Regardless of your feelings towards Russia and Ukraine, the invasion is having an impact on just about everyone. In the US, sanctions on Russian fuel imports have already sent the gas price to historic highs. In the UK, Russian oligarch Roman Abramovic’s ownership of Chelsea Football Club is making it impossible for fans to buy tickets to matches. Around the world, it is impacting financial vehicles like mutual funds.
This last has become evident as Vanguard Group, the second-largest investment firm in the world, has announced that it will be suspending purchases of Russian securities for the foreseeable future.
It may not seem like such a big deal. After all, less than 0.01% of current clients’ assets will be impacted by the decision. Vanguard Group simply does not generally invest in Russian securities. However, considering the type of company Vanguard Group is, this decision has interesting implications.
What is Vanguard Group?
As mentioned, Vanguard Group is an investment firm and the largest provider of mutual funds and the second-largest provider of exchange-traded funds (ETFs) in the world. However, unlike many other investment firms, Vanguard Group’s ownership structure is entirely made up of its funds which are owned by shareholders. Shareholders are therefore the only true owners of Vanguard Group.
Any firm that is owned by its shareholders is somewhat restricted in its decision making. While the individuals running various parts of the firm make the majority of decisions without direct shareholder input, big decisions like these are generally controversial. There will be many shareholders who are happy to take a stance against the Russian invasion of Ukraine, but others may not be so eager to do so.
This decision is therefore a strong statement by the fund managers that they are ready to take on any backlash. It certainly helps that the wealth of their shareholders will likely not be particularly impacted by this decision. Still, it is a bold step to take for such a big investment firm with so many stakeholders.
Other Factors Dominate
Individuals with money at stake may be more consumed with other factors which will impact their money. The suspension of purchases of Russian securities will not have nearly as big an impact as the sanctions placed on Russia by the US and other countries. With the US now banning all fuel imports from Russia, there is serious risk of major economic implications to come.
The gas price has already risen to its highest ever value. This is likely to increase the prices of all consumer goods in the immediate future. Inflation has already been at record highs. Now there is the risk of so-called stagflation. Stagflation refers to a scenario where rising inflation does not coincide with economic growth.
Recession could be imminent, with many markets at risk of crashing after months of recovery. Individuals with wealth tied up in mutual funds could see their finances taking a major hit. It is unclear what the best course of action is, but it seems that, whatever happens, upheaval is guaranteed.
Russia’s Role
The question many shareholders might ask is whether Russia is really impacted by decisions like that of Vanguard Group. The reality is that a decision that will hardly impact shareholders is not going to have much of an impact on Russia. However, in scenarios like this one, it is a scale that these things make a difference. The more firms that implement restrictions on Russia, the harder it will be for this invasion to continue indefinitely.
There is also the matter of reputation. A firm like Vanguard Group cannot afford to take an ambivalent position on Russia’s invasion of Ukraine. Before their suspension of purchases of Russian securities, people were already asking questions of their intentions. This is not just happening to investment firms, but to whole industries and even governments around the world. Neutrality is simply not an option.
Fund managers at Vanguard Group are unlikely to face too much opposition or backlash from shareholders. There will always be those who do not like unilateral decisions being taken, even if they agree with them. But most people will recognize the fact that a failure to act would have been unsustainable.
It remains to be seen where the Russian invasion of Ukraine will take the world economy. For now, we can only hedge our positions and continue to monitor the situation.
