Opening
On February 24, 2022, Russia invaded Ukraine, initiating a military conflict that would reshape geopolitical risk calculations across markets. For Canadian alternatives investors, the invasion had an immediate and specific impact: it pushed energy prices upward dramatically, it accelerated inflation concerns that had already been building, and it underscored how geopolitical shocks cascade through real assets and infrastructure investments. Unlike many countries, Canada benefited from parts of the energy shock—but the benefits came alongside broader complications for alternative investors, from supply chain disruption to accelerated inflation to elevated volatility.
What Happened
The military invasion moved markets immediately. Brent crude oil, which had been trading in the $90-100 range, spiked above $100 per barrel within days and would eventually approach $130. Natural gas prices, particularly in Europe, surged dramatically as energy markets recalibrated supply expectations. The initial shock was severe: markets feared that a prolonged conflict could disrupt not just Russian oil and natural gas but also grain exports from the Black Sea region, potash supplies from Russia and Belarus, and various other commodity flows.
The Canadian implications were immediate and complex. Canada is a major oil and natural gas producer. The invasion sent energy prices higher, benefiting Canadian energy companies, MLPs (master limited partnerships), and royalty trusts. The TSX Energy Index surged, with some energy stocks posting double-digit gains in the weeks following the invasion. For investors with exposure to Canadian energy alternatives—publicly-traded energy infrastructure, private energy infrastructure, or direct energy holdings—the shock was positive in terms of valuations and cash flows. (Statistics Canada, March 2022)
But the full picture was more complicated. Canada is also a major user of energy and a significant producer of goods and services dependent on stable energy prices. Supply chain disruptions, particularly affecting semiconductors and manufactured goods, rippled through the Canadian economy. Construction costs for infrastructure projects rose sharply due to increased energy prices and supply chain friction. Real estate development projects underwritten at lower cost assumptions faced margin compression. Refineries and petrochemical facilities that relied on stable feedstock inputs faced volatility.
The commodity spike extended beyond just energy. Russia and Belarus together represent a substantial portion of global potash and fertilizer production. With those supplies disrupted, fertilizer and potash prices surged—benefiting Canadian fertilizer producers like Nutrien but also raising input costs for agricultural businesses and construction. Wheat prices spiked due to disruption of Ukrainian exports. The inflation shock that had already been building accelerated visibly. (Bank of Canada, February 2022)
Within weeks, the Bank of Canada was forced to reckon with accelerating inflation and the need to begin raising interest rates. The geopolitical shock had intensified pressure on policy.
Why It Matters
The Ukraine invasion mattered to Canadian alternatives investors for three structural reasons.
First: Canada's unique position as a major energy and commodity exporter. Unlike most developed economies, which face unambiguous headwinds from geopolitical shocks to energy and commodities, Canada has asymmetric exposure. Energy company valuations rise, resource royalties rise, infrastructure operators extracting resource-related cash flows see upside. But this advantage is only an advantage relative to the alternatives—it doesn't mean Canadian alternatives investors were unaffected by the shock. It means the shock had mixed effects rather than purely negative effects.
Second: Inflation acceleration and the implications for private credit. The energy shock accelerated an inflation process that was already underway. By March 2022, Canadian CPI was running above 5% and accelerating. For alternatives investors, this mattered greatly. Much of the Canadian private credit space—mortgage investment companies, private lending platforms, direct lending strategies—had expanded dramatically during the low-inflation, low-rate period of 2020-2021. The inflation shock meant that borrowers suddenly faced higher costs, refinancing became more expensive, and lenders' assumptions about borrower serviceability were being tested.
For investors in these strategies, the invasion served as a signal that the benign conditions of the prior two years were ending. Borrowers who looked sound at 2% inflation and 0.25% rates looked different at 5%+ inflation and rising rates.
Third: Real assets as inflation hedge (mixed results). In theory, real assets—real estate, infrastructure, commodities—should provide protection against inflation. The Ukraine invasion seemed to validate this thesis: energy infrastructure and commodity producers benefited, at least on paper. But the thesis was more complex. Yes, nominal valuations and cash flows for resource-related businesses improved. But real returns are what matter. If inflation rose faster than cash flows, you hadn't actually been hedged. And rising rates, which typically accompany inflation-fighting, put downward pressure on asset valuations across the board. The real estate development projects and infrastructure investments that benefited from higher commodity prices faced headwinds from rising capital costs. (Bank of Canada, March 2022)
This isn't an argument against real assets or energy exposure. It's an argument for understanding what happens when inflation and geopolitical shock hit simultaneously, and for modeling scenarios where the "hedge" is partially offset by other shocks in the system.
What to Do
For Canadian accredited investors managing alternatives exposure, the Ukraine invasion suggested several practical approaches:
Stress-test your portfolio against geopolitical scenarios. If you have significant exposure to global supply chains, energy-dependent businesses, or commodity-sensitive investments, model what happens if a major geopolitical shock disrupts supply for 6-12 months. The invasion provided a real-time test case. Some investors with energy exposure did well; others with supply-chain-sensitive real estate or infrastructure faced headwinds.
Reassess your exposure to energy infrastructure and commodity-linked investments. The invasion created an attractive entry point for these assets as prices spiked. But entry price matters less than your forward return assumptions. Test whether your expected returns from energy infrastructure, for example, still make sense when rates are rising and the commodity-positive shock is already priced in.
Review your inflation assumptions. The invasion accelerated inflation expectations and likely pushed forward the timeline for Bank of Canada rate hikes. If your private credit or infrastructure investments were underwritten with inflation assumptions of 2-3%, those assumptions needed revision upward. Higher inflation means higher required returns to compensate.
Use volatility selectively. Geopolitical shocks create dislocations and opportunities. Investors with dry powder and ability to deploy capital into dislocated assets could find attractive entry points in real estate, infrastructure, and energy during the shocked period. But this requires both capital availability and conviction.
Diversify commodity and geography exposure thoughtfully. The invasion underscored the concentration risk in global commodity markets. Canadian investors are geographically concentrated in Canadian exposure already; adding concentrated commodity bets magnifies that concentration risk.
Closing
The Ukraine invasion would reshape geopolitical risk premiums globally for years to come. For Canadian alternatives investors specifically, it marked a pivot point: the end of the benign, low-inflation, low-rate, supply-chain-stable environment of 2020-2021 and the beginning of a period of higher inflation, rising rates, and elevated geopolitical uncertainty. The energy price spike created near-term tailwinds for resource-related alternatives, but it also signaled that the broader environment was shifting, and many alternatives strategies would need to adapt.
Alts Insider provides educational content for Canadian accredited investors. This is not investment advice. Always consult qualified professionals before making investment decisions.