By: Edward J. Leach, CFP®
Society of Worldwide Interbank Financial Telecommunication (SWIFT)
SWIFT is the acronym for Society of Worldwide Interbank Financial Telecommunication, a global network for payments between banks. Over 11,000 banks across the world use the SWIFT system. The network allows countries and companies to move money across borders and operate globally.
Over the weekend, the United States, Canada, and European Union issued a joint statement removing certain Russian Banks from SWIFT, effectively cutting off Russia from the international banking system. This step is viewed as an “economic nuclear weapon.”
What Does this mean for Russia?
It will prevent Russian companies from doing electronic business with banks or companies in other countries. This sanction will have a ripple effect through the Russian economy, impacting their currency, stock market, and central bank. However, one exception within the sanction will still allow Russia to use the SWIFT network for Gas & Oil transactions.
Russia’s Response
In response, the Russian central bank increased its overnight borrowing rate, like the Federal Funds Rate in the US, from 9.5% to 20% to fight off hyperinflation in the Russian Ruble, which frankly is not working very well. Before this crisis, it would cost about $1 to buy 50 Russian Rubles. Now $1 can buy over 100 Russian Rubles.
Also, the Bank of Russia announced there would not be any stock trading on the Moscow Exchange on Monday.
Russian Stocks in Your Portfolio
Neither Dimensional Fund Advisors nor Avantis, two ETF and mutual fund companies in your international equity allocation, have any direct investment in Russian equities in their holdings. Regarding emerging market indexes, like MSCI, there is a roughly 3.25% allocation to Russian equities. MSCI released a note announcing the Russian stock market is “uninvestable” and is considering removing Russia from its indexes.
What’s the Impact of these Sanctions?
Will these sanctions help the people of Ukraine defend themselves? The unfortunate reality is it will not.
Will it cripple the Russian economy and put a tremendous amount of pressure on Vladimir Putin? The answer is yes
Will it create volatility within the global equity, bond, and commodity markets? The answer is more than likely yes.
However, increased volatility does not always mean a bear market or a crash. Often, the markets take geopolitical events in stride. See the chart at the bottom of this email for reference.
The average length of a market downturn during the events in the chart lasted about 20 days, with an average time to recover of about 43 days. The average total drawdown was a little less than 5%.
Russia’s unnecessary invasion of Ukraine is an important reminder that geopolitical risk is a part of investing in stocks, bonds, and commodities. It is one of the risks you must live with to generate any type of investment return that allows you to accomplish your goals and objectives in your financial plan. Primarily, making sure your portfolio is growing by an amount greater than inflation, a measure of the increase in cost-of-living over time.
As we follow these events in real-time, we never want to lose sight of the countless lives destroyed because of indefensible actions by a desperate dictator. The Ukrainian civilians and military, standing and fighting, are examples of what true leadership in the face of evil truly is, and I admire them for their courage and pray for their safety.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
Ed Leach, CFP®, MBA is a Partner and Wealth Advisor at HIGHLAND Financial Advisors, LLC in Wayne, NJ and works directly with clients advising them on their financial planning and investments. Ed’s work focuses on the unique needs of business owners, helping them extract value from their business while creating efficiencies in their business and personal financial plans. He is, also, a member of NAPFA which is dedicated to serving fee only advisors.