Number 11 and Falling

Number 11 and Falling

Given Russia’s large land mass and population, many people are surprised when they learn the Russian economy is only the 11^th largest in the world – behind Italy and South Korea. Many argue this has a lot to do with rampant corruption. The oligarch class in Russia is incredibly wealthy while the average Russian has a median income well below the rest of Europe. According to Statista, the wealthiest 500 individuals in Russia have more wealth than 99.8% of the Russian population combined. Based on average income, Russia ranks 36^th in the world, behind Hungary, Poland, and Romania.

According to Bloomberg, international sanctions (which are just beginning) have already cost the wealthiest Russians a staggering loss of $33 billion in wealth with more to come. The Russian economy will most likely struggle as well under the sanctions and a recession seems likely.

Given this context, why would Russia want to invade Ukraine?  Ukraine’s President, Zelenskyy, has been an outspoken critic of Russia and has talked of joining NATO in various ways. Putin sees Ukraine as a nonnegotiable part of its sphere of influence. The idea of Ukraine ever joining NATO is an empirical red line for Russia. Putin sees this as an untenable geopolitical outcome and losing Ukraine as a buffer against the West is not acceptable. Since 1991 and the collapse of the Soviet Union, Ukraine has been an independent state, but has been in a tug of war between Russia and the West. Putin openly does not believe Ukraine is a legitimate independent country.

Whether Putin’s actions are rational can be debated, but make no mistake the price of war in Ukraine will, at least over the short-term, cause a spike in energy prices (oil surpassed $100 a barrel yesterday, a mark not hit since 2014) and a reduction in economic growth in Europe and around the globe. This puts the Federal Reserve and other central banks in a tough situation as they are intent on raising interest rates to fight inflation but raising rates too quickly could slow the global economy even further.

The stock market is now in correction territory, with the S&P 500 down over 11% from its peak through February 23^rd. We entered the year expecting bouts of volatility as the Fed began raising interest rates, but Ukraine adds more uncertainty to the short-term picture. It is these types of situations where being balanced and diversified really can help reduce downside volatility.

We strive to work with our clients to create portfolios that fit within their risk tolerance as well as help reach their goals over the long-term. Portfolios are designed and managed for the long run with the knowledge that market corrections happen, on average, every few years. Please feel welcome to reach out to us at any time to review your risk score, especially if you are nervous or losing sleep. We are here to take on the burden of market volatility stress.

Take care and be well,

The Bond&Devick Team