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Russia’s war against Ukraine moves the investment landscape

While the full impact of the Ukraine crisis on the global economy and markets is unknown, as is the Covid crisis, several major medium- and long-term themes are now easily recognizable.

In a European context, energy and defense policy are changing profoundly. Dependence on Russia as an energy supplier will be reduced sharply and materially, regardless of the form of the final solution to the conflict.

Read: EU bans Russian coal imports, Japan can follow suit

In retrospect, the extent of the dependence on a personal dictatorship for essential commodities will seem extraordinarily misunderstood. In his honor, Angela Merkel’s successor as German Chancellor Olaf Scholtz acknowledged the need to dramatically change politics and double renewable energy, and the alleged Bucha atrocities will now have silenced any continued opposition to a radical shift.

The extent of Europe’s broader challenge can be seen from the figures. Since the beginning of the war, EU nations have paid Putin’s Russia over 35 billion euros in energy payments; in contrast, Ukraine has received 1 billion euros in arms and weapons.

Increase defense spending

The other volte face was in defense spending. European delegates were taken aback by the NATO summit in July 2018, while then-US President Donald Trump lectured them on the need to meet their defense obligations and described them as ‘prisoners of Russia’ given their current and expected dependence on Russian oil and gas.

Germany is now committed to doubling defense spending, and non-aligned Sweden has announced that its defense budget will increase to 3% of GDP.

The benefits of peace are truly a thing of the past.

Increased spending will be financed by debt on a pan-EU basis, following the precedent of the Covid Recovery Funds, which will lead the EU further down the road towards monetary union.

China is in an uncomfortable position given President Xi Jinping’s announcement of the country’s ‘no limits’ partnership with Russia on February 4 – just 20 days before the Russian invasion of Ukraine.

The full consequences for China of its close ties with Russia have not yet been determined, but the consequences of the US willingness to ‘arm’ its currency through blocking or confiscation of reserves and exclusion from SWIFT, the dollar payment system, are clear.

A SWIFT ban on Russia means the Fed may have to prepare dollars
USA, Europe cut off some Russian banks from SWIFT: Ukraine update

Geostrategic imperatives will force China to allow a faster internationalization of its currency and develop an alternative payment mechanism.

Other nations are likely to support such developments in order to reduce their dependence on US currency and payment systems.

Saudi Arabia has first recently negotiated with China to accept oil payments in yuan and avoid the need to trade in US dollars.

With one blow, the momentum behind de-dollarization has received a material boost.

This does not mean that the dominant position of the dollar will be displaced in the near future, as it is too deeply embedded in the world trading system for it, but this probably marks the peak of the dollar era, and the US ‘exorbitant privilege’, to use the apt expression of former French President Giscard d’Estaing, having the first call for world savings, will be gradually eroded.

  • Philip Saunders is co-head of multi-asset growth at Ninety One.
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