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Market Volatility
The West is united
John Emerson
Vice chairman

Russia’s military aggression against Ukraine, which has become Europe’s largest ground war in generations, has impacted millions of people and triggered a large-scale humanitarian crisis as vulnerable Ukrainians take shelter or flee their homes. The intensification and spread of the conflict is deeply troubling and is having a devastating impact on those people caught in the crisis.


This article focuses on potential market and economic implications of the conflict.


The transatlantic alliance has not been this united since the aftermath of 9/11. It’s quite remarkable how, after years of skepticism and finger-pointing — whether it was over NATO funding, the imposition of sanctions after Russia began the Ukraine war back in 2014, Brexit or the Trump administration’s America First agenda — Europe and the United States have quickly come together in response to Russian President Vladimir Putin’s unprovoked war in Europe.


For more than two decades, the U.S. has unsuccessfully urged Germany to ramp up its defense budget, kill the Nord Stream 2 pipeline and reduce its energy dependence on Russian gas. Yet, within 72 hours of Russia commencing its invasion of Ukraine, German Chancellor Olaf Scholz signaled a radical shift in multiple sacred pillars of German foreign policy: defense spending will quickly exceed 2% of German GDP, including an immediate €100 billion infusion; German-made weapons can now be sent to Ukraine; and Nord Stream 2 has been halted.


International sanctions are mounting against Russia

Sources: Capital Group, Council of the European Union, U.K. Foreign, Commonwealth and Development Office, U.S. Department of the Treasury, U.S. State Department. As of March 7, 2022. Note: SWIFT is the Society for Worldwide Interbank Financial Telecommunication, which runs a messaging and payment system used by more than 11,000 financial institutions. Golden passports refer to residence permits that can be made available to foreign nationals and their immediate family via certain citizenship-by-investment programs.

Historically neutral Switzerland has stunningly agreed to adopt all European Union (EU) sanctions against Russia, including freezing Russian funds in Swiss banks. Even traditional supporters of Russia, such as Miloš Zeman, president of the Czech Republic, have condemned the attack on Ukraine and called for harsh sanctions.


We should anticipate significant Russian retaliation for these unprecedented sanctions. This could include severely reducing or even cutting off oil and gas exports to sanctioning nations, as well as restricting exports of titanium and other critical metals. While curtailing oil and gas sales to sanctioning nations would deprive Russia of needed revenue, China would presumably fill some of that gap — at fire sale prices. Moreover, Putin has used the time since the imposition of Western sanctions in response to his annexation of Crimea in 2014 to build up Russian cash reserves and enhance Russian resilience.


Furthermore, we should prepare for the possibility of major cyberattacks on European and U.S. communications, energy and financial systems.


The Germans are preparing for a reduction of Russian gas exports, making plans to backfill with imports of liquid natural gas (LNG). This will be complicated by Germany’s failure over the past several years to complete construction of regasification facilities at its North Sea ports. There is little doubt that energy costs in Europe are likely to skyrocket, which are expected to be inflationary and dampen growth.


All that being said, Putin clearly miscalculated on two fronts: First, the fact that the West would come together as quickly as it did, despite European reliance on Russian energy, the newly elected government in Germany, and potentially distracting domestic challenges faced by U.S. President Joe Biden, U.K. Prime Minister Boris Johnson and French President Emmanuel Macron. Second, Putin miscalculated the intensity of Ukrainian resistance from both the military and civilians.


Notwithstanding all that, sadly, in the end, I think we could end up with an ugly “peace,” with Russia expanding its control over eastern Ukraine after having severely damaged the country’s national infrastructure. It is hard to see how Putin backs down at this point, absent massive domestic opposition within Russia. I expect this war will get worse before it gets better.


Pandemic, inflation, war: It’s been a tough start to the year

Sources: MSCI, RIMES, Standard & Poor’s. As of 3/4/22.


John Emerson is a vice chairman of Capital Group International and the former U.S. ambassador to Germany. He was also president of a large wealth management firm and is a leading professional on industry trends.


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