Russia vs Ukraine

The S&P500 is in a correction for the first time in the last two years. Oil hit its highest price since 2014. How much worse could this get? Is this just the beginning?

Quick Background

Up until 1991, much of Europe was controlled by the communist-run Soviet Union, and at the time of its downfall, Ukraine had the 3rd largest atomic arsenal in the world. As a result, the United States and Russia worked with Ukraine to disarm and remove the nuclear missiles in exchange for the security that would protect them from a potential Russian attack. However, in 2013 the Ukrainian president rejected a deal that would integrate their economy with the European Union under the suspected pressure of signing an agreement with Russia. However, that proved very unpopular for Ukrainian citizens who protested throughout the region. Russia saw this and became concerned about the possibility of their neighbor Ukraine adopting new western alliances. Russian troops took over the neighboring peninsula, sparking tension that they had violated their original agreement not to attack.

Enter the North Atlantic Treaty Organization (NATO). NATO is an alliance treaty between countries that aim to resolve military and political conflict, build partnerships, and uphold the security of the North Atlantic. To join, there must be a unanimous agreement between all 30 countries.

Article 5 Agreement

What is this, and why is it important? Article 5 suggests that any attack on a NATO country would be treated as an attack on the entire alliance. Russia wants to gain more influence over their western region, and Ukraine wants to be their own independent country, causing a lot of friction.

Ukraine previously applied for a NATO membership in 2008 and was informally promised they’d eventually get the opportunity to join. Russia’s perspective is that their entire western border would be controlled by an alliance they see as a potential threat. Russia demands that NATO doesn’t take on any new members and is stuffing their borders with military personnel. NATO isn’t adhering to Russia's demands and has brought troops to support the Ukrainian borders.

How does this affect the economy?

Commodity prices have increased here in the US. Russia is one of the largest oil producers in the world. They supply Europe with nearly 40% of its natural gas and 25% of its oil. 90% of US semiconductor supplies come from Russia. Computer chip production and trade agreements with Russia could be halted during this conflict. Pretty much everything these days use computer chips. Tensions could cause a slow down in semiconductor distribution and would significantly impact the US economy. Inflation is already high and prices could continue to climb rapidly. Gasoline and Computers make up a large portion of economies around the world, and a slow down in supply could snowball affect into other markets. This tie-up puts financial strains on companies leading to a drop in stock prices.

What I’m doing!

The uncertainty with tensions overseas is causing a sell-off in stocks. These companies do not deserve these valuations, and their prices reflect the fear of the unknown. I like be buying stocks when stocks are priced by market fears rather than company earnings and execution.