Macroscope

Russia’s war on Ukraine is shifting the investment landscape

Philip Saunders, Co-Head of Multi-Asset Growth discusses the dramatic policy shift towards defence and energy spending in Europe, and explains why the conflict may mark a turning point in the world’s reliance on the US currency.

Apr 19, 2022

3 minutes

Philip Saunders
Philip Saunders, Co-Head of Multi-Asset Growth discusses the dramatic policy shift towards defence and energy spending in Europe, and explains why the conflict may mark a turning point in the world’s reliance on the US currency.

While the full impact of the Ukraine crisis on the global economy and markets is unknown, much like the Covid crisis, several major medium and longer-term themes are now readily discernible. In a European context, energy and defence policy is in the process of changing profoundly. Reliance on Russia as an energy supplier will be reduced sharply and materially, whatever the shape of the eventual resolution of the conflict. In retrospect, the extent of reliance on a personalised dictatorship for essential raw materials will seem extraordinarily misguided. To his credit, Merkel’s replacement as Chancellor of Germany, Olaf Scholtz, recognised the need to dramatically shift policy and double down on renewables and the alleged Bucha atrocities will have now silenced any continued resistance to a radical shift.

The extent of Europe’s wider challenge can be seen from the numbers. Since the beginning of the war, EU nations have paid Putin’s Russia over 35 billion-euros in energy payments; by contrast, Ukraine has received one-billion-euros in arms and weapons. The other volte face was in defence spending. European delegates were recorded laughing at the July 2018 NATO summit while then President Trump lectured them on the need to fulfil their defence commitments and described them as ‘captives of Russia’ given their current and projected reliance on Russian oil and gas. Germany is now committed to double defence spending and non-aligned Sweden has announced that its defence budget will rise to 3% of GDP. The peace dividend is well and truly a thing of the past. Increased expenditure will be financed with debt on a on a pan EU basis, following the precedent of the Covid recovery funds, which will take the EU further down the path of monetary union.

China is in an uncomfortable position given Xi’s announcement of the country’s ‘no limits’ partnership with Russia on 4th February – just 20 days before the Russian invasion of Ukraine. The full consequences for China of its close association with Russia are yet to be determined but those of America’s willingness to ’weaponise’ its currency via the blocking or confiscation of reserves and exclusion from SWIFT, the dollar payment system, are clear. Geostrategic imperatives will force China to permit a more rapid internationalisation of its currency and develop an alternative payments mechanism. Other nations are likely to abet such developments to reduce their reliance on the US currency and payments systems. Saudi Arabia, for one, has recently been negotiating with China to accept oil payments in renminbi, avoiding the need to transact in US dollars.

At a stroke, the momentum behind de-dollarisation, has received a material boost. This is not to deny that the dollar’s dominant position will be supplanted in the near future, as it is too deeply embedded in the world’s trading system for that, but this probably marks the peak of the dollar era and America’s ‘exorbitant privilege’, to use former French President Giscard d’Estaing’s apt expression, of having first call on the world’s savings will progressively be eroded.

Authored by

Philip Saunders
Director Investment Institute

Important Information

The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Ninety One’s judgment as at the date shown and are subject to change without notice. There is no guarantee that views and opinions expressed will be correct and may not reflect those of Ninety One as a whole, different views may be expressed based on different investment objectives. Although we believe any information obtained from external sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Ninety One’s internal data may not be audited. Ninety One does not provide legal or tax advice. Prospective investors should consult their tax advisors before making tax-related investment decisions.

This communication is provided for general information only and is not an invitation to make an investment nor does it constitute an offer for sale. Investment involves risks. This is not a recommendation to buy, sell or hold a particular security. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. The securities or investment products mentioned in this document may not have been registered in any jurisdiction.

In Hong Kong, this communication is issued by Ninety One Hong Kong Limited and has not been reviewed by the Securities and Futures Commission (SFC).

Except as otherwise authorised, this information may not be shown, copied, transmitted, or otherwise given to any third party without Ninety One’s prior written consent. © 2022 Ninety One. All rights reserved.

Past performance figures shown are not indicative of future performance. Investors are reminded that investment involves risk. Investors should refer to the offering documents for details, including risk factors. This website has not been reviewed by the SFC. 

By clicking on the hyperlink of Investor relations below, you are leaving this website with information specific for retail investors in Hong Kong and entering the global website.

Please note that the global website is not intended to target Hong Kong investors. It has not been reviewed by the Hong Kong Securities and Futures Commission (“SFC”). The website may contain information on funds and other investments products that are not authorised by the SFC and therefore are not available to retail investors in Hong Kong. The website may also contain information on investment services / strategies that are purported to be carried out by a Ninety One group company outside of Hong Kong.

Any product documents and information contained in this website are for reference only and for those persons or entities in any jurisdictions or country where the information and use thereof is not contrary to local law or regulation.

Issuer: Ninety One Hong Kong Limited
Email: [email protected] 
Telephone: (852) 2861 6888 
Fax: (852) 2861 6861