And Putin invades Ukraine … on the way to the next world? –March 23, 2022 15:33

Frédéric Leroux, a member of Carmignac's Strategic Investment Commission.  (Photo provider: Carmignac)

Frédéric Leroux, a member of Carmignac’s Strategic Investment Commission. (Photo provider: Carmignac)

Frédéric Leroux, a member of Carmignac’s Strategic Investment Commission, describes the economic and financial implications of the war in Ukraine for investors.

Russia’s invasion of Ukraine was a major event, first with humanitarian and then economic implications, and surprised the majority of Western critics and managers.

After this invasion, Russian debt securities lost 60% to 80% of their value almost immediately. At the same time, Russian stocks listed in the UK (mostly producers of banks and oil and other industrial products) will be listed between February 16th and March 1st, the day before the stock market delisting. It has fallen from 92% to 99% of its value. At the same time, European gas prices temporarily doubled 2.5 times and oil prices rose 55%.

Why is it so loose and instant fit? You can explain it just by taking into account two different factors.

The first, of course, is the sanctions imposed by the Western world, including a ban on Russian oil and gas purchases by Americans and British. Ban certain banks from the SWIFT international payment system and prohibit payments for the sales of excluded banks. Or even the freezing of assets of the Central Bank of Russia abroad.

In response, the Russians retaliated. Russian companies will soon be unable to repay loans in foreign currencies and export certain raw materials, which could lead to new bottlenecks in the global production chain.

Very heavy sanctions can rapidly damage the Russian economy. But those direct consequences and the corresponding retaliation measures also affect other parts of the world by accelerating the pre-conflict trends, inflation and economic slowdown.

Towards a new economic order?

The second factor in this violent adjustment of Russian asset and fossil fuel prices is a global financing effort on environmental, social and governance (ESG) considerations aimed at facilitating sustainable development financing. am. In this context, a management company like us that is committed to such an approach cannot continue to invest in Russia as if nothing had happened. Therefore, the most logical and legitimate reaction was to ban the purchase of Russian securities until further notice.

This decision, shared by so many asset managers, has helped to amplify the decline in Russian securities prices far beyond what is justified by economic sanctions alone. It also shows the new aspirations of society. The desire for a more “moral” economy is driven by the immediate economic efficiency requirements that have dominated our economic choices over the last few decades.

Sanctions, retaliation, Western companies’ decision to shut down operations in Russia, compliance with ESG commitments to boost energy prices by accelerating the pace of energy transitions … these decisions have a devastating impact on the whole There are effects that are already perceived as potentially giving. Global economy. Anything that could lead to a solution negotiated at the end of the dispute sooner than expected.

In addition to their very heavy economic costs, major political announcements that appear to be accompanied by this tragic event also strengthen the sanctuary of inflationary trends by increasing their roots. Accelerating energy shifts, increasing weapons budgets, redefining energy supply routes, and transferring production are all decisions that will drive inflation for years before they produce any form of economic efficiency.

In this sense, the conflict between Russia and Ukraine will confirm the end of the dynamics of disinflation over the last 40 years based on strong global economic integration and favorable demographics, and will initiate a new economic order. The need for a new order characterized by the form of economic withdrawal, a “collapse” aimed at promoting industrial and energy independence, a pandemic and current geopolitical tensions.

This reversal of a long cycle towards more inflation will restore the long-forgotten luster of the old economic sector if multiple constraints on their relocation are reasonably revisited. Current technological advances should facilitate this partial return to the world and promise to bring formidable efficiency in the long run. This is probably the “next world”.

Source: Carmignac, Bloomberg, March 10, 2022

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