Sanctions, market closures and their impact on indices and portfolios
Note: The Russian-Ukraine conflict has created significant turmoil in financial markets, and significant changes happen daily (or even hourly). We have written this note to do our best to communicate to clients what we believe to be important issues around what has happened and what we plan to do. At the time of writing (8th March 2022), we believe the information here to be right, but of course change can and probably will happen swiftly.
On the 24th of February 2022, Russia invaded Ukraine. This has led to numerous sanctions being imposed upon the Russian regime by the international community. Sanctions are typically issued by governments targeting individuals, corporations or governments in order to force their compliance with laws, condemnation of actions or threats to peace. Sanctions usually take a diplomatic or economic form and aim to provide incentive for the target to change their course of action. Previous forms of sanctions include the US Government sanctioning Chinese military companies in response to perceived national security threats1, and the European Union sanctioning individuals from Russia, Myanmar and Syria in response to terrorism and human rights infringements in those countries2.
The current round of Russian sanctions have primarily focused on damaging the Russian economy through asset freezes and restricting Russian access to the global banking system. The imposition of these sanctions have led to:
- Restrictions on the financing of Russian projects and withdrawal of foreign capital
- Increased costs of doing business in Russia due to the expulsion of several Russian banks from SWIFT, Mastercard and Visa payment networks3
- Numerous corporations withdrawing their business operations from Russia
- Freezing of overseas assets owned by Russians
- Restrictions on trade conducted with Russia
- Halting of the Nord Stream 2 gas pipeline
On top of government sanctions, we have also witnessed companies behaving proactively. For instance, Shell, ExxonMobil and BP have all announced their divestment and exit from all Russian oil and gas assets4.
Although existing sanctions have targeted a significant proportion of the Russian economy, they have largely avoided the energy sector due to Europe’s dependency on Russian supplies. There is still the possibility of future sanctions that target the oil and gas trade from Russia which would have a significant impact on global oil prices and a very direct effect on the Russian economy5.
This material has been prepared and issued by First Sentier Investors (Australia) IM Ltd (ABN 89 114 194 311, AFSL 289017) (FSI AIM, Realindex), which forms part of First Sentier Investors, a global asset management business. First Sentier Investors is ultimately owned by Mitsubishi UFJ Financial Group, Inc (MUFG), a global financial group. A copy of the Financial Services Guide for FSI AIM is available from First Sentier Investors on its website.
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