The Russian military in March 2014 took charge of the Crimean region of Ukraine after Crimeans, in a local referendum, decided to join the Russian Federation. The Russian President Vladimir Putin underlined the need to preserve the rights of the Russian people and Russian speakers in Crimea and southeast Ukraine.
This exacerbated ethnic tensions in the region. As per the UN estimates, 3000 casualties have been reported since the clashes of March 2014.
After two months of tension and demonstrations, pro-Russian separatists in Ukraine’s Luhansk and Donetsk regions declared independence from Kyiv.
Despite the Minsk 2015 peace pact between Kyiv and Moscow, sponsored by France and Germany, ceasefire violations have occurred on various occasions.
Progress has been made to reaffirm the 2015 peace pact between Russia, Ukraine, France, and Germany, but no significant conclusions have been made.
Current Situation
The conflict has heightened tensions between Russia and the United States and Europe, jeopardizing cooperation in other areas such as counter-terrorism, weapons control, and a political settlement in Syria.
The Russians say their armies have completed several drills to return to bases. However, the NATO Secretary general rubbished their claims and said that there’s no evidence of de-escalation of the Russian military, reporting that Moscow has instead added more forces near its tense border with Ukraine.
There have been talks about unlocking the standoff between the two. Recently, the EU has called a summit to discuss the solution and sanctions to be imposed in case of invasion.
Biden claims of high risk of the Russian invasion of Ukraine.
How should investors react?
Markets also felt the heat of Russia-Ukraine tussle after White House national security advisor Jake Sullivan warned of Russia’s attack on Ukraine any day.
US markets witnessed a sharp sell-off, with falling more than 500 points, sinking 1.9%. Demand for traditional safe-haven assets started picking up, lifting prices.
The NSE index fell 0.1% at 17,304 on 17 Feb 2022.
Russia is a key manufacturer of and supplying in many parts of Europe. The war can create a shortage of oil supplies as Russia can knowingly stop the collection or damage infrastructure. It can lead to an increase in energy prices. The blockage around the Black and Baltic Seas could interrupt shipping and food inflation.
Crude oil prices could touch $100 a barrel in case of invasion due to supply-side disruptions for the first time since 2014. Rising energy prices in Europe and worldwide could create volatility across financial markets.
Markets, over the years, are conditioned not to overreact to war and geopolitical tension as they believe that the issue will settle down without being intensified and second that the central bank will intervene to repress financial volatility.
However, investors buying the dip should focus on quality trades secured by a strong balance sheet and high cash-flow generation. Investors should avoid investing in less liquid market segments or large-scale shifts to international investments.
The practical advice for long-term investors should be to focus on the developments around the companies that they are invested in rather than tracking the geopolitical situation, which is difficult and impractical at the same time.
Simple things to remember:
1. Do not stop your Mutual Fund SIPs, do not unnecessarily time the market
2. If you are considering stocks for investment purposes, ensure there is a maximum margin of safety. The margin of safety is highest when one is not overpaying for the business. Valuations, healthy cash flows, strong ROE & ROCE, long term sustainable profitability are some of the metrics that must be tracked.
3. Invest in a lumpsum mode in the existing mutual fund scheme during deep drawdowns
4. Consult a SEBI Registered Investment Adviser (RIA) before investing
5. Avoid F&O and avoid leverage during high volatile markets unless your core profession is trading
Disclaimer: Only for educational purposes, not to be taken as a recommendation
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