woman reading a newspaper

Liz Looks at: Contagion Risk

The Stress of Spread

The events unfolding in Ukraine are tragic and heartbreaking. The war that continues to escalate has consequences from a humanitarian, social, political, and economic standpoint. Although seemingly trivial compared to the primary crisis Ukraine is facing, this article will cover the possible contagion effects that could, or already have started to, affect other global financial markets and economies. The main risks below are in descending order of threat, in my opinion.

Oil High on Low Supply

Russia is the largest exporter of oil to global markets and the second largest crude oil exporter behind Saudi Arabia. Given the current state of affairs and unity among Western nations, not many countries are willing to buy Russian oil. This has put a dent in global oil supply at a time when demand continues to be strong, driving prices higher (Brent Crude is up more than 16% since Feb 21).

The contagion effects are higher in some regions than others. Europe, for example, accounts for 60% of Russian oil exports and is much more sensitive to the reduction in supply. Only 7% of U.S. oil imports come from Russia, which keeps our supply risk lower. But, U.S. consumers are definitely sensitive to oil prices that affect gasoline and jet fuel, and thus airfare and other travel. This rise is coming at a time when we are already concerned with inflation and rate hikes. Not the best recipe for a “cooling off.”

Perhaps the supply itself isn’t the biggest risk, but the risk that price spikes and higher inflation readings could pose are the real concern. February CPI data comes out on March 10, and a FOMC statement comes out on March 16. Beware the market swings that may occur.

Catching Bad Feelings

As with many things in financial markets, sentiment matters. In this case, sentiment matters quite a bit at a time when the mood of the market was already fragile to bearish. For the first time since April 2020, the American Association of Individual Investors (AAII) survey reported more bears than bulls in its weekly reading.


There are some other indicators that haven’t shown quite as much sentiment stress (put/call ratio remains below extreme fear levels, for example), but these things can turn on a dime. There is a risk that a culmination of factors create fear in markets that builds to higher levels. At this point, we’ve seen enough of a flush that valuations don’t present as much vulnerability, but there is always a chance that fear begets fear.

Watch consumer sentiment indicators: spending, saving, confidence surveys. So far, no major signs of distress. But if market jitters bleed into consumer jitters, that creates a bigger problem.

Financial Asset Freezes

It may seem odd to list this risk as the least of my concerns in this bunch, but it’s about exposure more than the severity of the sanctions that were imposed on Russian businesses (which were strong, to be clear). As a result of the sanctions, the Russian ruble fell precipitously, spurring a hike in Russia’s main policy rate from 9.5% to 20% — a hike of epic proportions — in an attempt to control inflation and prevent further currency depreciation.

The Russian Central Bank also shut down its domestic stock stock market in anticipation of steep declines. Additionally, Russia imposed capital controls that restricted residents from sending money to foreign bank accounts. An agreement by various western nations to remove selected Russian banks from the SWIFT system exacerbated the financial stresses in the country.

Although this presents risks for banks that are exposed to Russia, the U.S. exposure is relatively limited and would suffer more if European banks became entangled in a serious credit event. I find some comfort in the fact that U.S. bank exposure to European countries and citizens is only ~10% and U.S. banks are well-capitalized (as a result of regulations imposed after the Global Financial Crisis, to prevent contagion and “too big to fail” risks).

Too Early to Tell

It’s still too soon to declare that the Russia/Ukraine war won’t cause globally contagious effects, and this article lays out what I see as the main areas to watch. I’m encouraged by the strength of the U.S. economy and unified stance among western nations. Although market volatility could stick around for a while, the threat of a global economic crisis is low — for now.


Want more insights from Liz? The Important Part: Investing With Liz Young Thomas, a new podcast from SoFi, takes listeners through today’s top-of-mind themes in investing and breaks them down into digestible and actionable pieces.

Listen & Subscribe

Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.

All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store SoFi Android App, Get it on Google Play

Liz Young Thomas ABOUT Liz Young Thomas Liz Young Thomas is SoFi's Head of Investment Strategy, responsible for building out the function and providing economic and market insights. Prior to joining SoFi, Liz was the Director of Market Strategy at BNY Mellon Investment Management where she formulated and delivered views on macroeconomic themes and their effects on capital markets. Earlier in her career, she was a due diligence analyst at Robert W. Baird and a research analyst at BMO Global Asset Management. Liz is passionate about educating others on markets and investing in order to help people feel empowered to take a more active role in their financial futures.

TLS 1.2 Encrypted
Equal Housing Lender