- In mid-February there were more than a hundred thousand Russian troops by Ukraine’s border, and the United States warned of an imminent invasion.
- Stocks, gas and oil moved with every statement: markets react to expectations, not only to facts.
- A geopolitical risk cannot be predicted, but one can measure one’s own dependence on energy and suppliers and put a simple plan in writing.
In mid-February 2022, with more than a hundred thousand Russian troops by Ukraine’s border, the United States warned that an invasion was imminent. Every statement and every piece of news from eastern Europe fed uncertainty. Stock markets, the price of gas and the price of oil swung almost daily depending on what was becoming known. The moves were large and often contradictory, because the same piece of news could be read in opposite ways depending on who was reading it.
For anyone running a company or managing a family’s wealth, the difficulty was twofold. On one hand, nobody knew how the situation would develop. On the other, the economic effects of a conflict in Europe could arrive by several routes at once: energy, trade, investor confidence. In such a context, rather than guessing, it is better to identify what one depends on and how well one is covered. That question applies equally to a small business and to a family with savings, though the answers will differ.
Why markets move
Financial markets price in expectations, not only facts. Faced with the threat of a conflict, investors revise their forecasts for energy supply, trade and growth, and prices react to every announcement even if the situation on the ground has not changed.
This explains why prices can fall or rise sharply on a day when nothing new has happened on the ground. Markets incorporate what is expected, and a statement can change those expectations instantly. That is why reacting to every headline is of little use: volatility is the way the market digests uncertainty, not necessarily a signal of what will happen. Someone with a long horizon and a defined plan can afford to look at the noise from a distance; someone who needs the money within a few months should have planned differently.
A risk that is hard to measure
Geopolitical risks are hard to quantify, because they do not follow a data history as other economic variables do. This does not mean they cannot be prepared for: a company or a family can analyse which kinds of scenarios it is most vulnerable to without needing to predict which one will occur.
A useful exercise is to think in scenarios rather than forecasts: what would happen if energy became much more expensive, if a supplier stopped delivering or if payments with a region became difficult. The point is not to guess, but to know in advance what would be done and how much room there is to do it. An exercise like this, done calmly, avoids having to improvise if the scenario materialises.
The first step
Knowing how far a business depends on energy or on suppliers from one particular region is the first step. From there, it is worth assessing alternative sources of supply, the cash margin available and the cover already in place, and putting a simple action plan in writing.
The plan does not need to be complex. A page with the main dependencies, who is responsible for each decision and the thresholds at which action is taken is usually more useful than a long document nobody consults. Reviewing it with an adviser helps to spot blind spots, and updating it when circumstances change keeps it from going stale. The difference between being prepared and not is often as simple as having the questions asked in advance.
We cannot predict the next scare, but we can know what we depend on.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
