Russia’s invasion of Ukraine is a decisive event with major implications, initially humanitarian and subsequently economic. It caught the vast majority of western observers off guard – including asset managers like us, Frédéric Leroux writes in an essay on finews.first.
This article is published on finews.first, a forum for authors specialized in economic and financial topics.
Russian debt instruments lost between 60 percent and 80 percent of their value almost immediately after the invasion. Russian companies listed in the U.K. – mainly banks and producers of oil and other industrial commodities – saw their stock prices fall 92 percent to 99 percent between 16 February 2022 and 1 March 2022, the last business day before trading was suspended. At the same time, natural gas prices in Europe temporarily shot up by a factor of 2.5 and oil prices jumped by 55 percent.
This large, nearly instantaneous price adjustment can be explained by two distinct factors.
The first is western countries’ economic sanctions against Russia; these have included introducing a U.S. and U.K. embargo on the purchase of Russian oil and gas, expelling certain Russian banks from the SWIFT international payments system – meaning account holders can’t receive payment for their sales – and freezing the assets that Russia’s central bank holds abroad.
«The sanctions will weigh heavily on Russia’s economy and could rapidly bring it to a standstill»
Moscow has taken a series of retaliatory measures in response. Russian companies soon won’t be able to make debt payments in any currency other than the rouble, and the government may ban the export of some commodities – which could engender more bottlenecks in global supply chains.
The sanctions will weigh heavily on Russia’s economy and could rapidly bring it to a standstill. And the direct effect of those sanctions, coupled with the retaliatory measures, will also impact the rest of the world and accentuate two trends that had started before the conflict: rising inflation and slowing economic growth.
«This also reflects society’s new aspiration to an economy that’s more ethical»
The second factor is the growing movement by investors around the world to incorporate environmental, social, and governance (ESG) criteria into their investment decisions, as part of efforts to promote sustainable finance. Asset managers who have committed to socially responsible investing – a category that includes us at Carmignac – cannot now keep investing in Russia as if nothing has happened. The most reasonable and legitimate response is to refrain from purchasing any Russian assets until further notice.
This is the path taken by us and a number of other investors, putting additional downwards pressure on the prices of Russian securities and causing them to depreciate much further than would be warranted by the sanctions alone. It also reflects society’s new aspiration to an economy that’s more ethical and puts less of a priority on the immediate financial gains which had driven so many economic decisions in past decades.
«These shifts will underpin higher prices for years to come before the benefits start to be seen»
Asset managers’ ESG commitments are also pushing up energy prices and speeding the transition to renewable energy. These commitments, coupled with the sanctions, retaliatory measures, and moves by western multinationals to pull out of Russia, are already giving us an indication of the war’s potentially devastating consequences on the global economy. This could have the advantage of bringing about a negotiated resolution to the conflict more quickly.
The major political decisions being taken in response to the tragic event will come with a considerable economic cost. They could also fuel inflation by expanding the range of price drivers, such as a swifter transition to renewable energy, higher defense spending, new energy procurement routes, and the repatriation of production plants. These shifts will underpin higher prices for years to come before the benefits start to be seen in terms of economic efficiency.
«The new order will be based on the de-integration of global economies»
Viewed from this perspective, the war in Ukraine marks the end of a four-decade-long trend of disinflation caused by extensive globalization and favorable demographics and is ushering in a new economic order. The new order will be based on the de-integration of global economies as countries erect barriers and prioritize energy and manufacturing independence – an issue which the pandemic and now the geopolitical tensions have propelled to the top of the agenda.
This long-term trend reversal from disinflation to secular inflation will restore the appeal of long-forgotten sectors of the old economy, provided that the many constraints involved in bringing them back on domestic soil are rationally assessed. Many of today’s technological advancements should help restore these sectors and give them a formidable level of economic efficiency, at the end of the day. The world after COVID-19 and the invasion of Ukraine?
Frédéric Leroux is a member of French asset manager Carmignac’s strategic investment committee.
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