Peter Kraneveld argues that investors should take the possibility of future economic and financial sanctions against other countries seriously

The war in Ukraine will not decide whether or not it is a watershed for financial markets. That will be decided by how it ends. Pundits can only speculate on how – and when – it ends.

However, there is an immediate effect of that war that will endure no matter how it ends: a new political risk is born. Economic warfare. Like electronic warfare, it can be waged without a declaration of war and with a low probability of escalation, so it is suitable to be used by as well as against nuclear powers.

The sanctions against Russia have multiple objectives. However, their tools are clear: economic and financial relations. The tools are making use of the structures and institutions constructed and developed after the second world war, slowly at first, ending up in an unprecedented movement, often referred to as globalism.

The vanguards of this movement are the International Monetary Fund (IMF) and the World Trade Organisation (WTO). Under IMF leadership, the vast majority of currencies became convertible: they could be exchanged more or less freely into another currency. WTO diminished border taxes to an insignificant level – except for agricultural goods – and attacked the sneaky practices that took their place with a wide range of specialised treaties and even a dispute settlement procedure.

The success and development of the European Union (EU) proved the advantages of economic co-operation.

That system has been under attack from several directions. The crisis of 2008 was a lesson in how a local economic or financial problem could spread quicker than COVID-19 over the globe.

Populism and nationalism took hold in several countries, notably in Russia and the former satellites of the Soviet Union, Italy, the UK and the US. The opposition of populists and nationalists is dogmatic: it is an article of faith, rather than a conclusion based on facts and logic. It can even stand in the face of proof that the policy hurts the national interest.

peter kraneveld

Peter Kraneveld

The war between Russia and the Ukraine takes de-globalisation a step further, because it has shown that disrupting economic and financial relations is successful. Payments were largely stopped by cutting Russia off from the SWIFT system, making trade pointless where there could be no payment.

Not long after, the rouble collapsed and became in practice inconvertible. As investors tried to shed their Russian holdings, the Moscow market collapsed and was closed, making financing of new investments impossible. Restrictions on financial trading made Russian bonds, including government bonds, illiquid and threatened by default. Russia is back to the period of the gold standard.

It is clear that the sanctions have an effect on the Russian economy that in the long run cannot fail to restrict the options of the Russian government.

Meanwhile, the sanctioneers are feeling the consequences of their own actions. The Russian economy is floating on fossil fuel exports from Russia, but the EU has a degree of dependency on importing fossil fuels from Russia. It needs to find replacement imports, probably at a higher price.

It is equally clear that the success of these sanctions invite use of them in other situations and against other countries. There can be little doubt that the US will want to do just that in case China invades Taiwan.

Investors should be prepared for such a situation. With perfect hindsight, the Russian stonewalling and lies after the downing of Malaysian Airlines flight MAS17 over the Ukraine in 2014 now looks like a clear harbinger and testimony of the Russian government being indifferent to international condemnation of its behaviour.

Those investors who sold their Russian holdings following the shooting now look far-sighted.

Other signals that all is not well in Russian government circles are the lacklustre vaccination campaign against COVID-19 and unwillingness to co-operate in the fight against climate change, perhaps signs of indifference towards public health that translated into a high casualty rate and low morale of Russian troops in Ukraine. Investors who dis-invested from Russia recently for these reasons must feel relieved.

Peter Kraneveld is an international pensions adviser at Prime, BV