Geopolitical Risk Update: Russia-Ukraine

In an apparent desire to create a weakened border state unable to join NATO, Russia supported separatists in eastern Ukraine by recognizing the independence of two regions: Donetsk and Luhansk. In support, Russia ordered “peacekeeping” troops to the areas, prompting sanctions by world powers. This was a risk we cited in our Top Global Risks of 2022 published late last year and elaborated on in January’s Guide to Geopolitical Risk: Russia-Ukraine. We wrote that the market response may be muted and cautioned investors against overreacting in their portfolios.

In textbook fashion, stocks declined modestly—about 1%—in the U.S., Europe and emerging markets on Tuesday. Sanctions announced so far by Germany, the U.K. and the U.S., have been as expected and are likely to have a limited impact on the global economy and inflation. Russia seems to be bearing the brunt of the costs of its actions. These events are not likely to impact central bank policies—a key driver of markets this year—unless energy prices spike and exacerbate inflation pressures or economic momentum slows due to uncertainty around further developments.

A history of mild market reactions

While Russian military confrontations can be unsettling, markets tend to take them in stride, as the impact on global economic and earnings growth tends to be small. Prior Russian geopolitical events include:

  • August 8, 2008: Russia accused Georgia of attacking pro-Russian separatists and launched an invasion of Georgia, which Russia called a "peace enforcement" operation, recognizing the independence of Abkhazia and South Ossetia from Georgia. Stocks ended higher that day in the U.S., international developed and emerging markets.
  • August 3, 2014: Unmarked Russian troops invaded Ukraine to support pro-Russia separatists and annex Crimea. The Russian air force engaged NATO members as the U.S. and allies began military exercises on Russia's border. Stocks fell less than 2% that day in the U.S., international developed and emerging markets. They shortly began to rebound from those losses.

Historical geopolitical events involving Russia

*Turkey is a member of NATO, now and at the time of the event.

Source: Charles Schwab & Co., Inc. and FactSet. Data retrieved 1/28/2022. All price performance is in USD. Past performance is no guarantee of future results.