Worldwide Reactions to Russia’s Aggression: Is Your Portfolio Safe?

Russia’s ongoing invasion in Ukraine has not only led to harsh sanctions from nations, such as the U.S., but has also caused many companies to reevaluate their relationship with Russia. (BBC News; The NY Times). As of March 8, 2022, McDonald’s—whose opening in Moscow two months after the fall of the Berlin Wall symbolized a new era in business relations with Russia—closed all 850 Russian locations. (Radio Free Europe; PBS News). Powerful Russian individuals are also not immune from these reactions since the U.S. imposed sanctions on several “oligarchs” who have close personal ties to Putin. (Steve Holland, Matt Spetalnick, & Daphne Psaledakis, Reuters). These unprecedented regulatory sanctions, combined with upheaval in the global markets, will likely lead to short term losses in investors’ portfolios, but will likely be inconsequential for the average individual investor in the long run (Lananh Nguyen, The NY Times).

One of the key ways the U.S. has sanctioned Russia is by cutting off its natural resources industries, most notably oil (Jen Kirby, Vox). In 2021, the U.S. imported 672,000 barrels per day of Russian oil, a number which made up a reasonable amount of Russia’s daily oil production of 11.3 million barrels. (Arathy Somasekhar & Marianna Parraga, Reuters;Statista; Iea). The U.S. originally froze all Russian central bank assets held in the U.S. and imposed restrictions on Russia’s sovereign wealth fund. (Alan Rappeport, The NY Times). This freeze has several consequences: (1) Americans may not take part in any transactions that involve the largest Russian financial institutions; and (2) any Russian central bank assets held by U.S. financial institutions, as well as all U.S. dollars owned by the Russian Central Bank, are now inaccessible. Id. Other sanctions target certain Russian individuals by freezing or outright seizing their assets. (The White House). However, The U.S. Department of the Treasury recently took further steps and imposed full-blocking sanctions on Sberbanke, Alfa-Bank, and their subsidiaries. (Department of the Treasury). Sberbanke and Alfa-Bank are, respectively, the largest public and private banks in Russia. The Department of the Treasury also imposed full-blocking sanctions on Putin and his foreign minister, Sergey Lavrov. Id. Full-blocking sanctions add these individuals and organizations to a list of Specially Designated Individuals (SDNs). (Department of the Treasury). The assets of those placed on the list of SDNs are blocked and all U.S. persons are prohibited from doing business with them. Id.

On top of these government sanctions, many companies across every industry decided to reevaluate their business operations and business relations with Russia. (Yale School of Management). The Yale School of Management breaks up these companies into several categories based on their actions: (1) withdrawing completely; (2) temporarily suspending operations; (3) scaling back operations; (4) “buying time,” which entails the company holding off on new investments/developments while continuing current substantive business; and (5) digging in and defying outside pressure to alter their relationship with Russia.

Some notable companies that fall into the first category are BP, Bryan Cave (a global law firm), Exxon, FIFA (banning Russian athletes from competing), Netflix, S&P (by curtailing access to capital markets), Vanguard (a mutual fund complex), and Amazon. Id. However, it is often difficult or impossible for a company to simply terminate contractual obligations and cease conducting business without facing heavy penalties. For example, Pennzoil, Co. sued Texaco, Inc. for breach of contract and was awarded damages exceeding ten billion dollars. (CaseBriefs). Nonetheless, force majeure clauses can make such termination possible. A force majeure clause is a “provision in a contract that frees both parties from obligation if an extraordinary event directly prevents one or both parties from performing.” (Westlaw). A non-performing party may claim force majeure to terminate contractual obligations if circumstances arise that are out of the non-performing party’s commercially reasonable control and are not due to any fault or negligence by the non-performing party. Id. The World Bank website has a simple example of a force majeure clause that includes “war, hostilities (whether war be declared or not), invasion, act of foreign enemies, mobilization, requisition, or embargo” as events that can terminate contractual obligations. (The World Bank). War is commonly included in force majeure clauses, which can allow companies to get out of contractual obligations, given the current situation with Russia. (Janice M. Ryan, Venable, LLP). A recent example of a party using a force majeure clause to cancel a contract occurred when a New York art dealer cancelled an auction due to the COVID-19 pandemic. (Jaburg Wilk, JdSupra). The court ruled in favor of the art dealer due to the presence of a force majeure clause in the contract with the auctioneer. Id. Russia is one country that even recognizes force majeure clauses in legislation. (Sergey Patrachtov, Ksenia Erokhina, & Dmitry Kuptsov, Legal500). 

While some companies across the world (and U.S. investor’s portfolios) may have been hit hard financially in the short term by this conflict or a subsequent decision to cease business operations in Russia, the market in the U.S. is generally unaffected in the long term by events like these. (Ron Bousso & Dmitry Zhdannikov, Reuters; Macrotrends). According to Statista, 45.7% of Americans owned shares in mutual funds in 2020. (F. Norrestad, Statista). As of 2021, 53% of Americans owned stock in some form with the majority of Americans participating in the stock market through mutual funds. (USAFACTS). Mutual funds are much more closely tied to general market performance than individual stocks. (F. Norrestad, Statista). Furthermore, while the U.S. market fluctuates in response to world events, it historically has always recovered and reached new highs. (Macrotrends). For example, the S&P 500 more than doubled its value between January 1946 and January 1990 (roughly the duration of the Cold War). (Macrotrends). The events that took place during this time were just as tumultuous as current events yet the market during that time was still moved upward. (Id.; Dan De Luce, NBC News).

For the average individual investor who is primarily invested in mutual funds, most portfolios will likely only suffer some short-term losses from this conflict. (Fidelity). However, while investors who are approaching retirement may need to worry about their portfolios taking a hit right before retirement, most investors’ portfolios will  likely have ample time to recover from any short-term losses caused by this conflict. (Dana Anspach, The Balance; Mallika Mitra, Money). In other words, if you already have a solid investment plan, the best thing to do is to do nothing at all. (Mallika Mitra, Money).