After waiting for the conclusion of the Beijing Winter Olympics to avoid offending Chinese President Xi Jinping, Russian President Vladimir Putin launched the invasion of neighbor Ukraine earlier this morning.

Unlike the surprise Soviet invasions of Hungary in 1956, Czechoslovakia in1968, Afghanistan in 1979, and a lesser known incursion into Georgia in 2008, the current attack was widely anticipated with Russian troop movements documented on Instagram and TikTok as well as conventional satellite imagery.

What does Putin expect to gain from this invasion?

Putin was a young KGB agent in East Germany in 1989 when dismantling the Berlin Wall led to the collapse of the East German government and eventual reunification with West Germany. Putin was shocked by the Soviet Union's inability to control events.

Putin shares the Russian instinctive fear of invasion from the East - Napoleon in 1812, Hitler in 1941. Putin watched with horror as the Soviet Union disintegrated from economic and ethnic tensions between 1988-1991 and former Warsaw Pact nations like Poland, Hungary, Romania and the Baltic States joined NATO. 

Moscow is now less than hour away from NATO aircraft and cruise missiles in Poland. Putin's number one motivation in invading Ukraine is to maintain a geographical buffer between NATO and Russian borders.


At the end of the Second World War, the United States and the Soviet Union were the dominant political powers on the planet. Even so, at the peak of the Cold War, the size of the Soviet economy was never more than 50% of the size of the US economy, with an outsized portion of the economy allocated to military spending.

As of 2021, the Russian economy is the 12th largest in the world with GDP 6.4% of the US, and 35.0% of Germany despite covering the largest land mass of any country spanning 11 time zones.  Like many third world countries, Russia is dependent on commodity exports - oil, natural gas and wheat.  

Putin believes Russia deserves more respect from the US and Europe despite diminished economic status.


Finally, Putin is worried about his own regime survival.  The last three decades saw the transfer of much of Russia's wealth to the band of kleptocrats in Putin's inner circle.  Meanwhile, living standards for average Russians have improved somewhat, but per capital income remains half of Germany, the United Kingdom or the United States. 

Thanks to widespread adoption of the Internet, average Russians can see life beyond Russia's borders.  Russians are generally apathetic about politics, but mass protests have coalesced in recent years around opposition leader Alexei Navalny.  Navalny survived poisoning by (allegedly) Putin's security forces in 2020 and is currently imprisoned in a Russian prison facing a 15 year term.

Putin hopes to "rally the flag" around invading Ukraine, but Russians, especially younger Russians, seem skeptical about the motives and advantages of this action.  Putin very much fears a democratic government in Ukraine offering an alternative example to the "illiberal" democracy bordering on autocracy that prevails in Russia.

Swallowing the Porcupine

Another aggrieved leader of a nation, Saddam Hussein, believed that Iraq's problems could be solved by invading a defenseless neighbor - Kuwait in 1991. Coalition forces dislodged Iraqi forces 6 months after the initial invasion. In the subsequent 2003 war, Hussein was deposed and subsequently executed in 2006.

We don't expect that the US and NATO will send troops or aircraft to force Russia out of Ukraine. Unlike Iraq, Russia can retaliate with nuclear weapons.  We do expect Western countries will funnel light arms, particularly anti-tank and anti-aircraft weapons, to what's left of the Ukrainian army after the initial attack is complete. 

The US CIA provided similar arms to the Afghan resistance after the Soviet invasion in 1979. The Soviets left Afghanistan after 8 years with 15,000 Soviet soldiers killed, 35,000 wounded, but with the collateral deaths of 2 million Afghanis.

At present, the Russian military is the 4th largest in the world with 900,000 active personnel, of which 280,000 are ground troops. 190,000 or 68% of ground troops are in Russia facing Ukraine or in neighboring Belarus. If those troops are forced to remain as an occupying force, Russia would be woefully under defended on every other border.

Putin's problem is that once Russian troops occupy Ukraine, withdrawing without losing face is problematic. Russia may attempt to install a pro-Russia government and withdraw. The previous pro-Russian government headed by President Viktor Yanukovych ended in February 2014 under popular protest. Yanukovych fled to Russia for sanctuary.

Immediate Consequences

Russia supplies 40% of Western Europe's natural gas supplies, and was poised to provided an additional $15 billion/year in natural gas through the recently completed Nord Stream 2 underwater gas pipeline. That project is now shelved indefinitely. European Union countries are scrambling to find substitutes for the natural gas currently piped through Ukraine. 

Natural gas prices jumped 54%, crude oil prices 42% since December. Russia also provides 18% of world wheat exports (with Ukraine providing another 7%.) As a result of the conflict, wheat prices are up 16% since December.

In anticipation of reduced revenues from exports, Russia accumulated a hard currency surplus of $600 billion. That treasury will protect the Russian economy in the short term, not indefinitely.

The tiny Russian stock market declined 52% from the October 2021 record, falling 42% in the past two weeks. The ruble is at the lowest level against the US dollar in the last six years, though the actual decline is only 3%.

World stock markets are down 1.3% in the US, 4-6% in the European Union, 1-3% in Asia, From the December all time high, the S&P 500 is down 13.1% though most of that decline resulted from worries over inflation and interest rates, with Ukraine only being a concern in the last week or two.

What next for our investments?

Investors often overeact to the news of the day. Headlines like, "Ukraine could be worst war in Europe since 1945" do not reassure. Today, investors are selling risky assets like stocks, buying up "safe" investments like US Treasury bonds and gold.

However, as we remind our clients time and again, the stock market ultimately only cares about three things:

1. Company revenues

2. Company earnings

3. Interest rates

Even with a breakout of war between Russia and Ukraine, Amazon, Apple, JP Morgan, Pfizer and the thousands of other companies that make up the US stock market will keep doing their jobs. In 2021, S&P 500 earnings grew 47% (during a pandemic!) and are expected to grow another 10% this year. 

Meanwhile the US Federal Reserve bank is expected to raise rates 4-5 times in 2022, 2-3 more times in 2023. Even so interest rates will only rise from the current 0.25% to perhaps 1.75% by the end of 2023. Fed Funds were 2.5% prior to the Covid-19 pandemic and 5.25% prior to the 2008-9 financial crisis.

In December we said that earnings would push stocks higher in 2022, but rising rates would push stocks lower for net gains of 6-9% by year end. Our year end forecast has not changed because of the Ukraine situation, which is a humanitarian crisis, not an economic crisis.

To make our minimum year end target of 6%, stocks would have to gain 21% from current levels. On that basis, we are taking our clients fully invested this week.

If you have cash on the sidelines now, by all means call us to consider putting that cash to work. 

David Edwards is president and wealth advisor with Heron Wealth, a $500 million registered investment advisor based in New York City working with 225 client families across the U.S. and around the world. Dustin Lowman contributed additional research for this column.