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It’s been a little over a week since the unprovoked attack by Russia on Ukraine has triggered a war in Europe unseen since World War II. A humanitarian tragedy is unfolding before our eyes as Russia continues to attack civilian areas, the Ukrainian military continues to defend their territory, and over a million Ukrainian refugees have been forced to flee their homes.
This article isn’t about the war itself. There are lots and lots of people far more qualified than me writing about the day-to-day news in the conflict. We aren’t a news site, we’re a finance blog, so what we’re going to talk about is how this war has affected, and will continue to affect, the financial markets.
That being said, please know that in no way am I trying to minimize the suffering of the innocent people caught up in this. I am only covering the financial aspect of this tragedy because the other angles of this event are covered so well by the news already. Let’s hope that this conflict comes to a halt as quickly as possible, because this war is hurting everybody.
Should Russia Be Expelled From Our Investments?
The most immediate effect of the Ukraine conflict is that volatility has returned to the stock market. Stocks hate uncertainty, and a war in Europe involving a nuclear power is about as uncertain as you can get, so stock markets will be heaving up and down for the near term as the world digests this extremely unpleasant piece of news.
Obviously, stock market volatility is nothing compared to what Ukrainians are experiencing right now as their homes and livelihoods are destroyed by the advancing Russian army. However, it should be noted that the economic shock wave of the war isn’t limited to Ukraine. Russia’s economy is being absolutely hammered as well.
Punishing Western sanctions have cut off Russia’s banking system from the rest of the world, and the knock-on effects of those sanctions has been to trigger an almost immediate recession inside Russia. The ruble has dropped 40% since the war began, the Russian central bank has more than doubled their benchmark interest rate overnight from 9.5% to 20%, and unemployment has spiked as pretty much every country in the Western world refuses to do business with a regime that would attack a neighbour so viciously and without provocation. Just yesterday, VISA and Mastercard announced they were pulling out of Russia, instantly turning Russia into a financial black hole.
Visa said in a statement that it would cut off transactions “over the coming days” and consequently cards issued in Russia would not work abroad as well as foreign issued cards in Russia.
Visa and Mastercard will both suspend operations in Russia, TheGuardian
Russian citizens have begun pulling their money out of their banks en masse as they rush to convert their savings out of rubles in a scene reminiscent of the hyper-inflationary environment of 1930’s Germany.
With all that happening, you might be tempted to think that a Russian recession’s impact on a globally diversified portfolio would be pretty catastrophic.
You would be wrong.
Despite Russia’s size and military strength, on a global scale the economy of Russia is surprisingly small. Russia’s 2020 GDP of $1.48 trillion may seem like a large number, but Canada’s is higher at $1.64 trillion. That’s right, somehow Canada’s economy is technically bigger than Russia, despite them having nearly 4x the number of people (144 million versus Canada’s 38 million).
Russia’s participation in the world stock market is also surprisingly small considering how freaking huge the country is. In the MSCI Emerging Markets Index represented by ticker symbols XEC (CAD-denominated) and IEMG (USD-denominated), Russia represented only 2% of the shares being traded. That’s not 2% of the world economy, that’s 2% of an index specifically designed to track emerging markets.
And now, they won’t even have that as MSCI has announced that they have removed Russia from the index completely.
Russia’s stock market is “uninvestable” after stringent new Western sanctions and central bank curbs on trading, making a removal of Russian listings from indexes a “natural next step”, a top executive at equity index provider MSCI said on Monday.
MSCI says removing Russia from indexes ‘natural next step’, Reuters Business
Note that this announcement is not for a move that will take place sometime in the indeterminate future. They’ve already pulled the trigger. Russia is no longer listed under the geographic breakdown of their ETFs.
So if you were wondering whether our Investment Workshop portfolio had any Russian exposure, the answer is: They used to, but not anymore.
Bye bye Russian companies. You will not be missed.
Interest Rate Outlook
The other potentially major impact of the Ukraine conflict on the financial world is on interest rates.
Normally, when something like this happens central banks respond by dropping interest rates in order to stimulate the economy. They did it during 9/11, the Great Financial Crisis of 2008/2009, and of course the recent pandemic.
This time is different.
First of all, interest rates are already at rock bottom. You can’t go drop interest rates when they’re already at near-zero.
Second of all, because Russia is a major oil-producing country and outrage over their behaviour is prompting countries to block Russia from the oil markets, oil has increased in price. Already, oil prices as measured by the WTI crude benchmark has soared from $90 a barrel to $115. Prices at the pump have already responded, and consumers are likely going to see higher energy costs for some time.
All this means more inflation.
In a world still recovering from the trauma of the pandemic, and with inflation already sitting at levels that we haven’t seen in decades, this is the last thing consumers needed.
Taming inflation is central banks’ number one goal. And that means that they will have no choice but to keep raising interest rates.
In Canada, our central bank has already started.
The Bank of Canada announced Thursday that it was raising its key overnight lending rate by a quarter of a percentage point to 0.5 per cent, as it attempts to fight inflation driven higher by everything from energy prices to supply chain woes caused by the COVID-19 pandemic.
Bank of Canada raises overnight rate to 0.5% — first hike in years will be the first of many, experts predict, Toronto Star
In a major decision that promptly got buried underneath all the news coming out of Europe, our central bank went ahead with their long-planned rate hike. They hedged the decision by saying that the uncertainty around Ukraine may change their outlook, but the reality is that they were backed into a corner.
Now all eyes are on the US Fed, which will make their move in the middle of March. Anything could happen between now and then, but odds are that they will follow suit and choose to tackle inflation rather than stimulate the economy.
Stay Globally Diversified
All this proves the importance of maintaining a geographically diversified portfolio. Betting hard on any one country or region opens you up to an unforeseeable geopolitical event like this from completely derailing your portfolio. But if you place your bets on multiple geographic regions, negative events like this in one region of the world can be counterbalanced by positive developments in other regions.
Check this out. This is the graph of the MSCI EAFE index. EAFE covers Europe, Australia, and the Far East, so it’s the ETF that we own that’s most exposed to this war. This is its chart from Feb 23 to today.

You can see the sharp drop on Feb 24, when the invasion began. Then a few days of optimism as the West began to impose sanctions, then a sharp drop afterwards as the war doesn’t look like it’s getting resolved anytime soon.
Now let’s look at the same chart with the US index as tracked by VTI overlaid on top. VTI is purple (because USA = Red + White + Blue = Purple)

The US index also experienced the same drop on the day of the invasion, but then recovered its losses as traders realized that this was, as of now anyway, unlikely to expand into a global war that might drag the US into it. The bet is that the US economy continuing to recover from COVID will have a greater impact than a war in Eastern Europe.
Now here’s where it really gets interesting. Here’s the same chart, but with Canada’s stock market tracked by the ETF VCN, in red.

That’s right. Canada’s stock market actually went up.
Why? Canada and Russia’s stock market share one thing in common: they’re both heavily commodities based. Specifically oil. They pump a lot of oil out of Siberia, and we pump a lot of oil out of Alberta.
Typically, when oil prices go up, our respective stock markets also go up. Higher oil prices mean higher corporate profits. However, with this current market shock, Russia’s going to have a lot of trouble going forward selling their oil to the world. But the world still needs oil, so they’re going to look to other countries to get it. Countries like…Canada.
And as a result of these counter-balancing forces, when I bring up my portfolio on Passiv for the same time period, this is what it looks like.

We are down slightly, but only by 1.2%.
Did I see this coming? That a Russian invasion would trigger global sanctions that drive oil prices up and made the Canadian stock market rally? No, no I did not. Not even close.
But that’s the power of geographic diversification. Negative events in one part of the world were counter-balanced by positive events in another. If you didn’t watch the news and looked only at this graph, you’d think nothing was happening.
So as a result, FIRECracker and I are planning to continue our 90% equity/10% fixed income. As we wrote at the beginning of the year, the math behind our projected living expenses this year ($43,000) and our portfolio’s yield ($44,000) tells us that we are no longer vulnerable to our portfolio’s day-to-day gyrations. We will keep our even split between Canada, the US, and EAFE because no matter what happens in the news, we will be able to keep financing our retirement with the dividends while still positioning ourselves to benefit long term.
Update on Johnny FD
Before we wrap things up, I thought I’d provide an update on our friend Johnny FD. The last time we wrote about him, the war in Ukraine had just broken out and he was stuck in Kyiv.
Since then, I’m happy to report that he managed to make it out safely. Apparently, him and another Youtube personality named Benjamin linked up and the two of them were able to escape Kyiv together on one of the last trains out of the city. Their journey was absolutely harrowing, but in the end they both made it out alive.
That being said, if there’s one tiny silver lining in this whole horrible affair, they filmed their escape and in my humble opinion produced one of the finest examples of citizen journalist I’ve ever seen.
To support the Ukrainian people affected by this terrible crisis, please consider donating to the International Committee of the Red Cross, or whatever reputable charity you prefer. Slava Ukraini! Glory to Ukraine!
Stay safe and stay invested, everyone.

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Glad to hear that Johnny FD manage to escape Ukraine on time. I don’t think everyone got that lucky. Sending my positive thoughts and support to the people of Ukraine that are to go through this. I can’t even imagine how hard and devastating this is. This is for us a good reminder to enjoy the freedom we’ve got for the time being!
Thanks for the analysis! Very helpful to be reminded of diversifying your portfolio across regions. Was wondering what happened to Johnny FD last week so glad he made it out.
Yeah, no kidding. Really makes those people who were screaming about mask mandates as “pure fascism” seem like entitled babies.
This war is what fascism actually looks like.
Thank you for sharing some investment information. Many thoughts cross my mind, and I’m sometimes doubtful about my investment here in Canada, especially with the recent freezing of accounts – the implication of that action is enormous. We saw similar action against Russia, and unfortunately, many innocent Russians are affected too 🙁 I wondered about the future of Canada, and my faith in the financial institution was shaken. I have been looking forward to hearing what you think about investing in this current environment.
About this war, if we want to make a dent in Russia, why are Canada and the USA still buying gas from Russia? On a daily basis, I heard it amounts to billions! We don’t want war, so here’s a bit of sanction, and yet we give Russia billions of $$ to fund the war?? It just doesn’t add up! Especially when both Canada and the USA can be energy independent. Sorry to rant a bit… just feeling frustrated and a bit uneasy.
Thanks so much to Johnny and Benjamin for their superb mini-documentary of their flight from Ukraine. How utterly surreal it must have been for them (and hundreds of thousands of others) to have become refuges with very little warning. I am squished for Ukraine.
The bloated and ineffective Red Cross is not your best bet, by a longshot, for donations. I should know, I worked for them. Do your own research. Give as directly as possible. Avoid paying for PR departments, high-cost marketing campaigns and other indirect costs.
Do you have any recommendations for other charities?
I’ve been donating to the CRC for years but always had an uneasy feeling about the amount of money going to PR. However, I don’t really have much time to research and in the end, their PR worked and they are the charity in to of mind…
that’s so good to hear that JFD made it out safely
LOL. But Powell stated inflation would be “transitory”.
Just goes to show you that either these analysts paid huge salaries have as much idea what is going on as anyone does which is nothing or they are being deliberately manipulative
I am scheduled to make an rsp contribution this week. The rebalance indicates purchases of my CDN eft, INT eft, and US eft (no FI purchases required, 75/25 split). Should I proceed as is scheduled or should I adjust based on the Russia/Ukraine conflict? And if so, how?
Continue to buy and maintain your allocations as if you were a machine without emotion. You didn’t stop buying when covid hit, did you? Why would you question it now!
because being reactionary and nimble with your portfolio is being promoted now here.
“From the start of WWII in 1939 until it ended in late 1945, the Dow was up a total of 50%, more than 7% per year. So, during two of the worst wars in modern history, the U.S. stock market was up a combined 115%”
https://www.investopedia.com/solving-the-war-puzzle-4780889
What would you do with a $100k windfall right now?
Invest it like at any other time.
In the short and medium term, the war in Ukraine is a net negative for the world. It’s not just russian companies barred from selling their goods abroad, but also foreign companies not able to do business in Russia. Think of McDonald’s, Coca-Cola or Apple. All of them are not headquatered in Russia, but they will still be affected if they don’t sell in Russia anymore.
It’s true that the impact won’t be very large. Although Russia is a very big country, most of its lands are inhabitable and it’s economy is very weak due to the lack of freedom and a very deficient justice system. This is bad for the rest of the world, but not that bad.
I think long-term could be a different story. I see Russia – or the Putin’s regime – as very weak. It’s probably what prompted the war in Ukraine. If you think of it, Ukraine is not really a threat to Russia, but it’s a very real threat to the dictatorial regime of Vladimir Putin. If people in Russia want freedom like in Ukraine, they have no choice but to get rid of Putin. I think his regime is getting so weak that he had to destroy a successful neighboring democracy in order to protect himself.
With the economic impact being so large on Russia because of the sanctions, I am in the impression that Putin will not be able to pursue this war for a very long time and it may eventually end with a revolution in Russia.
I may be too optimistic. But that turn of events would be very positive for the world.
Anyway, we don’t really know. So I can’t invest on that basis. Like you say, better remain diversified. But it’s a reminder that short term problems can turn into positive outcome in the long term.
I’m not sure I agree when you say the conflict was unpredictable. Maybe the date was unpredictable. But Putin was preparing this for many years. He probably would have hoped his friend Donald Trump was still in office when he attacked. But the pandemic in 2020 probably derailed this plan. With oil at -40$/b, an attack at that time would have been impossible for Russia.
Which lead me to my last point. Is it the war that prompted the increase in the price of oil or the price of oil that prompted the war ? Kind of asking whether it is the egg or the chicken that comes first ?
I agree that, in the short term, the war provide a boost in oil prices, due to short term difficulties in procurement and temporary shortages. But in the long term, commotidies have the double effect of increasing the benefit of a war as well as increasing the means of warfare states.
We can take the example of wheat, oil and other metal as examples. When their prices are low – nobody wan’t them – it’s not worth fighting over them. But when their price is up – when buyers (countries) have difficulties providing them – then there is much more value to steal other countries’ resources. Ukraine has some oil. But they have a lot of wheat and other resources.
Second, wars are generally conducted by weaker states. Stronger states rely more on commerce, which is based on confidence, freedom and stability to do business. Weaker, dictatorial states have much more difficulty to conduct business because of the risk of loss involved in doing business in these countries. Those weaker countries will then rely heavily on resources, because they can’t be rely on to do commerce. Also, entrepreneurs will prefer to establish their business in a democratic and free country to have the best chances of success.
Since the economy of Russia is so heavily reliant on commodities, they absolutely need higher commodity prices to conduct their war.
Hence, higher oil and commodities prices may be the reason why we have this war, and not the other way around…
I say that because, although I did not predicted the war would start on February 24 2022, it was very obvious Russia was preparing something and that oil would reach new all time highs eventually. Both of them occured quicker than I had thought…
Inflation may continue for a while. So better be prepared.
Anyway, I hope these events can lead us to a better world eventually. We don’t need Putin anymore. Ukrainians and Russians both deserve better. Let’s see how hard they are ready to fight for their freedom ! I obviously wish them the best, even if the coming months will be very hard. 🙁
There’s so many “what if’s” to this situation… What if Putin threatens to allow a nuclear power plant in Ukraine to melt down unless the free world ceases supporting the insurgents. What if the insurgency gains the upper hand and Putin does a WMD/chemical attack ? What if the insurgents clearly win, resulting in years of reparation payments from Russia ? What if, out of desperation, the insurgency starts planting bombs in Moscow ?
..the only thing I’m confident in is that I have no confidence in the information we’ve received thus far. We need another week or so before the situation becomes more clear.
The legitimate army of an internationally recognized government is not an “insurgency”.
Yes.. totally agree… my bad.
So, I was just starting the process of aligning my portfolio to the workshop mix when all of this volatility started. The current mix is heavily US stock indexes and has taken a 10% hit so far. Is now a good time to continue with that transition? This isn’t rebalancing — this is swapping out index holdings and purchasing new ones as described in workshop — essentially selling into a down market. Should I wait until things come back up before doing the overhaul? Thanks
I think that depends on what you are selling and buying.
If you are selling some narrow US ETF (which is down) to buy a broad US ETF (which is also down) then it doesn’t matter when you chose to transition.
If you are selling something that is down to buy something that is up, then it depends on the extent. Selling something that went down 0.5% in order to have a better overall portfolio is worth it. If it’s down 10% (and if you think it will recover soon) then waiting makes sense.
Also, you can always DCA it, and I’d suggest that for the very least you start investing all new contributions with the new allocation until you are comfortable selling the old holdings.
I’m not sure how I should divide my equities investments between my home country and the rest of the world. Right now it’s about 67% Australia, 33% MSCI World ex-Australia, because investing in Australian shares is tax advantageous for me, but I’m thinking of moving towards 50/50, because the Australian economy is so dependent on trade with China, and if they try to invade Taiwan…
Question: at the end of the post you tell that your yield shield will be 44K
How can you get this value if the dividends depend on the price of the stock. ? Is an average based on the historic of dividend of each ETF ?
it is true they can’t know for certain. it’s an estimate that as you said, usually falls with drops in stock price
That didn’t make any sense. Stock prices go up and down on a continuous basis. Except for rare occasions like recessions or poor corporate governance, dividends normally grow. If they don’t, those companies are punished via their stock price until the price aligns with what investors believe is the correct dividend payout.
Kristy and Bryce invest in broad based index ETFs. I do the same and I’ll tell you that I have only seen continuous growth year over year in the dividends I receive.
Do you actually invest in broad based index ETFs? It diesn’t sound like you do.
thanks tiktok!
There’s a lot of “in the moment” portfolio adjustment being promoted on this blog lately to react to whatever news is circling be it inflation, Ukraine, covid etc. Setting people up for predictable bad habits and buy high sell low behavior. just stick to your asset allocation come rain or shine is the winning long game
Sad that this senseless war is still going on. I pray that the war ends soon.
Not negating the effect of what’s happening in Ukraine. I am wondering would you touch on how should a person investing in a diverse portfolio react when their own country’s currency has gone down like a step function. In this case Russia’s currency.
So as an example if john has been planning for a FI in Russia and he was just a year away his plan has completely derailed. What should a person like John in Russia do in this rough times ?
Well now that the UK has said that they’re not going to get any Russian energy anymore by EOY, I am wondering if Canadian oil or some other energy source is going to be the successor to supply the previous demand for Russian energy?
Seems like a good buy or good call LEAPs if not already baked in.