Economic sanctions can create ill effects not only for the targeted country, but also the rest of the world. Here’s how the economic sanctions imposed on Russia could affect you and your investments.
Russia’s invasion of Ukraine has triggered one of the most severe and wide-ranging raft of economic sanctions in recent memory.
This action, designed to pressure Russia to cease their hostilities by targeting the country’s economy, is mainly led by the US, UK and the EU. They are joined by several other countries, including Japan, Australia and Singapore, who have enacted their own penalties and restrictions.
Economic sanctions carry weight because they can isolate the target country from global markets — which can seriously harm or even devastate its economy.
In Russia’s case, the country heavily relies on exports of oil and gas. With the stoppage of these exports, the country is now cut off from a major source of revenue.
The resulting economic fallout is expected to persuade Putin to call off the invasion so as to save his country from a catastrophic recession.
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How have these sanctions impacted the global market?
However, precisely because of the globalised nature of the modern world, sanctions are somewhat of a double-edged sword; the economic impact isn’t limited to the target country, but can spill over into the rest of the world.
Just as an example, with Russia oil banned, countries that used to rely on them are now forced to seek other sources. This causes oil prices to go up, as supply is now (artificially) suppressed, without a corresponding drop in demand.
Well, the last time we checked, oil is still pretty much an essential commodity, so it’s not like we can just stop using it. Besides being critical in energy generation, oil and its many by-products are essential for the operation of several industries and the production of many common everyday goods, such as plastic.
This means an increase in oil prices will not only mean higher prices at the fuel pumps, virtually every industry, service and product with direct or indirect links with oil is also at risk of cost pressures.
As if that’s not scary enough, Russia is also a major exporter of several other important commodities such as wheat, cobalt, nickel, platinum and gold, which have also been impacted by the ongoing sanctions.
How will this affect your investments?
Okay, so economic sanctions are bad for everyone, but what does all this mean for investors in Singapore?
This is primarily because investment firms here largely have low levels of exposure to the Russian economy.
Additionally, Singapore’s exports to Russia and Ukraine account for only 0.1% of the total. Meanwhile imports from both these countries make up only about 0.8% of Singapore’s total imports.
So, it appears that there is no immediate danger to the average Singaporean investor (unless, of course, your entire portfolio is composed of Russian oil companies and rouble-denominated bank bonds).
But that doesn’t mean there won’t be any impact. In fact, since the start of the conflict, oil prices have seen significant jumps, and this could herald the arrival of several more market shocks.
Well, nobody can predict the future, but we can make the following educated guesses about how your investments may be impacted.
Market volatility will continue
If you’ve been paying attention to the stock markets, you’ll know that 2022 hasn’t been the smoothest so far. The first quarter has been marked by turmoil in the markets brought on as — to put it in highly simplified terms — central banks attempt to rein in inflation brought on by the pandemic.
When the Russian-Ukraine war broke out at the end of February, further shocks were thrown into a global supply chain that was already under tremendous stress. This has heightened and prolonged uncertainty among investors.
When markets are uncertain, volatility tends to ensue. Judging by how things stand now, we can expect market conditions to remain volatile in the near to mid term.
(Non-Russian) Oil stocks and ETFs should do well
If you hold oil stocks and ETFs in your portfolio, you could be in for some juicy returns.
As we’ve already seen, oil prices are hitting high points not seen in over a decade. Despite a recent pullback, analysts expect oil prices to recover and continue remaining high throughout the year.
Should this hold true, you can look forward to a nice chunk of change at the end of 2022 — provided your portfolio is properly set up, of course.
However, bear in mind that markets are volatile, and will likely continue to be for some time. Be sure to do your research and diversify your exposure instead of going all in on just one or a few oil producers.
Eastern Europe or emerging market funds may fall
Although its economy is relatively small, Russia is often included in investment funds that focus on emerging markets. As you’d expect, the country is also featured in funds based on nations in the Eastern European region.
Judging by the severity of the sanctions imposed, it’s conceivable that such funds will take a hit in the short term, dragged down by poor performance on the part of the Russian economy.
This could be further exacerbated as investors work to remove these types of funds from their portfolios.
You may have less money to invest
Inflation of 4% may seem small, but could have enormous implications on your personal budget.
The major drivers of inflation in Singapore are food, accommodation and personal transport, and an increase in inflation means that you may need to spend more on these expenses.
In turn, this could lead to you having less money to invest, which is likely to affect or even derail your financial goals.
Read these next:
The Russian-Ukraine War: How Does It Affect The Global Economy And Your Investments?
How To Take Advantage Of The Commodity “Supercycle”
9 Ways to Hedge Against Inflation with Investing
Money Confessions: 9 Singaporeans Share Their Portfolio Asset Allocation
How To Build A Multi-Asset Portfolio Even In Your 20s
By Alevin Chan
An ex-Financial Planner with a curiosity about what makes people tick, Alevin’s mission is to help readers understand the psychology of money. He’s also on an ongoing quest to optimise happiness and enjoyment in his life.