Russia’s current unprovoked attack on Ukraine has set the world ablaze. As the Russian invasion moves into the next stage, the West fights back with an economic war through sanctions to cripple the Russian economy. Whether a military war can be stopped by an economic war remains to be seen. Although the Russian economy, currency, and stocks are in free fall this has not stopped the war. (Note: since Monday the Russian stock market has been closed but select Russian stocks continue to trade on the U.S. exchange)
President Putin’s strategy so far has been based on two major assumptions:
NATO military forces would not get involved to defend Ukraine.
First, since there is no public support by Americans, or Europeans to risk their lives and get involved in another long war.
Second, NATO would not want to risk a larger escalation of the war with a superpower, such as Russia.
Europe would not stop imports of Russian oil and gas and if they did prices would skyrocket potentially leading to a European and American recession.
Russia is the second-largest exporter of oil with approximately five million barrels per day. Approximately 60% of oil exports go to Europe and 20% to China. Note: Russia represents 34% of oil imports for Europe.
With 41% of European natural gas coming from Russia, a gas ban would cause natural gas prices in Europe to increase substantially, either causing a recession or forcing governments to provide massive subsidies to consumers and businesses, which would cause significant deficit spending.
As expected, the West is genuinely concerned about oil prices since historically, when the oil price has doubled year-over-year, it has led to a U.S. recession (see chart below). With oil prices now over US$100, on Tuesday the International Energy Agency (IEA) announced a plan to release sixty million barrels of oil from global reserves to counter the high price. This represents 4% of the 1.5 billion barrels in reserve and only accounts for 12 days of Russian oil exports, thus it's unlikely to cause the oil price to decline significantly.
A Sharp Spike in Oil Often Leads to a Recession
Source: Alpine Macro
The Bottom Line
We expect stock markets to remain volatile as the war moves through various stages. However, we do not believe an oil price-led recession is going to happen. We believe a combination of the excess IEA global reserves available and select OPEC members’ ability to increase production should be able to tame oil prices from significantly damaging Western economies.
What if we are wrong and oil prices lead to a recession? The global central banks will use the same playbook that they used during the 2008-2009 Great Recession and the 2020 COVID Recession. Central bankers will restart quantitative easing (buying bonds and other financial assets) and cut interest rates back to zero again. National deficits and debt will balloon again, as they did the last two years, but this is a better option than another recession.
The Matco Global Equity Fund does not own any Russian stocks directly. Indirectly it has a less than 0.4% weight to Russian stocks through an iShares emerging markets index exchange-traded fund (ETF). However, on March 9th this ETF will be moving its exposure to Russian stocks to zero.
Matco continues to remain focused on owning high-quality dividend-paying companies and is watching the Ukrainian developments closely.
Our hopes and prayers are with the Ukrainian people.
Anil Tahiliani, MBA, CFA
Senior Portfolio Manager, Canadian Equities
Founded in 2006 to manage and service seven family offices, today Matco offers the benefits of our extensive investment management experience to individual investors, foundations, endowments, condominium corporations, trusts, corporations and not-for-profit organizations.
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