Frédéric Leroux, a member of Carmignac’s Strategic Investment Committee, explains to investors the economic and financial consequences of the war in Ukraine.
Russia’s invasion of Ukraine is a major event with first humanitarian and then economic implications, which surprised the vast majority of Western commentators and leaders. Following this invasion, Russian debt securities almost instantly lost between 60% and 80% of their value. At the same time, Russian equities listed in the UK – most often banks or producers of oil or other industrial commodities – fell 92% to 99% of their value between 16 February and 1 March, the day before, the suspension of IPOs. At the same time, gas prices in Europe were briefly multiplied by two and a half, while oil prices rose by 55%.
Why such a loose and instant fit? Only taking into account two different factors can explain it.
The first, of course, is sanctions from the Western world, including the embargo on American and British purchases of Russian oil and gas; exclusion of certain banks from the international SWIFT settlement system, which prohibits those excluded from being paid for their sales; or even the freezing of the assets of the Russian central bank abroad.
In response, the Russians did in return. Russian companies would soon no longer be able to repay their foreign currency loans, and certain commodities could no longer be exported, potentially contributing to new bottlenecks in global production chains.
The very heavy sanctions are likely to quickly paralyze the Russian economy. But their direct effects and the retaliatory measures that respond to them will also affect the rest of the world by accelerating the trends observed before the conflict: inflation and economic downturn.
Towards a new economic order?
The second factor in this drastic adjustment of the price of Russian assets and fossil fuels is the commitment of global finance to environmental, social and governance (ESG) considerations with the aim of promoting the financing of sustainable development. In this context, a management company committed to such an approach can not continue to invest in Russia, as if nothing had happened. The most logical and legitimate reaction, therefore, was to ban any purchase of Russian securities until further notice.
This decision, which was shared by a very large number of asset managers, helped to intensify the depreciation of the prices of Russian securities far beyond what economic sanctions alone would have justified. This also illustrates society’s new aspirations: the desire for a more “moral” economy that pushes the demand for immediate economic efficiency into the background that has guided our economic choices over recent decades.
Sanctions, retaliatory measures, Western companies’ decisions to cease their activities in Russia, compliance with ESG commitments that push up energy prices by accelerating the pace of energy transition … These decisions have effects that can already be seen as potentially devastating for the entire global economy . What could lead sooner than expected to a negotiated solution at the end of the conflict.
In addition to their very large economic costs, the major political announcements that seem to have followed this tragic event also strengthen the protection of inflationary trends by multiplying their roots. Accelerating energy conversion, increasing arms budgets, redefining energy supply routes, shifting production are all decisions that will boost inflation for years before producing any kind of economic efficiency.
In this sense, the Russian-Ukrainian conflict would confirm the end of the disinflationary dynamics of the last forty years …
… Based on strong global economic integration and virtuous demographics, and initiate a new economic order. A new order characterized by a form of economic withdrawal, a “disintegration” aimed at promoting industrial and energy independence, the need that the pandemic and the current geopolitical tensions have strongly revealed.
This reversal of the long cycle towards more inflation would restore a long-forgotten luster to the sectors of the old economy, provided that the many constraints on their relocation are reconsidered with rationality. Current technological advances should facilitate this partial return to the world before, and promise to give it a formidable efficiency in the long run. Maybe this is “the next world”.
Sources: Carmignac, Bloomberg, 03/10/2022
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