The invasion of Ukraine by Russian troops has caught Europe off guard, reminding it of the darkest hours before the Second World War. NATO countries and European leaders have so far ruled out direct military confrontation because of the risk of escalation between nuclear powers.
However, the Western democracies and Russia have been engaged in an unprecedented confrontation over the past few days. This takes the form of a merciless economic and financial war, the declared aim of which is to suffocate the Russian economy. The freezing of the assets of the Russian central bank is a measure that undermines its financial sovereignty, preventing it from fighting the collapse of the rouble. The sanctions will result in a deep recession in Russia, which should prevent Putin from financing a long war.
Our baseline scenario is therefore “a short conflict”. But we keep in mind that in history, short conflicts can last for many months. Uncertainty about the outcome of the conflict is not likely to dissipate quickly.
Financial interconnectedness and the high degree globalisation give economic weapons a power that they hardly had in past centuries. Two orders are confronting each other: the economic-financial order and the military order, which is unprecedented in modern history. The resulting shock of uncertainty will inevitably have major consequences.
In this special edition, we seek to shed some light on different possible scenarios and questions. Paradoxically, it is perhaps in the longer term that the clearest consequences of the current crisis are emerging.
Politically, NATO has emerged stronger from this crisis and Europe has been able to show its unity on issues that were the subject of disagreement (defence policy, arms supplies, nature of sanctions). But the consequences go beyond Europe and NATO. The role that China will play will give a new shape to the new international order.
Investors should bear in mind that we are not living in normal times. We are in the middle of a regime shift characterised by unprecedented inflationary forces not seen in the past five decades. The regime we are moving into (see “Russia conflict marks a further step on the road back to the ‘70s”1) is not only inflationary in nature. It will come with a harsh readjustment of the geopolitical order (implying higher fragmentation), with the final death of globalisation and the emergence of regionalisation centred on new global powers. Among the winners will be China, whose economic cycle is gaining independence from the US and with a rising role for the Chinese renminbi as the currency of trade for the region.
In any case, the evolution of the conflict will have important (geo)political and economic consequences And we hope this document will help investors understand the issues for asset allocation.