The Russia-Ukraine crisis: Its affect on wealth management and retirement planning

Russia’s invasion of Ukraine has sparked even greater uncertainty amid markets jolted by the pandemic and expected interest rate hikes. Wealth managers now face fresh questions on how to navigate rapidly shifting equity and bond markets and the fallout on retirement portfolios.


Points we'll discuss:

• The hit to the overall global and U.S. economies

• The effects seen in financial markets

• The impacts of financial sanctions




Brian Wallheimer (00:10):
Welcome everyone. Thank you for joining us today. We are going to talk about the Russia-Ukraine crisis,
it's effect on wealth management and retirement planning. Myself, like I said, Brian, Walheimer, interim
editor-in-chief right now at Financial Planning and financial-planning.com. I also want to say thank you
for signing up for this, signing up for this webinar and for subscribing to financial planning. We hope you
enjoy our presentation today, learn a little bit and spend some time on financial planning.com and
getting the most out of your subscription. I'm also going to introduce Lynnley Browning. She is the
wealth editor of financial planning, and she's going to do most of the heavy lifting today here. And she
has quite a bit of experience in Russia. Lynnley right now writes about tax planning and investment
strategies at financial planning, but she spent nearly six years as a reporter in Russia.
Brian Wallheimer (01:01):
In the 1990s. She led coverage of the energy and commodities markets across the former Soviet Union
as a reporter for Reuters in Moscow. She's fluent in Russian, which gives her the opportunity sometimes
to get in a few digs, we assume in some of our meetings, but she's also walked oil platforms of Baku,
descended underground into the Arctic mines of platinum and palladium and trod in the alleys of
Grozni, Chechnya, to profile the region's central banker, and find out where the Vatican gets its special
wax for candles. She's also written about, excuse me, written about Vladimir Putin's love of judo and
financial sanctions against Russia, as well as flown on flown on Lukoil president's private jet and partied
with former collective farmers in Krasnodar. She grew up in Tulsa, Oklahoma, and graduated from
Princeton university with a degree in Slavic languages and literatures.
Brian Wallheimer (01:52):
She has a fondness for Russian literature, art and Soviet kitsch. And you might notice behind her, she
even has a bust of Vladimir, excuse me, Vladimir Lenin. I almost said Putin. I'm sure she picked up in her
many adventures. So I'm going to hand things off to Lynnley here in a second. What I do just want to
remind everyone is that this is,, first and foremost, a humanitarian crisis. So while we're talking about
wealth management and retirement today, our hearts and thoughts are with the people of Ukraine who
are going through the terrible tragedy of this invasion. And we hope for a speedy end to the hostilities
there. But we are going to talk now about wealth management and retirement, and I'm going to hand
things off to Lynley.
Lynnley Browning (02:32):
Thank you, Brian. Hello, and thank you all for joining. First and foremost, to reiterate and echo what
Brian said, the atrocities taking place in Ukraine are devastating and heart rending. They demand our
attention, empathy, and action. Tolstoy understood these precepts, and it turns out they still have
relevance for our 21st century selves on the wealth management front, which is our focus today. The
invasion is now in its sixth week, and it's having an impact on the global economy, oil prices, inflation
and markets, which means it's affecting the financial planning industry and its clients. Why don't we
start with why this is happening now and how it's unfolding in markets? Why is this happening? The big
factor driving Putin's land grab is the vacuum of geopolitical power in global politics. And this recently
became known as G zero coined by Ian Bremer of Eurasia group.
Lynnley Browning (03:44):
And it refers to the lack of teeth in the G7 and the competing interest of G20 members to keep the
world in order. It reflects the decline of American military and economic power. G zero basically reflects
the world in which every nation is for itself. And we have seen evidence of G zero in recent years —
Brexit, NATO members not spending 2% of their GDP on defense as required under article five. Put all of
that in the context of Putin's view of the collapse of the Soviet Union in 1991 as the greatest geopolitical
disaster of the 20th century, Putin's view of that catastrophe reflects his sense that the G zero theory is
real. Putin's goa; isn't to restore the former Soviet Union. It's rather to reconstruct a centuries old
empire that he lost in places like Belarus Ukraine, Moldova, et cetera.
Lynnley Browning (04:49):
The existence of a G zero world of every nation for itself has underpinned a relative lack of responses by
the U.S. and other countries to Putin's prior incursions. In 2008, he snags a chunk of Georgia, in the
caucuses six years later, he grabs Crimea and a chunk of the Donbas region in Ukraine, but there was
little consequential punishment on the world stage for these land grabs. And how do, what's the
evidence for that? Well, come 2018, Russia's hosting the world cup in Moscow. Putin met five times with
former president Donald Trump, most famously during that closed-door meeting in Helsinki in 2018. He
met Biden in Geneva in 2021. The grand takeaway of all of this is Putin thinks he can get away with it.
The counter force that Putin is having to contend with is that the Kremlin's invasion of Ukraine has
forced NATO to reckon with its mission and purpose.
Lynnley Browning (06:06):
So it has functionally strengthened NATO at a time that Russian military tactics have been an absolute,
shocking disaster. I hope everyone has seen the videos on the ground of Ukrainian farmers using their
tractors to tow broken down Russian tanks or Russian tanks that ran out of fuel. They're pretty kind of
unbelievable. Putin was really, really unhappy, has been unhappy, deeply unhappy for many, many years
about what he perceives as NATO's aggressive expansion right up into his border. His situation and his
fear is now surely exponentially worse as non NATO countries like Finland and Sweden are sending
weapons to Ukraine and even indicating that they may possibly want to join NATO. And then you've got
baltic states which are seeking permanent NATO bases again, right up on Russia's border. So the upshot
is that if Putin felt cornered and threatened before, you can multiply that by about 10. Let's go to
sanctions.
Lynnley Browning (07:27):
So obviously the U.S., and other countries would place a round of sanctions on Russia, central bank,
financial institutions, leaders and oligarchs. They're working in that insofar as they are severely
pressuring the Russian economy. The flip side of that, of a stressed economy in Russia is that more
Russians tend to regard the west as evil. If we were really to block economically the Russian state, we'd
blacklist Gazprom, which is one of the world's largest energy companies and a major source of gas in
Europe. But so far Gazprom has gotten only limited sanctions that have been aimed intending at curbing
its ability to purchase certain debt and equity. In terms of oil, unlike its gas, Russia sends its oil east
rather than west to Europe. The oil goes east, but then it just goes back to Europe.
Lynnley Browning (08:30):
So it goes from Russia to Asia, to Europe and all that transportation back and forth just drives up
consumer prices, which leads us to the and global economies. So the invasion has obviously disrupted
the flow of food and energy around the world. Russia and Ukraine are top global producers of
commodities. They account for 25% of the global wheat trade. Russia's the world's largest exporter of oil
and third largest oil producer. The EU imports nearly half of its natural gas from Russia, sunflower oil,
Russia, Ukraine account for 70% of global production. Sunflower oil goes obviously in tons of food
products. Then we go into like ammonia for fertilizer. Ukraine's the biggest producer in Europe, iron ore,
platinum group metals, 40% of Russia's palladium into the catalytic converters and semiconductors that
we buy.
Lynnley Browning (09:39):
The upshot is that this economic disruption is taking place at a delicate moment. Meaning as the global
economy emerges still from the pandemic, comes out of clogged up supply and deals with inflation. So
inflation, we've had one hike already, we've got six more coming by year's end. So the question then
becomes, how do stocks perform when the fed raises rates and what happens when rates rise during a
very serious geopolitical conflict and pandemic stressed economy? The conventional wisdom is that
higher interest rates lead to lower stock prices because investors mark down their discount, the future
cash flows of publicly traded companies that makes them worth less today. Also conventional wisdom is
that is bond yields rise, investors tend to dump their stocks and move more into fixed income. That
conventional wisdom can get very, very, very complicated and not play out.
Lynnley Browning (10:50):
So if we look at what markets are doing, bond markets have been sending mixed signals, equities have
basically continued overall the rise since the fed raised first rates, interest rates in, in, uh mid-March. But
overall, the upshot is that Russia in Ukraine injects uncertainty and risk into an already fragile
environment of persistent inflation supply chain bottlenecks, and a pandemic economy. So what does
this mean for you guys? What does this mean for financial advisors? Well, let's keep in mind that Putin is
famously a long-term thinker, sometimes centuries long, which makes it somewhat ironic and perverse
that the long view is exactly what all of you guys take when gaming out retirement and estate planning
for your clients. So in this odd sense you guys, and financial advisors and wealth managers everywhere,
share something in common with Vladimir. And the long view shows that over time, over many years,
prudent planning, amid interim market and economic jotls works, which means that wealth managers
have a couple of things to perhaps keep top of mind as they consider how Russia's invasion of Ukraine is
affecting, if at all, what their clients are doing.
Lynnley Browning (12:30):
with retirement portfolios. With the fear gauge up, you know, people can reconsider the 60-40
allocation, they can focus on high-quality U.S. stocks. Wall Street analysts are particularly bullish on
energy stocks. Those aren't of course very ESG friendly. So the boom in energy stocks following Russia's
invasion of Ukraine is a definite problem for the ESG movement. In fact, the Morningstar U.S. Energy
index tracks the broad market in the first three months of this year. It was up 43% compared to the
market's overall 5% decline. This crisis in Ukraine isn't going to go away anytime soon. Active
management is making a comeback and the active financial planning will too. Brian, we could go to
some of the slides, the charts,
Brian Wallheimer (13:42):
You want to go back to some of those charts? Yeah. We can go back to there. And I also want to point
out, there are, I think what you're saying Lynnely is there's a lot of people looking for safety right now.
Diana Li actually has a story coming out — one of our interns — she has a story coming out today,
actually probably in the next hour or so, about how she is seeing some wealth managers even turning to
100% cash right now, looking for a safe place to store things because volatility is so, is so all over the
place. And I think this chart kind of says some of that. We look at some of the crises that have happened
over the last, what do we got here 80 years or so from Pearl Harbor through the Iraq war? And we can
see that the markets have not necessarily responded in the same ways. Can you talk a little bit more
about that? I think we lost Lynnley for a second there. But as you can see out there, she is back. All right.
So what can you, so, as I was saying, these, we don't see markets responding the same way every time
we have a major geopolitical crisis. What can you tell us about that?
Lynnley Browning (14:49):
I mean, if we had to tease out the broad trends and I would first and foremost, note that in a, there's a,
there's a degree to which this chart is mixing apples and oranges and pears and every other kind of fruit.
You can imagine, because for example, Pearl Harbor is structurally and fundamentally different
compared with the September 11th, the 9-11 attacks. Nonetheless, we can see that, you know, different
types of crises have had different economic and market effects over different periods of time. So it's,
you know, it's normal when there's a geopolitical crisis, a war, an invasion, a terrorist attack, for things
to get jolty and things to get super bumpy, but it has to be looked at within the context of everything
that's else that's going on in that political and economic climate.
Brian Wallheimer (15:52):
Yeah. We have here the annual S&P 500 performance since 2007. What are you, what are you looking at
here? Lynnley?
Lynnley Browning (16:02):
I'm trying to pull it up. We see a lot of variation. We see things going up and then things going down
again. The point of this slide was to give a sense of why it's important to take the long-term view and
really important not to get completely hysterical and flip that out and, you know, completely throw a
portfolio back to the drawing board, but rather to do a sort of spring cleaning and ferret out what needs
to stay what needs to go, what needs to be arranged.
Brian Wallheimer (16:51):
And now we have a shorter term view.
Lynnley Browning (16:54):
We do have a shorter term view. It's often the shorter term view is what captures the attention of
investors who are so focused on, you know, a one day, 300-point drop or, you know, over two weeks,
we're down X percent. It's important to see how obviously things really, really have responded in both
up and down ways to the invasion of Ukraine. The point of that is that reflects volatility and volatility
reflects a need by wealth advisors and financial planners to really pay attention to how a client's
portfolio is positioned to handle that.
Brian Wallheimer (17:48):
Okay. And energy stocks, obviously this one is going to be huge, right. I read, what was it, yesterday, the
day before, a Morningstar report that talked, I think you touched on it about those, about that oil
moving east into Asia, and then moving back and the transportation cost rising. And it just, it sort of of
floored me that, you know, it doesn't mean that oil isn't going to move, right. It just means that it's
probably going to get more expensive, at least in the short term. Even things such as, you know, if
Europe were to get its oil from other places, the distillates in that oil can change things in terms of the
amount of oil needed to make the diesel fuel that's preferred there and those sorts of things. So, tell me
a little bit about what you're seeing in terms of energy stocks right now, here in this slide.
Lynnley Browning (18:37):
What, what we've seen in terms of energy stocks is that energy stocks have really had a good, good
spike, and good run up after Putin invaded Ukraine. Fears over global energy supplies, fears, over access
fears over costs, fears over how much worse this crisis is going to get, and it is going to get worse or how
long it's going to last. And it is going to last a while.
Brian Wallheimer (19:09):
Yeah. Yeah. I'm interested, you know, you also mentioned, I think in one of those last slides about, oh,
what was it? I lost it for a second there. Well, I'll come back to it. Oh, I know what it was. You talked
about the, you know, the energy stock, but that goes against some of the ESG trends that we're seeing.
Right? I mean, it seems like energy stocks might be a place that you, that look safe right now, but then
you have to balance that with your clients and what clients are willing to invest in. Right? I'm also
interested we have the Q and A and the chat, I would love to hear, you know, not only question from
the audience, but also if you have any comments on what clients are saying right now. Is ESG that big of
a factor? We've written before as well at financial planning that ESG is one of those things that people
love to talk about.
Brian Wallheimer (20:05):
But sometimes when it comes to brass tacks, what your clients are really interested in is the return.
There was a paper that came out a while back that suggested that maybe there was a bit of virtue
signaling in terms of ESG. So if anybody out there has any thoughts on that too, and wants to throw
those in the chat, I'd be happy to read that out. And we can elaborate or answer any questions that you
throw in there as well. But it seems like the one place where you're going see the volatility in the one
direction that we want is the one place that people might not want to invest.
Lynnley Browning (20:39):
They might not want to, or they might want to, if they're so panicked about preserving or buffering their
portfolios against losses and preserving retirement nest eggs. It will be interesting to see how this plays
out. It will be interesting to see at what point the desire for a strong investment return, trumps the
desire for an ESG friendly investment. So obviously with energy stocks up the way they are in this one
chart, it's pretty clear that investors see U.S. Energy stocks as a haven, and perhaps, just surely more so
than ESG stocks. Although it must be said that, you know, that's a conversation and a distinction that
comes down to very personal and individual levels. Some clients are absolutely going to say no, no way,
no, heck no way am I investing am I going to have any of my money in big oil. Others are going to say,
well, given what's going on in the world right now, it's kind of a nightmare. I'm gonna go for it. So, yes, I
would absolutely love to hear from you guys who are, who are watching and listening now. How you
think this tension between oil stocks as a kind of safe haven that's doing really, really well right now will
play out with the growth of ESG investing as a trend.
Speaker 3 (22:28):
Brian Wallheimer (22:29):Well, thank you, Lynnley. I really appreciate, you had some great insights there. I'm going to look downfor the Q and A, if anyone has anything they want to throw out, I think we have gone through ourmaterial. As journalists, we tend to talk fast as we go. WeLynnley Browning (22:44):Do talk fast.Brian Wallheimer (22:45):Yeah, that's one of our things. But I do invite any questions or ,questions or comments or anything likethat, that, that we can answer right now,Brian Wallheimer (23:02):Anybody out there? I don't see anything yet. I do want to remind you as well that we have, as Imentioned some stories coming out on this. We've had a number of different pieces that can informsome of this as well. I'm going to get down to our closing slide here real quick, with ways to reach us.But please do, please do check out financial-planning.com. You're subscribers now, which we very muchappreciate. And there's an opportunity there to see Diana Li's story here later today. She'll be talkingabout, like I said, those moves into cash. We have, we have one firm that said it's moved all of its clients,assets into cash right now, and plans to do that for a few months. We also have some stories out thatyou can check out, Ryan Neil, our tech editor, wealthtech editor.Brian Wallheimer (23:56):He has some stories out recently about Russian cyber attack threats right now. And how many wealthmanagement firms have not had to spend as much time worrying about that. He also has a nice coverstory for the current issue of the print magazine that we have out that touches on that as well, and howit hasn't been necessarily a major threat to wealth management companies at the moment. But thatthreat is rising and that is an opportunity for a player like Russia. So, so keep your eyes open for those aswell. And we send those out as emails, which hopefully you'll get, and we'll have some opportunity tosee those as well. So I'm not seeing any other,Lynnley Browning (24:39):The connection between, the nightmare that's happening in Ukraine right now and taxes, the taxsituation. As you all know, we are in yet our latest round of proposals about for tax hikes, the Bidenadministration's fiscal year 2023 budget proposes some pretty hefty rate increases. A lot of them, if notmost of them, are perhaps probably maybe unlikely to happen with these, with this latest tax increaseproposal coming out as Russia ramps things up in Ukraine. It's a distraction in a way from perhapsefforts by lawmakers. It's distracting lawmakers from efforts to think about tax changes.Brian Wallheimer (25:41):Absolutely. All right. Well, I I don't see anything else from anybody out there So I want to thank you forproviding some great insights and sharing some of your experiences and thoughts with us. And again, I,excuse me, I welcome everybody, now that you're you're subscribers to financial-planning.com, pleasego through, find some you'll find some great content there that elaborates on many of the things wetalked about, and of course we will be covering this as we go along, the effects on wealth management,retirement portfolios and all those things. So thank you so much for joining us today. And if there's any other questions offline or anything that we can touch on, Lynnley's contact information is here. And so,and we're always happy to hear from our readers.Lynnley Browning (26:32):Thank you all for joining.