25 Feb 2022 3 min read

Ukraine conflict: implications for investors

By Sonja Laud

What Russia's invasion of its neighbour means for markets, the global economy and how we manage our clients' assets.

Ukrainian National Flag - GettyImages-1262275250 banner.jpg

Following a period of growing tensions, Russia began a military invasion of Ukraine on Thursday, intensifying a diplomatic crisis and rattling global markets. Against this backdrop, we remain focused on managing risk to achieve our clients’ long-term objectives.

Indeed, our approach to all such geopolitical risk events is summarised by the motto: “prepare, don’t predict”. This means we undertake rigorous scenario planning, rather than seek to forecast imponderable outcomes.

Below are some of the key factors we’re assessing as part of this ongoing process.

Market conditions

In the immediate aftermath of the Russian move, risk assets sold off, so-called ‘haven’ assets were in demand, oil prices lurched higher and market volatility spiked.

Liquidity is patchy in those assets most directly affected by the crisis, something that would likely be worsened by credit-rating downgrades in Russia, Ukraine and Belarus, which we expect. But broader liquidity conditions are holding up, with bid-offer spreads on a range of key assets in line with historical norms. Where our traders need to trade on behalf of our clients, they are able to do so.

For investors in index and ETF strategies, it’s worth noting that Russian and Ukrainian securities only make up a fraction of benchmark indices.

And of course, should market conditions deteriorate markedly, we have policies and procedures in place to deal with such an eventuality.

Scope for sanctions

Many developed-market nations have already ramped up sanctions on Russia in the past week; one of the most significant was Germany’s decision to halt certification of the Nord Stream 2 gas pipeline.

In the wake of the invasion, countries led by the US, EU and UK unveiled a further wave, covering large Russian banks, government officials and sovereign debt. Belarus, which has been a staging area for Russian forces, is also included in the sanctions.

We believe exclusion from Swift, the global payments system, and a ban on energy and technology exports are also plausible. Should the former prove challenging, Washington could prohibit global banks from exchanging US dollars with Russian institutions.

One challenge with these steps is that sanctions may not constrain Russia over the short term: the country is running a fiscal and external surplus, has no government debt and boasts massive reserves of $630 billion. The imposition of sanctions also entails different costs for the US and Europe – with the latter more vulnerable – which could undermine a unified response.

Economic impact

As Russia’s share of global GDP is only around 1.7% – similar to that of Spain – the direct implications on the international economy are limited, in our view.

However, Russia has a significant share of commodity and energy markets. Not only is the country the second-largest oil and gas producer in the world, but also ranks in the top three for a range of metals and agricultural products.

So we need to consider the threat to global supply, not least because Russia can operate self-sufficiently, running surpluses in many areas.

Higher energy prices put clear upward pressure on global inflation, further complicating decision-making for central banks, which have been trying to rein in rising prices with increasingly hawkish stances as the world continues to recover from the pandemic.

Still, policymakers may also wish to stabilise markets, while mitigating any negative growth effects and general risk aversion that could spur financial disorder.

Beyond the headlines

In light of this unfolding story, which has so many moving parts, we remain humble and prudent in managing our clients’ assets. And we are focused on the longer-term questions whose answers may reveal opportunities for our active fund managers, as investor sentiment can skew market pricing.

At LGIM, we also consider how such geopolitical events – and their underlying causes – intersect with the macroeconomic environment and affect structural investment themes, such as the energy transition. This helps us to seek sustainable, long-term returns in addition to positioning for more immediate developments.

We’ll share further analysis over the coming days and weeks; in the meantime, our thoughts are with all of those affected by this conflict.


Unless otherwise stated, information is sourced from LGIM analysis as at 24 February 2022.
Views expressed are of Legal & General Investment Management Limited as at 24 February 2022. Forward-looking statements are, by their nature, subject to significant risks and uncertainties and are based on internal forecasts and assumptions and should not be relied upon. There is no guarantee that any forecasts made will come to pass. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be solely relied on in making an investment or other decision.

Sonja Laud

Chief Investment Officer

Sonja is CIO of LGIM, having joined the business in January 2019 as Deputy CIO with responsibility for LGIM’s Solutions, Global Fixed Income, and Active Equity teams. Sonja joined from Fidelity International where she held the title of Head of Equity, responsible for the Global, Equity Income and UK Portfolio Managers as well as the Investment Director team.

Sonja Laud