As is customary, we try to share our thoughts on world events that bubble into focus (recall we wrote a piece on Cyprus and on the bankruptcy in Detroit). Having served in war torn areas of the globe, our hearts and prayers go out to the people of Ukraine, as they undergo both an internal political crisis and what appears to be (or have been) military intervention from Russia. For people of a certain age (including my father), the current events, with tanks rolling across the Russian border into a neighboring nation that wants to exercise its freedom, it feels a bit like the Cold War days all over again.
World markets have followed their normal cycle of over-reacting (positively and negatively) to these events, and our bottom line observation is that unless you are heavily invested in the Russian economy, this latest crisis will likely be seen as a portfolio non-event.
Whenever troop movements and fires in the streets of a capitol city transpire, financial markets seem to assume the worst and move money to the sidelines. But is this really the best strategy?
Here are some facts that you might not know about Ukraine which we hope will help you assess whether that is the best strategy:
1.) According to the World Bank, Ukraine's economy is the 51st largest in the world, ranking just behind Peru and the Czech Republic, and just ahead of Romania and New Zealand. But its $7,295 (US) per-capita income (a rough measure of a nation's wealth) ranks 106th in the world, behind Namibia and El Salvador and ahead of Algeria, Micronesia and Iraq.
2) Ukraine's largest city, Kiev, has a higher population (2.8 million) than Chicago, America's third-largest city. The population of Kharkiv, Ukraine's second-largest city (1.4 million), is greater than San Antonio, San Diego and Dallas, America's seventh, eighth and ninth most populous cities. Despite comments that Ukraine is divided between ethnic Ukrainians and Russia, 77.8% of the population is ethnic Ukraine, and only 17.3% is Russian.
3) Russia sells approximately 80% of its oil and gas exports to the European Union through pipelines that pass directly through Ukraine. The European Union receives 25% of its oil and gas from Russian sources through these conduits. Ukraine also happens to be Russia's second-largest customer of petro-fuels. Russia is drilling for oil in the shallow waters of the Black Sea near the Crimean Peninsula, which shows promise of having significant reserves.
4) Among others drilling in the same area: Chevron and Shell Oil. If they begin production under the Ukrainian flag, it would significantly undercut Russia's oil and gas market share and prices, simultaneously boosting Ukraine's economy.
5) Russia's economy could be the big loser in the aftermath of the Ukrainian crisis. Share prices for companies based in Russia declined by 10 percent the day after its soldiers took over the Crimean peninsula, also triggering an outflow of domestic currency that Russia desperately needs to invest in modernizing an economy largely (today) based on selling abroad what is pumped or mined out of the ground.
6) Ukraine's currency is the hryvnia, adopted in 1996 after the country suffered the greatest one-year bout of hyperinflation in global economic history. (Zimbabwe has since broken the record.) Today, one dollar will buy 9.6 hryvnias. A euro will buy 13.3 of them.
7) Among the most likely responses to the Russian/Ukrainian crisis is the cancellation of the upcoming G8 summit in Sochi. Another possible response might remove Russia from the G8 club. This would embarrass Russian strongman Vladimir Putin at home and isolate him (and Russia's economy) abroad.
8) The threat of disruption of trade between Western nations and Russia (either due to sanctions or reluctance to deal with a country that doesn't seem to be focused on following international law) has already cost the Russian economy $60 billion in a matter of days--more than the total cost to stage the Sochi Olympics.
9) Due to low birth rates, Ukraine's population is declining at the sixth fastest rate in the world, behind the Cook Islands, the Federated States of Micronesia, the Northern Mariana Islands, Niue (an island nation in the South Pacific) and the Eastern European nation of Moldavia, which borders Ukraine.
10) Ukrainian troops have been deployed as part of international peacekeeping missions in Somalia, Kosovo, Lebanon and Sierra Leone, and has engaged in multinational military exercises with U.S. military forces. NATO has accepted Ukraine as a member pending a national referendum on the matter--which will obviously be delayed until the conflict with Russia has played itself out. I have personally served with Ukranians in Iraq, and I found their love for America to be profound and genuine.
11.) Several pundits have unhelpfully pointed out that the Crimea became the flashpoint for World War I, but the world is quite different and much more inextricably linked today. There could be some impact from higher energy prices in Europe if the Ukraine pipelines are disrupted temporarily, but Russia needs to sell its oil and gas as much as Europe needs to buy it.
As mentioned above, unless one is heavily invested in Russian stocks, this crisis will likely to have little or no impact on portfolios. To answer our question posed at the onset of this article, we do not believe moving money to the sidelines is prudent. We recommend sticking to your investment plan and maintaining a disciplined approach to portfolio re-balancing when your exposures move outside of the ranges you have objectively (and hopefully unemotionally) set to help you achieve your financial goals.
Posted on Tue, March 4, 2014
by Kimberly Pauley filed under