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The Russian army’s invasion of Ukraine on 24 February has delivered the grimmest of times to its victims, to the wounded and to the exiled. Observers further afield are reminded of such dark episodes as the USSR invasion of Afghanistan in 1979 or that of Kuwait by Iraq in 1990. In both of these cases, the theoretically better-armed assailant was forced to retreat in the end…
Moreover, the nostalgia for the Soviet empire shown by the current Russian president, combined with his accusatory discourse against NATO, seems to have taken us right back to an atmosphere worthy of the Cold War. Are we indeed “Back in the USSR”, as the Beatles sang in 1968, shortly after the Soviets crushed the “Prague Spring”?
This is partly true as far as the anti-imperialist discourse is concerned, although communist rhetoric is no longer a factor. It is also true in terms of the autocratic nature of the regime and the strict censorship imposed in Russia.
However, it is not the case in regard to the economic and geopolitical impact on the rest of the world. In economic terms, the global consequences of this local conflict are immediately deeper than many Soviet conflicts in the past (except, of course, the Second World War). Indeed, it has triggered a record surge in inflation by causing the price of most commodities to skyrocket. Admittedly, some Cold War conflicts had significant economic repercussions. The Vietnam War, for example, emptied the United States’ coffers and precipitated a switch from the gold standard to the dollar. But this war had no notable effect on the supply of commodities. The historical example most similar to the current situation is the oil shock of late 1973, which was not directly a Cold War episode. In a few short months, the oil price quadrupled. In 1979, a second shock almost tripled it. The scale of this shock may be smaller for the moment, but it is worth noting that the conflict is far from over and it is also affecting other raw materials. These include certain metals that are vital for the energy transition (e.g. palladium, nickel and cobalt) and essential agricultural commodities (wheat, corn, soy, etc.). The current commodities price shock may therefore be smaller at this stage, but it is much more widespread. Moreover, it is unfolding amid what is already a critical situation for certain goods (cars, semiconductors) and sectors (US real estate in particular).
At the time of the two oil shocks of the 1970s, the economic consequences were enormous. They brought an end to the thirty-year post-war boom known in France as the “Trente Glorieuses”. The past three decades have hardly been all that “glorious”, so the inflation we are seeing will not bring a period of economic exuberance to an end. On the other hand, it could signal the close of a different type of era: that of broadly accommodating central banks – despite certain episodes of very gradual increases in key rates – and a downward trend in nominal interest rates. Because once inflation is infused into the economic system, it is not easy to fight, especially if prompted as much by vigorous demand as by falling supply, as is currently the case. Ending it may require drastic hikes in intervention rates, which central banks nowadays shy away from because of the economic drag they would cause. They are certainly moving in that direction now, albeit with evident delay and maximum precaution. Hence, the US key rate is still close to 0% while inflation is already nearing 8%. In Europe, the ECB is maintaining negative key rates while forecasting inflation at close to 5% for 2022! If inflation were to soar again, much more resolute action would be necessary, slowing down the entire economy.
Consumers around the world will therefore feel a chill from the conflict, as will manufacturers who depend on raw materials, and even service companies, affected by a possible deterioration in consumer confidence, lower economic visibility, and less favourable financial conditions.
However, in the midst of these doldrums, a new economic order is emerging, which will present opportunities. Companies whose business is in local or renewable energies, or in energy efficiency, will be the first winners. Companies in the defence and security sectors will also come out stronger, chiefly supported by Germany's rearmament effort, which has just brought 70 years of low military investment to an end. Finally, even traditional energy producers will be able to tap into their increased profits for resources that can be used for their own energy transition. More generally, any company helping to optimise resources or working towards European autonomy in goods, services and strategic materials should be carried along on this favourable wind. Just like the Beatles’ traveller returning to the USSR: “you don’t know how lucky you are, boy!”
Writen on 11 March 2022 – Olivier de Berranger, CIO, LFDE