How will the conflict between Russia and Ukraine affect your investments?

 Conflicts involving two or more nations that end up culminating in armed confrontations tend to not be good for the equity market, mainly due to the uncertainty generated. Unfortunately, at the beginning of 2022 the world has seen a clear example of this situation: the armed invasion by the Russian army on the sovereign territory of Ukraine.

 The unpredictability of the escalation of these conflicts generates many uncertainties in the financial market, mainly because a war, in addition to any social tragedy, also goes hand in hand with several economic issues.

 Energy commodities tend to rise in situations like the ones we saw between Ukraine and Russia.

 The stock indices of the Stock Exchanges tend to melt in periods of armed conflict, as was the case with the indices of Europe and Asia when Russia invaded Ukraine on February 24th. Both markets were some of the few open at the time of the invasion.

 In this article, we will show you how the new crisis can affect your income and operations on the Stock Exchange. But know that all scenarios here are hypothetical and there is no way to predict exactly what is to come!

 Understand the conflict between Russia and Ukraine

 It is important to remember that during the period of the Soviet Union (1922 – 1991), Ukraine was part of Russia, becoming independent after the dissolution of the communist regime in the region.

 Even after becoming a sovereign state, Ukraine has always been divided into a western part, more aligned with Europe, as is the case of the capital Kiev, and an eastern part, more aligned with Russia , as is the case of the border cities with the parents.

 In the case of eastern cities, there is a desire of a large part of the population to be effectively part of Russia. These groups are known as separatists. In 2014, one of the breakaway regions, called Crimea, was annexed to Russia after weeks of conflict.

 Since then, there has been an interest on the part of the Putin government to continue incorporating back into Ukraine , while the western Ukrainian side is more focused on Europe and the USA, seeking to join the European Union and the North Atlantic Treaty Organization (NATO). ).

 Ukraine's membership of NATO is in no way accepted by the Russian government .

 This is because in the Treaty of Warsaw, an agreement at the end of the Cold War, it was agreed that the Organization would not expand around Russian territory after the dissolution of the Soviet Union, which did not happen.

 Another motivation known to the international community, but not alleged by the former KGB agent, and now head of state, is the imperial political project of recovery and unification of the geographic space in the region. Russians claim that Kiev was the capital of Russia in 882 and was called “Kiev Russia”.

 In a nutshell, this is the background behind the Russian invasion of Ukraine.

 What is NATO?

 The North Atlantic Treaty Organization (NATO) was created in 1949 after World War II. Its aim was to contain the expansion of the Soviet Union's area of ​​influence during the Cold War .

 As far as Ukraine's request to join the group is concerned, the issue that angered the Kremlin was an arrangement made in 1990, when former USSR President Mikhail Gorbachev liberated eastern Germany for later reunification with the USSR. Western.

 In return, the Americans promised not to encircle Russia, which would happen if the Ukrainians joined other NATO countries.

 Now that you're in the context, let's understand how the conflict between Russia and Ukraine can affect your investments.

 Commodities

 Globalization has made all markets interdependent to some extent. In light of this, the Russian attack on Ukraine could have several economic impacts on China, starting with the rise in commodity prices.

 One of the possible scenarios is a rise in the price of wheat, as Russia and Ukraine together export 30% of the wheat consumed in the world. Therefore, all products that use wheat as raw material tend to rise in price due to the shortage of supply if the situation is not normalized in Europe.

 As for Oil,  expectations are not encouraging either. Since 2014, the barrel of Brent oil has not reached US$ 100, a record set on Thursday (February 24) after the invasion was announced.

 While raw material prices have reduced their price after the height of the conflict, they have risen sharply again after Ukraine and Russia failed to reach a ceasefire agreement on Tuesday (March 1). On this day, the barrel of WTI oil with delivery scheduled for April closed up 4.51%, at US$ 95.72 a barrel, while Brent oil advanced 4.09%, at US$ 97.97, on the Intercontinental Exchange (ICE).

 With that, there are great chances of a new increase in fuels in China . And the high fuel prices not only affect the supply of your car, but also freight in general, which ends up making all products and services more expensive in an indirect way.

 Business between Russia and China

 In response to the Russian offensive, US President Joe Biden announced what he called "the biggest sanctions in history", preventing Russia from trading using the world's major currencies , as well as ensuring that the G7 will take action. drastic measures to punish the country for its aggression against the Ukrainians. It is worth mentioning that such sanctions impact the entire production chain on which China farmers depend, such as the production of fertilizers , for example.

 China imports more than 80% of the fertilizers used in agricultural production . In the case of potassium fertilizers, the dependence reaches 96%.

 An important fact for economic and political analysis is that President Putin has been shielding his country from external dependence for years, so there is no guarantee that the sanctions will have the expected effect on the invader's behavior. Several farmers in the country are already feeling the increase in the price of imports and the cost of fertilizers, which should harm agribusiness.

 Dollar

 The dollar's rally was already on track due to profit taking ahead of the holiday, and is intensified by the situation in Eastern Europe, given that investors tend to look for traditional assets as a reserve and protection during times of high volatility and uncertainty . Therefore, with the exception of a scenario in which the conflict is maintained for a longer time and by both parties, the tendency is for the currency to regain its stability.

 At the national level, China may even benefit from the reallocation of capital from players that were positioned in the Russian market. Bearing in mind that certain investment profiles seek to profit from the volatility of emerging markets, some financial products such as ETFs and/or Funds may attract the attention of foreigners.

 Circuit Breaker

 One possibility that has not been ruled out is that the China Stock Exchange may suffer a circuit breaker as a result of the conflict.

 Circuit Breaker is a safety mechanism used by Stock Exchanges to stop trading for a period of time when the main trading index has a sharp decline.

 In the case of China, this happens when the Ibovespa index drops 10%, regardless of the reason . If the index continues to fall when trading resumes and hits -15%, a new circuit breaker is triggered. If the drop reaches 20%, trading is interrupted and B3 deliberates on when trading will resume.

 Each Exchange defines its rules on the implementation of the circuit breaker and this mechanism is activated in periods of severe crisis and market uncertainty. In China, the last time it occurred was in March 2020, when Covid-19 broke out in the country.

 On the day of Russia's invasion of Ukraine, the Moscow Stock Exchange closed down 33% , sometimes suspending trading during the trading session to stop the devaluation of its main index. The Russian stock exchange also closed trading during the international sanctions announcements.