Written by 12:59 pm abroaden weekly insights

WTF x AWI #084 – War, Oil, and Cryptos

war about to hit the fan

This is issue #084 of our weekly newsletter, and in this edition, we’re looking at the potential economic impact of war in Ukraine.

How will a potential war in Ukraine impact markets? 

You’ve probably caught that there’s trouble a-brewin’ on the eastern fringes of Europe. For reasons still not entirely clear, Russia is amassing a significant chunk of its army around three corners of Ukraine. 

The threat of war in Europe hasn’t been this high since the late 1990s. 

More concerning, tensions between NATO and Russia are almost back to Cold War-era levels. 

It’s scary, especially considering how much human catastrophe could occur if conflict breaks out. 

But what would a war between Russia and Ukraine mean for the markets? 

It’s complicated, but in short, there’s a lot at play. 

  • There will be an impact on oil and natural gas prices. Russia is a significant exporter of both (more on that below). Furthermore, one of Europe’s primary natural gas pipelines runs through Ukraine. A conflict would likely shut down the flows.

    That said, Europe and its allies are arranging for backup supplies. The US negotiated with gas-rich Qatar to increase deliveries to the continent. Meanwhile, the US is also exporting liquid natural gas at maximum capacity.  
  • If Russia goes through with an invasion, expect severe sanctions to follow closely. In that case, those of us investing in many emerging market ETFs will see the impact, even if minor. For reference, the popular iShares emerging markets ETF is 3.71% Russian.
  • Commercial travel and cargo could face significant disruption. Russia controls an enormous amount of air space between Europe and Asia. If Russia shuts that down, passenger and cargo flights will need to take longer routes, increasing prices and transit times.
  • Investors will flock to the dollar, as it will be seen safer than the euro due to less exposure for the US.

With that in mind, we’re being mindful of a couple of points. 

  • Many investors priced in the risk already. Tensions between the three parties have been steadily escalating for months. With social media providing real-time, open-sourced intelligence, professional investors and markets have already adjusted prices in case war begins. 
  • Europe and the West are still safe. While there’s a possibility of Russia going to war with Ukraine, there is very little chance of Russia and NATO (and the US) engaging directly.

    A direct war between these powers would be unprecedented and catastrophic for both sides. It’s in neither side’s interest to go further than even the hottest moments of the Cold War.

    Europe would feel the brunt of any economic fallout, considering its reliance on Russian fossil fuels. Yet, that’s a drop in the bucket compared to the devastation actual war creates. 
  • There’s still time and space for diplomacy. The saber-rattling is almost deafening right now. Still, all parties want to avoid an armed conflict beyond the noise. Never count out a peaceful solution or even detente until it’s too late. 

Oil is back up. Should we be concerned? 

Oil prices are hitting 7-year highs, adding more inflation pressure to already stressed economies.

There are a couple of reasons driving the rally: 

  • The economic recovery came much faster than most people thought, pushing oil demand upwards. There’s a lack of supply due to high demand. What’s more, travel is (hopefully)coming back this year. When that happens, there will be more demand for fuel.    
  • Concerns over the conflict mentioned above. Even if Ukraine and Russia avoid going to war, the tensions between the two countries and between Russia and the West will linger. As Russia is a major oil producer and exporter, the loss of its supply could drive prices even higher.

What’s more, tensions between the West and Iran are also rising. Should Iran come under additional sanctions due to its nuclear ambitions, it would undoubtedly hit its oil exports.

With that in mind, though, let’s take the price increase with a bit of context. 

  • High oil prices can also act as an inflation deflator. In other words, if people are spending more money on petroleum-based products (mainly gas), then they have less to spend elsewhere. Since they’re spending less on other goods and services, that drops demand, lowering prices.
  • We’re more efficient and less dependent on oil than we’ve ever been. Thanks to our push to go green combined with advances in automation, we can do more with less oil than in previous cycles. In other words, even if the commodity’s price goes up, it will have a more negligible overall impact on prices. 

Get these insights straight to your inbox each Tuesday when we publish and never miss out on what people living abroad need to know about the economy.

This video on Wyoming’s crypto play

We recently saw this video explaining why the US State of Wyoming is making an ambitious push into cryptocurrency

We enjoyed it and thought you would too, as it covers: 

  • Why Wyoming is creating the US’ first crypto-banking regulations 
  • How banking licenses work in the US (it’s a bit nerdy, but helps put a lot of the financial services industry into context) 
  • The origin of the American LLC.

Aside from lacking any intrinsic value, crypto’s biggest problem right now is that there’s not a uniform regulatory framework. 

In turn, that adds risk to crypto investing while holding the sector back. 

It’s worth taking a look at this video, as many regulators around the world will likely be watching how Wyoming’s gambit plays out. 

The FBI makes a record crypto recovery. 

It’s no secret that crypto has a serious fraud issue despite its decentralized and transparent aspirations.

Law enforcement agencies worldwide juggle between stopping the illicit and helping the victims recover stolen property.

Last week, the FBI announced they recovered nearly 3.6 billion USD in stolen bitcoin dating from a heist in 2016. (At that time, the holdings were worth “only” 71 million USD). 

Maybe more concerning is the awkward clinginess of the accused thieves. Indeed, the couple in their early 30s hardly kept a low profile, with one of them launching a budding rap career as the “Crocodile of Wall Street,” AKA “Razzlekhan.”

Her partner in crime is a “startup founder” claiming to be a cyber security expert. (Technically, he does have first-hand experience here) 

I’m sure prison will be an enlightening experience for them both.

The Queen snatches an NFT. 

Speaking of seizures, Her Majesty’s Revenue and Customs confiscated an NFT following an investigation into tax fraud. 

After investigating three individuals for an elaborate tax cheating scheme, the UK authorities decided to act. 

The perpetrators allegedly claimed 1.4 million GBP in phony tax declarations using a maze of shell companies and fake invoices. 

As part of HMRC’s investigation, officials took three NFTs and other crypto-assets, marking the first time authorities have seized a non-fungible token.

(Note, we’re aware that the Queen is only nominally in charge of HMRC. Still, it would be pretty badass to see her personally get involved in these sorts of law enforcement activities. The element of surprise alone would be worth the risks). 

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