Geopolitics & Women-Centric Investments:
Ukraine Conflict‘s Economic Impact
Photo@REUTERS/Valentyn Ogirenko
My dear Friends
It is almost three weeks since I started writing this blog about geopolitics and its impact on women‘s investment. Back then, diplomacy was still considered an option to end the Ukraine-Russia dispute.
The situation was tense, and I struggled to decide on my portfolio. So I decided to address geopolitics and the dynamic it has on female-centric investing.
Today the article is more relevant than ever. But, the questions that needed answering have either changed or have become more precise. So, I decided to rewrite this edition.
I had to sort out a pile of conflicting information with regard to the financial markets. Secondly, I had to calm down my own feelings of anger and sadness. But admittedly, also my growing fear. The war, a mere 5 hours away, had ignited insecurity.
I like to thank you for wanting to know more today than you did yesterday, so please hang in there while we discover how geopolitics impact women-entric investment
– yours, Harper-
What exactly is geopolitics
The definition of geopolitics: policy involving political, geographical, and economic factors. Geopolitics is multilevel communication between at least two nations.
The term is usually associated with international relations or foreign policy. The overall purpose is to benefit the interests of the countries involved.
History
Relations between countries or tribes have existed pretty much since the existence of humans. However, the term “geopolitics” was not widely used until the Swedish political scientist Rudolf Kjellen first coined the term in the early 20th century C.E.
After World War II, the term became synonymous with international relations and foreign policy.
Excerpts
- The Treaty of Paris(1783) is the oldest treaty signed by the United States and still in effect. It ended the American Revolution and established the United States. It is one of the most consequential treaties in world history.
- Congress of Vienna(1814-15) occurred at the end of the Napoleonic Wars and dramatically reshaped Europe. Several treaties were signed at the Congress, it prevented the outbreak of a major European war for a hundred years.
- The United Nations(UN), the international organization, was founded in 1945 and comprises 193 Member States. Their charta claims to be the one place on Earth where all the world’s nations can gather together, discuss common problems, and find shared solutions that benefit all of humanity.
- North Atlantic Treaty Organisation-NATO(1949), is a military alliance formed by 12 countries, including the US, Canada, the UK and France. Its aim was to counter the threat of post-war Russian expansion in Europe.
- Warsaw Pact(1955-1991), was Russia‘s response to Nato, a military alliance of Eastern European communist countries. In 1991, 14 former Warsaw Pact members became NATO members.
- Belt and Road Initiative(2013), claims to “promote the connectivity of Asian, European and African continents and their adjacent seas”. The BRI‘s stated outline is to establish and strengthen partnerships among the countries along the Belt and Road.
A journalist‘s 2020 forecast
A Time journalist once stated: “2020 will prove a tipping point in international politics”. He predicted challenges greater than in the past and tribalism within national politics undermining global cooperation.
His prophecy:
- Uncertainties in US politics, the political institutions will be tested as never before.
- Tensions between the US and China. Both countries are fighting for supremacy in technology, the military, space and cyberspace. This could end globalization and business around the world will have to adapt to this new reality.
- A more independent Europe will generate friction with both the US and China.
- Climate Change is the cause of social tension. The academic mainstream will be unforgiving of investors, companies and politicians if measures to curb climate change are moving too slowly. As a consequence, the price of living and social tension will be fuelled.
- The major Shia-led nations, Iran, Iraq, and Syria, create significant risks for regional stability in the Middle East.
- Discontent in Latin America leads to more protests, anti-establishment politicians will grow stronger, and election outcomes will be less predictable.
- Turkey’s President Erdogan enters a period of steep political decline. Erdogan’s responses to economic pressures will further damage Turkey’s ailing economy.
What really happened
In January 2021, a mob of disgruntled voters stormed the US Capitol, and America’s democratic system was under serious threat.
For national security reasons, the US, Canada, Japan, Australia and Great Brittain decided to ban HUAWEI from supplying 5G technology. In a chain reaction, other Western countries questioned HUAWEI‘s safety. As a result, the much faster 5G network is slow to arrive in many Western countries.
Seemingly abundant amounts of liquidity send share prices through the roof, and the number of billionaires grows. The social gap is widening, the middle class is the biggest loser. This could lead to social unrest and long-term difficulties for politicians.
The “Gilet Jaune” movement in France shows how voters can react to “green” politics that result in higher prices.
The Iran nuclear agreement is still being negotiated without major progress. In the meanwhile, the Middle East remains a troubled region. The current rise in oil prices, however, has other reasons.
The situation in Latin America is as fragile as ever, with populist politicians fighting to stay in power or trying to gain power.
Inflation in Turkey is at an all-time high. If Mr Erdogan can survive as a politician is unknown. The people in Turkey can barely pay for their food and any intervention by the government to ease the burden of rising prices is short-lived. The next election is in 2023.
a fatal miss
Few paid attention to Russia’s increasing threat to Ukraine, nor did anybody think about the possible economic consequences such a war would have.
The global community of politicians and economists sleepwalked into a geopolitical crisis with severe consequences for Russia, Ukraine, and the global economy at large.
Investors, faced with volatile markets even before the war started, are now, like never before, faced with the impact this war will have on their portfolios. Investors will have challenging times ahead.
Sanctions-the implications
The Council of Foreign Relations’ definition is: “Governments and multinational bodies impose economic sanctions to try to alter the strategic decisions of state and non-state actors that threaten their interests or violate international norms of behaviour. ”
Since the end of World War II, sanctions have been the defining feature of the Western response to several geopolitical disputes. For example, sanctions imposed on Iran, North Korea’s nuclear program and as a reaction to Russia’s intervention in Ukraine in 2014.
Sanctions are widely considered a form of intervention. They are generally viewed as a lower-cost, lower-risk course of action between diplomacy and war. Imposing sanctions is commonly seen as a legitimate tool to condone an aggressor.
The effectiveness of sanctions, with regard to political decision-making, is questioned. Only 30% of sanctions issued proved to have the desired effect. However, this assumption is flawed as nobody can tell the outcome if sanctions had not been imposed.
The new sanctions imposed on Russia are the beginning of an economic war with an uncertain outcome. Some economists claim it is the “worst economic and financial risk to Europe since 1945”.
Illusion or a magic wand
Russia has been preparing for this event since 2014. Today, Russia is a kind of “fortress” economy.
Debt was reduced to 18% of its GDP(US debt is at 99%). Due to the Russian economy’s ability to produce more and more goods at home, the dependency on imports has decreased since 2014. That will soften the blow of sanctions, at least for a while.
The bad news first, in the short term, both sides could go through a substantial economic downturn.
The IMF forecasts that Russia‘s economy will shrink by 10% in the long term, whereas the rest of the global economy will only shrink by 1%.
Some data
Russia’s GDP is less than Italy‘s, with $1,483 billion vs. $1,886 billion. Russia is a far bigger country than Italy, with 17.130.000km2 and a population of 144,1 Mio, so its GDP was clearly underperforming. Russia‘s economy has been on a downward trajectory since 2014, when the first sanctions were imposed.
Russia and Ukraine collectively account for just over 3 per cent of the global economy. But both countries are leading suppliers of vital commodities. A shortage will cause serious disruptions in the global economy.
Because of the sanctions imposed, the deliveries like oil, gas, potash, ammonium, nitrogen, neon gas, wheat, corn, or metals are seriously disrupted.
We will see unprecedented price surges for these commodities around the globe. To soften the blow, industries around the globe would have to find new sources in a short period of time. A very unlikely scenario.
From Russia, with love
Compared to other developed economies, Russia’s technology sector is lagging behind in the Tec Industry and is thus dependent on imports. The main importers are China and South Korea.
The country‘s economic survival depends largely on exporting oil, gas and minerals. So, sanctioning the export of gas and oil would bite the Russian economy, which really hurts. However, the oil export could be rerouted to China and other Asian countries.
Overall, the blow to the global economy will be severe. Especially Europe will be hard hit due to its dependency on Russian oil and gas and its many economic ties with the Russian industry and banking system.
Russia‘s foreign exchange reserves are at roughly $635 billion, and Russia’s sovereign fund was estimated at $185,9 Billion(2021). Further, Russia increased its gold reserves and decreased its dollar proportions.
Where it hurts
It can be assumed that neither Russia‘s foreign exchange reserves nor assets owned by the sovereign wealth fund are stored away in some Kremlin vault. The assets are parked and invested in international banks or stored away in some offshore companies.
Freezing all assets held by the Russian Government or Russian Banks abroad will hurt Russian state finances.
The rubel is falling rapidly, and a lack of foreign exchange makes things dire for the Russian economy.
Considering the fragile economic situation the world was already in due to measures during the pandemic, we have to prepare for worse to come. This war will hurt us all in one way or another.
The flow of money
Russia‘s trade surplus will soften the blow of sanctions. However, Russia will need more finances and financing to finance the war and keep the country running.
Usually, a country would issue bonds and sell them in the global markets in order to finance government expenditure. Russia was never in the habit of trading government bonds outside the country, at least not to a large extent. So, 80% of Russia´s national debts are with the Russian people.
Rating agencies downgraded Russian bonds to junk level. A clear signal and warning to investors that Russia is at high risk of defaulting on its debts.
The international banking lobby warned this week a default is “extremely likely” if the Ukraine crisis persists. But this only means $20 billion will be wiped off bondholders outside Russia. So, the systemic risk for Russia is minimal.
Cutting Russian banks off the SWIFT system, with the exception of money transfers in connection with gas and oil, does hurt Russian banks. Whether this is the proverbial ” nuclear option”, is to be seen.
Certainly, it will make international payments difficult for Russia. It is, however, unlikely that this will have the desired effect on the government’s decision-making.
Russia, however, has alternative options available. It could, for example, turn to the Chinese CIPS system. This would have an added benefit for China, its currency(RMB) would get a boost. However, compared to SWIFT, the Chinese CIPS system is far smaller, less widely used, and needs the SWIFT system for ” assistance”.
The consumer
The withdrawal of services from major international brands from Russia will not do any real damage to the majority of the Russian population with the exception of Russia’s upper-middle class.
The action is symbolic rather than bearing significant economic consequences for the Russian economy.
The withdrawal of major credit card companies will most likely not affect the average Russian or the Russian Government either. It will, however, have an effect on Russian tourists or the odd oligarch currently travelling or respectively living abroad.
Credit Cards are connected by a brand name, a system and for international payments but the issuing bank manages the client‘s payment.
The oligarchs
Sanctioning and freezing assets of oligarchs are probably designed for the voter at home and is unlikely to have any effect on the current conflict.
Despite any personal opinions we might have on the deeply flawed system of oligarchs and their crooked networks, it remains doubtful if or how much influence these industrialists really have.
Markets on edge
Since late 2021, global markets are on edge for many reasons. For one, a very relaxed fiscal policy in many countries since 2008. Second, the plethora of measures to curb the lockdown side effects during the Covid-19 pandemic.
This has already left a mark on global economies, the majority of global economies were/are already in an artificially created recession and struggling to find a way out.
Governments keep borrowing money, interest rates are kept low so, the fiscal policy is pouring more cheap money into markets. Signs for a change in monetary policy are faint to non-existent. Investors increasingly feared a slow down of growth rates, rising inflation and overvalued stock markets. So, by QIII 2021 markets became volatile
Collateral damage
The current geopolitical disruption is yet another problem facing global economies, and will, without doubt, have a serious and far-reaching impact on already struggling economies around the world.
For one, rising energy prices invariably result in high inflation. Second, a shortage of agricultural commodities and fertilizers will lead to rising food prices. Third, excessively high energy prices will lead to factory closures and high unemployment.
Many economies could be heading for stagflation or a recession with high unemployment rates and social unrest.
Bear Markets
Historically, stock market drawdowns due to disputes between nations are short-lived. And indeed stock markets on the 25th and especially 28th February 2022 took a nose dive only to bounce back during the first days of March.
Within a week, extensive sanctions against Russia were announced and stock markets took another hit.
On March 7th most European markets had turned to “bear markets”. While oil and gas prices and many other commodities are on a seemingly unstoppable upward trajectory.
Oil and Gas
On Monday the 27th, March oil prices were at $139.13 a barrel – due to considerations by the EU and the US to ban the import of Russian oil. Analysts predict a further rise of $20 per barrel. These levels were last seen a decade ago- in July 2008 when the Oilprice was at $147.50.
US and Arab Oilproducers could ease the problem by pumping more oil.
Chancellor Olf Scholz’ (Germany)decision to stop the Nordstream 2 project and Europe’s high dependency on Russian Gas leaves Europe in a vulnerable situation. As an immediate reaction, gas prices went up which will push inflation rates even further.
Currently, Europe needs Russian gas not only to keep people warm but as a vital component for industrial production. Europe imports 50% of its gas from Russia.
A quick change to liquid gas(LNG) or other alternative sources will not be possible as Europe neither has enough liquid gas terminals nor adequate technology to produce enough alternative energy.
If there is anything positive at all coming from this conflict – Europe is now forced to speed up innovation and make the transition to alternative energy go a lot faster and less bureaucratic.
Food Prices
Another problem of this geopolitical conflict will be rising food prices. Russia and Ukraine are the world`s biggest exporters of wheat(33%). Because Russia introduced a wheat export limit already in 2021, the wheat price has gone up by 80% already(2020-2021). Since the beginning of the recent conflict wheat futures were on an upward trajectory.
The problem however is not just a shortage of wheat. In recent days, the price of agricultural commodities has fluctuated sharply as the conflict increasingly threatens to disrupt production and global shipments of wheat, corn, and vegetable oil
Further, Russia is a major producer of potash, phosphate, and nitrogen, vital components for fertilizers. Russia produces 13% of the global total, main importers are Asia, Brazil, and Africa. Early February 2021 Russia introduced a ban on ammonium nitrate fertilizers. A lack of fertilizer will lead to more insecurities in global food production.
Rising food prices are a problem for the industrialized world, but the worst hit will be developing economies. Social inequalities will get worse and social unrest, like the Arab Spring, could be a result.
Metals
The Russian company Nornickel is the world’s largest producer of palladium(40%) Palladium is essential for converters used in vehicles to limit harmful emissions. 30 per cent of titanium, a crucial component for the aerospace industry comes from Russia.
By the way, Russia is the world‘s third-biggest supplier of gold.
The sleepwalkers
Many policymakers fear that Europe is less well prepared than Moscow. Putin has prepared for years for this event. His “Fortress Russia” policies have prepared the country to weather even the toughest of sanctions.
Overall, Russia is the EU‘s fifth-largest export market, accounting for 4 per cent of its goods exports in 2020. But trade from large EU economies to Russia has been in decline since its annexation of Crimea. Less than 2 per cent of goods exports from Germany, Italy or France go to Russia.
The Banking system
Lenders are also at risk, as the ECB has warned. About $60bn is owed to EU banks by Russian entities, nearly four times more than the amount they owe to US banks, according to the Bank for International Settlements. Large amounts deposited in EU banks by Russian entities are frozen.
Ukraine’s government owes about $23bn to holders of its sovereign bonds. Bondholders have grown increasingly nervous about a possible default or restructuring. The cost of insuring against default has doubled since September.
European Banks heavily involved in Russia and Ukraine, like the Austrian Raiffeisen International, will most likely need government support to avoid a major default. The Austrian-based Russian Sberbank Europe AG and VTB Europe have filed for bankruptcy which will have a ripple effect on other European Banks.
Investors’ interpretation
This turmoil leaves us with considerable unease as investors. We have no crystal bowl nor a reliable prophet to tell us how the conflict will play out and what decision to make next.
Some investors plan a flight to safety in global markets, away from stocks and into government bonds or other traditional havens such as the Swiss franc, yen, and gold.
Others rush into commodities, like oil, gas wheat or sunflower and hope to make a killing. The more cautious believe real estate is the only safe haven.
Gamblers see an even rosier future for cryptocurrencies. Crypto has been given a new chance by becoming a new tool in war as Ukraine and Russia leverage digital currencies. Russia wouldn’t be the first country to use crypto to get around sanctions.
Now what?
The past weeks were marked by surprisingly swift and united reactions from the West. Within a few days of Russia‘invasion harsh sanctions were announced. The energy sector was explicitly excluded from the sanctions as not to cause major disruptions for the markets in the west. Still, the dynamic in global stock markets was conflicting and decision making for investors has become even more difficult.
