Log inInvestments Market Update 14th February 2022 from Jilly Mann
21st Century Appeasement – where next for the Russian predicament?
I often write about lessons from history and how one must continue to pay heed to that which has gone before to assert what may come next. The Russian predicament feels like another one of those moments.
By the time you read this, Russia may have already invaded Ukraine and war in Europe may have broken out. I must caveat this article, because I am not a political commentator nor do I have any insight on what is happening on the ground in Eastern Europe. I write this from a purely personal perspective as someone who has long been fascinated by Russian history, but who these days has an eye firmly on investment markets.
Russian activity on the Ukraine border seems a rather damning indictment of the chasm of leadership prominent today in Western politics. President Vladimir Putin seems to be taking advantage of this chasm and flexing his muscles accordingly. It wasn’t so long ago that we saw North Korea trying similarly antagonistic tactics on South Korea and the US, or China with the ongoing dispute over Hong Kong and Taiwan. Russia annexed the Crimean Peninsular away from Ukraine in 2014 and so there is reason to believe that Russia will keep eating away at Ukraine to take back land and more importantly, strategic influence over the Black Sea. The recent television series shadowing the British Navy clearly demonstrated the brazen nature of Russian intelligence in and around UK waters. These are deliberated coordinated tactics designed to remind everyone of Russian capability.
President Putin is well aware of the reliance of Europe on oil and gas supplies from Russia. He holds the upper hand in these negotiations and this is where either blind faith in perpetually friendly relations with Russia or Putin spotting an opportunity with weak leadership has led to Europe finding itself in a very awkward situation.
Who has the personality and diplomatic skills to abate this potential crisis? In the UK, whatever the rights and wrongs of lockdown parties, we are more concerned with committing intelligence resource and parliamentary time debating who was where and when two years ago. If Russia did invade Ukraine, we can all be fairly confident that in no time at all opposition leaders would be decrying the Government for not focusing on the major issues of the day. UK politics today can feel more like the personification of Spitting Image puppetry than issues affecting national security. Boris Johnson could help resolve this crisis, he has a personality to do so, but Putin knows that the UK Prime Minister is distracted.
In Europe, the leading figure of Angela Merkel is no longer in situ. Her German Chancellor successor, Olaf Scholz, is due to reach Moscow for talks tomorrow and he may seize the opportunity to show his standing, but Europe as a whole lacks much in the way of strong leaders. President Macron is another who is too often fighting for his political life in France thereby distracting him from any international gravitas.
President Biden has thus far been underwhelming during his time in office. He is struggling to push through domestic policy in the US and rather than being a central figurehead who leads policy like some of his predecessors, Barack Obama in recent times springs to mind, he seems to be too influenced by others who are making questionable tactical calls.
There seems to be a desire to continue talks to avert an invasion in spite of any perceived leadership weakness, which is encouraging and I do wonder whether Putin actually needs a full scale invasion to achieve his aims of a pro-Russian leader in situ who could effectively achieve the same aim. Ukraine have been looking to build better ties with Europe than Russia, but if the Russians did invade, the level of support they then receive from Europe, with a backdrop of recent global conflicts in mind, would be quite instructive as to how long any European conflict could last and which way Ukraine would ultimately fall.
1938 saw Neville Chamberlain embark on a policy of Appeasement in Europe. His hope was to avoid war with Nazi Germany by engaging in diplomatic means, which ultimately resulted in the Munich Agreement of 1938 ceding the Sudetenland region of Czechoslovakia to Germany. This policy ultimately failed as Germany took control of the remainder of Czechoslovakia the following year, thus prompting the start of World War 2. I’m not comparing Russian activity to Nazi Germany, but as a precedent for diplomatic success or otherwise, the 1930s Appeasement policy teaches us some lessons. For diplomacy to work, it requires the will to succeed on all sides and strong leaders on all sides who will get things done through force of personality.
The West has an opportunity to make diplomacy succeed and to work with Russia. How that pans out over the coming days and weeks we will soon find out, but if an invasion does happen, I’m not convinced it needed to happen. The West desperately needs to find some status and start being proactive, not reactive.
If the crisis worsens, one can expect energy prices to continue to rise. That is not an appealing prospect in the UK where energy prices are already leaping upwards. Any stocks exposed to Eastern Europe, which are registered on Western stock exchanges will be punished, we have already seen Evraz Plc the FTSE 100 listed mining firm with operations in Russia and the Ukraine fall by over 35% today. European stocks may be more jittery than the UK, US and Asia, especially as they are now starting to feel the full of effects of rising inflation domestically anyway. We have vastly reduced our European exposure in recent weeks and removed our Russian exposure earlier this year.
Below is a chart showing the S&P 500 (US), FTSE 100 (UK), Brent Crude Spot Price and Evraz Plc from 1st January 2014 to 31st March 2014, the period during which Russia annexed the Crimean Peninsular from Ukraine in February 2014. As can be seen, the US, UK and Oil indices fell by around 5% at the peak of the Russian annexation, whereas Evraz Plc plummeted to eventually halve in share price.
A full blown invasion of Ukraine could perhaps have more prolonged pressure on global markets than the annexation of the Crimean Peninsular, but without wishing to sound dismissive, unless Russia then embarks on a more extensive land grab, markets will likely shrug off the issues in Ukraine and refocus on reinstating energy relations with Russia and solving their own domestic problems.
Within our portfolios, we have been increasing our exposure to resources and stocks which will be a necessity for people to own, rather than a nice to have. There are a lot of factors bothering markets at the moment, but we are seeing increasing support for our view that things aren’t as bad as they have been hyped up to be. Inflation in the UK and US isn’t going to more than double again over the coming year, it will start to come down as the Covid peak falls out of the figures. Predicted interest rate rises of sevenfold this year are unlikely to happen, we will see some rises, but we doubt it will be seven and so again the interest rate hype is largely overblown.
We recognise that this is a worrying time for investors, but we remain confident that there shall be much more positive news to come for markets in the next few weeks and months if politicians and Central Banks can hold their nerve.
President Putin may have other ideas and if he is intent on a reversion to the Soviet Union then we will clearly take the action that is necessary to protect portfolios by moving the strategies to a very defensive footing, but I remain unconvinced that Russia actually need to adopt a fall on war strategy to achieve her aims.
The question I keep coming back to is, what would Donald Trump have done with the Russian predicament had he still been in office? Whatever he would have done, I think it would have involved some quite direct negotiations with Russia and I’m fairly sure it would have reached a conclusion far sooner than we have seen happen thus far. Maybe we will find out if we can stumble through to 2024 and the next US election without a full blown war in Europe erupting.