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Russian Invasion of Ukraine: A Study in Geopolitics and Their Effect on Markets

Geopolitical threats are looming along the Ukraine-Russia border, as the threat of war between the two countries becomes more and more viable day by day. Recent talks attempting to stop Russia's military buildup near Ukraine made no progress as the Russians inch further to invading the country. Russia has already established bases near the border with nearly 100,000 troops. Cyber and information attacks have been launched by the Russians against the Ukrainian government in an effort to weaken their neighbor but also scare NATO into coming into their demands, such as weakened security in the East. The fallout of a potential invasion would have major effects on our global economy. Sanctions could be established to block Russia from the macro space, which ultimately hurts the economy and worsens international relations. Europe also depends on Russia for nearly 40% of their gas, which could allow the Russians to strain global supply issues in a move to establish seniority in the global energy sector. These geopolitical risks possess an important effect on global and American markets.

Measuring geopolitical risk can be quantified through the GPR (Geopolitical Risk Index), which was created by the Federal Reserve. The reason geopolitics are so influential in the markets is simply because of the absence of concrete and steady information. Uncertainty delays commitments from corporations and institutions as well as spending from consumers. Geopolitical events such as the Gulf War, the 9/11 attack, and the Iraq War presented in the table below reflect the volatile atmosphere they create.

U.S. Treasury notes and bonds are valuable investments during times of geopolitical distress. When prices of equities are moving downwards, treasuries generally go in the opposite direction, as TYOO (the 10-year treasury rate) could be a useful tool for investors. Market reactions to geopolitics tend to fall quickly in the short-term but recover to higher levels in intervals of time greater than a few months. Ned Davis Research examined the 28 worst geopolitical crises over the last 80 years; in 19 of the 28 cases, the DJIA was higher 6 months than after the event began. However, this Russia-Ukraine conflict could prove to have a significant impact if America and NATO are subsequently dragged in to defend against Russian advancements. Thus, investors should prepare to hold their investments over the news of a potential invasion but be alert for a "black swan" type scenario that could trigger greater, geopolitical tensions.


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