Like everyone I have been struggling to understand Vladimir Putin’s reasoning for his full-scale invasion of Ukraine, Russia’s neighbour to the south. And like everyone struggling to make sense of the senseless, I turn to history to find comparisons.
Because Putin has conducted his war with such brutal indifference to civilian casualties the obvious comparisons spring to mind: Adolf Hitler, Joseph Stalin. Putin lacks the rhetorical power of Hitler and has yet to kill his closest associates through kangaroo court trials, so he’s no Stalin; he seems much more like Samson, the fabled Israelite warrior and judge.
In the Bible’s Book of Judges Samson appears as a super-strength legend who massacred an entire army of the Philistines using only the jawbone of a donkey. His treacherous lover Delilah cut off the source of his super-strength — his hair — while he slept. He was then delivered to the hands of his deadly enemies — the Philistines. As his hair grew back, his strength recovered and — once more powerful — he pulled down the temple in which he is jailed, killing himself and everyone inside.
For me, Putin is doing a Samson. He has become indifferent to his future, his reputation. His nihilism is complete. Any hope that he might one day shake hands with a US President disappeared once it became known that he was offering Middle East mercenaries $400 a day to fight Ukraine. Russia has a long association with nihilism, but previous nihilists have never been in control of nuclear weapons. Putin is pulling down the temple which will kill him, slaughter untold numbers, and damage us all. His war has changed our life more dramatically than in a century.
It has changed the global economy, changed expectations, and perhaps will usher in the death of the US Dollar as the global reserve currency. The Financial Times highlighted this unintended possible consequence: “If your dollars can vanish at the whim of the issuer [such as the US sanctions against Russia] then a reserve must exist [needs to exist] outside the dollar-based financial system”. That ‘new’ reserve sounds like gold to me.
Four weeks into the war, we’re just at the start of its consequences. As Nestle, Philip Morris and Sony joined Unilever, Mondelez, Procter & Gamble, and McDonald’s (among others) in boycotting capital investment and/or operations in Russia, in protest against the invasion, Putin must be astonished — as are many of us — at the speed and apparent unanimity of Western reaction. Even Goldman Sachs has decided to turn its back on Putin’s Russia.
Yet all these boycotts merely seem to be provoking a doubling-down; Andrei Turchak, secretary of the ruling United Russia party’s general council, said Russia might nationalise idled foreign assets. He said: “We will take tough retaliatory measures, acting in accordance with the laws of war”. For Putin and his supporters, we are therefore already ‘at war’. Even though the desire to punish Putin is understandable, does the fact that he has committed murder give any government the right to confiscate his (and others’) assets?
The World Bank’s chief economist, Carmen Reinhart, has warned that Russia is edging towards a sovereign debt default on $40 billion of its external bonds ; this would be Russia’s first major sovereign default since the Bolshevik revolution in 1917. The ratings agency Fitch has downgraded sovereign Russian debt from ‘B’ to ‘C’, saying a default is imminent as sanctions and trade restrictions have undermined Russia’s willingness or ability to service its debt. The risk is that such a default could set off a chain reaction among Western financial institutions, making the financial crash of 2008 look like a tea-party.
Collectively international banks are owed more than $121 billion by Russian entities, according to the Bank for International Settlements (which has suspended Russia’s membership). Will they get the money back? Pimco, the California asset manager, for example reportedly holds $1.5 billion of Russian government bonds. Goldman Sachs and JP Morgan say they are “unwinding” their Russian businesses; other banks will follow.
Sovereign debt risks are high and Western governments seem to want them to get higher. Liz Truss, the UK’s foreign minister, said: “We want a situation where they [Russia] can’t access their funds, they can’t clear their payments, their trade can’t flow, their ships can’t dock and their planes can’t land”. The noose around the Kremlin is tightening — and not just Moscow but all of us will pay a price. Perhaps the only persons who will profit from this mess will (as usual) be the lawyers; as Russian-owned assets are confiscated, and debts go unpaid, lawyers will make a fortune challenging the legality.
The costs we are facing
Choking off Russia’s access to Western brands is an understandable (and laudable) response to the laying waste of Ukrainian cities, but it comes at a price.
The sportswear firm Adidas for example has closed 500 of its Russian stores (around 25% of its total); it has said its sales will drop by up to €250 million ($277 million) as a result. Holders of Adidas shares will be wondering if the company’s dividend (1.51% last year) can be sustained. Profits of all companies that are ‘doing the right thing’ by shunning Russia will be hit, their dividends probably will be lowered, their costs rise. This is true not just for Adidas but all companies that have cut their Russian connections. Re-establishing them one day in the future will be costly; maybe not as costly as re-building the blitzed Ukraine, but still…
The price of most commodities has spiked since the invasion started. Nickel trading on the London Metal Exchange (LME) was suspended after the price hit $100,000 a tonne. Russia is the world’s third-biggest nickel producer and accounts for about 17% of high-quality nickel production. Traders who have been ‘short’ these commodities (i.e. those who have bet that the price will fall) have been caught out and forced to cover their positions, leading to higher volatility and loss of liquidity. Jeff Currie, head of commodity research at Goldman Sachs, told CNBC that “liquidity in these markets [is] collapsing across oil, gas, metals, agriculture”.
Official consumer price inflation in the US is now 7.9% but that is a retrospective figure, covering February. Unofficial assessments put the real figure at twice that. Bloomberg says: “A few weeks ago, many economists were eyeing February as the peak in U.S. consumer inflation. Now it’s looking more like a fresh baseline.” Expectations are that US inflation will rise to 8%-9% next month thanks to the Ukraine war. In the UK inflation (as measured by the consumer price index or CPI) is at a fresh 30 year high of 5.5% but is widely expected to rise above 9% and stay at more than 7% until spring 2023. In the UK staple foods such as bread, potatoes and pasta are likely to rise in price by 10%-50% in the coming months say farmers and importers; the international price of wheat has gone up by 50% in the past two weeks.
Russia and Ukraine combined supply almost a third of global wheat exports. According to the US Department of Agriculture’s latest assessment, the Ukraine war will cut wheat exports from Russia and Ukraine by 12% this year. The impact of this calamitous drop (and consequent price rise as countries compete for supplies) will be most felt in Afghanistan, Algeria, Egypt, Kenya, Pakistan, Tanzania, Turkey, Yemen, and European Union countries. Many of those countries are already deeply unstable; bread prices became a flashpoint in the build-up to the 1789 French Revolution. The Ukraine war might spark another catastrophe 4,000 kilometres distant.
The mainstream media — in the UK at least — has become obsessed with the fate of Chelsea football club, now that its owner Roman Abramovich has fallen foul of UK sanctions, but the ripples from the Ukraine war are much more profound than kicking a ball around. Germany is more than doubling its military spending, from €47 billion ($52 billion) in 2021 to €100 billion ($110 billion) this year. From where will this extra money come from? More taxes, welfare cuts, or the printing press?
President Putin and Russia are no doubt feeling encircled by hostile forces. But so is the chairman of the US Federal Reserve, Jerome Powell, and his peers at other Western central banks. Powell et al are caught between the Devil and the deep blue sea, between the need to take action against inflation by raising interest rates, and the fear of an economic recession partly a result of the Ukraine war.
It is not what we at Glint seek, but this kind of scenario is perfectly constructed for gold. It’s not just that gold has often been regarded as a safe place to park your money when inflation is rising, or when geopolitical anxieties are high — or when both are (as now) hotter than for decades. When your fiat currency — your Pounds Sterling, your US Dollars — are losing around 8% of their purchasing power every year, and equity markets are fragile, gold is an alternative. Luca Paolini, chief strategist at Pictet Asset Management says “Europe is probably already in recession… consumers aren’t going to go out and spend the savings they’ve built up when there’s a war happening on their doorstep, and that’s before you consider a big increase in inflation”.
At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.