The financial and economic implications of Russia’s unprovoked invasion of Ukraine are probably worse than what President Vladimir Putin expected.
Signs of Moscow’s miscalculation have already emerged with the decision by the US, European states and Canada to disconnect specific Russian banks from the Society for Worldwide Interbank Financial Telecommunication or SWIFT. This effectively isolates as much as 80% of the Russian financial sector from the global financial system.
Moves are also afoot to prevent Russia’s central bank from using its US$600 billion of foreign reserves to sidestep sanctions.
China’s decision to abstain from the United Nations Security Council vote condemning Russia’s aggression calls into question any move to rely on Chinese support to offset the impact of Western sanctions. “China’s not coming to the rescue,” one US administration source said to CNBC.
Global markets appear to be recovering from the initial shock. For equity investors, Russia’s attack looks as digestible as the Covid-19 crisis.
In the energy market, West Texas Intermediate crude oil prices had dropped back below $92 a barrel at the time of writing after shooting up to over $100 on February 24. For some context, prices were below $60 a barrel in April 2021. And natural gas, which tested lows close to $3.50 per ounce in late December, ballooned to around $6.25 in late February and is currently back at around $4.46.
Short term, the increases will stoke inflation, especially in commodity-dependent economies like India. They will also put a fire under the economic and geopolitical case for abandoning fossil fuels. Russia’s primary export by a huge margin. Renewables should look even better in future.
One broader, and longer-term, conclusion should be obvious: this ought to mark an end to Western investors’ and pundits’ flirtation with the fantasy that strongmen leaders can deliver more consistent and steady economic growth than democracies.
Autocrats have no love for stability, prosperity, or consistent returns. If the reassertion of state control in China and the increased regulatory and political risk around Chinese companies wasn’t enough, then look at the prospects for any investor in Russia.
Autocracies destroy freedom, peace and wealth. Avoidance of them doesn’t come from high-minded principles but simply from the self-interested calculation that they’re too likely to rob or kill you. The risk of investing in them – in narrow fiduciary terms or in far wider senses – is simply too high. Stay away.