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A shameful assault with lasting consequences

The world woke up to a new reality on Thursday 24 February. Barely out of its sick bed, focused on rebuilding strength after the pandemic, and with most of its attention fixed on treating a nasty dose of inflation, overnight everything changed. 

A European country has been invaded; death, destruction, misery and chaos have been inflicted on the Ukrainian people, now forced to flee for their safety. The spectre of nuclear war has been raised several times by the aggressor. We have entered a new and dangerous age.

In an attempt to absorb the Ukraine into Russia, Vladimir Putin has unleashed a brutal war that could last for many months, or longer. While the immediate response from world leaders was guarded, in the intervening days there has been a significant ratcheting up of the sanctions being applied to beat Russia into a corner by crippling its economy.

The measures imposed by the US, UK and EU include a ban on transactions with the Russian Central Bank, a block on Russian access to its foreign reserves, the freezing of assets belonging to oligarchs and banks, the ejection of a number of Russian banks from the Swift financial transactions system, a renewed effort to crack down on Russian dirty money in the UK, the suspension of shipping to and from Russia, a block on access to ports and air space, Russian state and Russian companies refused access to finance and restrictions on their business transactions, and limits applied on exports to the country. 

Shell (SHEL) and BP (BP.) are cutting ties with Russia and divesting of Russian assets at enormous cost, and pressure is mounting on other energy companies to do the same.

Russia is being made a pariah. 

It would have been difficult to sit by and do little given Ukraine’s ferocious fight to keep the invader at bay. President Volodymyr Zelensky has captured the attention and respect of the world with his refusal to capitulate, his determination to save Ukraine.

Who knows what the outcome will be, but all the indications are that the ground war will become more vicious and that Putin’s resolve has been hardened. 

The ramifications, while particularly terrifying for Ukraine and its people, stretch from elevated global inflationary pressures and slower economic growth to a prolonged period of geopolitical instability, a heightened risk of a new world war and the prospect of several countries simply “disappearing” in the coming years and decades. 

We should expect greater stock market volatility and we explore several aspects of the consequences of the conflict in our news pages this week. The view from Capital Economics is that overall the chance of a sustained period of poor returns from equities has increased. A stagflation-lite scenario cannot be ruled out.

But the events of the past week will reverberate in other ways, too, particularly in regard to ESG. Defence spending and energy security have acquired a fresh impetus. This will be disappointing for many but the dangers of ignoring real, external risks have now been clearly exposed. My colleague Alex Hamer’s view is that while geopolitics have always figured in energy supply, this war could mean the green energy revolution takes a back step. In the short term, he says, moves such as turning away Russian imports will mean more liquid natural gas (LNG) deliveries from further abroad, while this crisis could even trigger spending increases on production in the North Sea. A model is the US, which during the mid-2000s oil bull market poured billions into bringing on new shale supply, helping to remove its reliance on Saudi Arabia and other difficult partners. 

But ESG campaigners may have gained a new respect for BP and Shell and they will surely apply pressure in the future to other companies to respond in an equally unequivocal way when it comes to their campaigns for change.