Madison Investment Market Update

Russia’s invasion of Ukraine has been rapid and dramatic, but the likely economic consequences will be slower to materialise and by nature less spectacular. The war itself is terribly tragic, first and foremost for the Ukrainian people, but also for the Russian people – many of whom do not support it. These brief notes will focus on some of the myriad snippets of news and analysis that are likely to impact financial markets.^

  • Some positive news: President Zelensky of Ukraine says Ukrainian and Russian delegations could meet for talks “without preconditions” on the Ukrainian-Belarusian border. It is doubtful that anything will come of this in the short term, but it is a positive sign nevertheless.
  • Regarding the war itself, reliable information is difficult to come by. However, it appears that fierce Ukrainian resistance and logistical difficulties are hampering the Russian invasion, which seems to be going slower than Putin would have expected. To date, and this could change within hours or days, no major Ukrainian cities taken.
  • Vladimir Putin has put Russia’s nuclear forces on high alert as his troops continued to face fierce resistance from the Ukrainian military and populace, and the West’s stepped-up efforts to punish Moscow. This is alarming, and an indication of Putin’s lack of restraint. Likely to cast a pall over consumer and business confidence, especially in Western Europe, but also globally.
  • The US, EU and others (including Australia) are to cut off a number of Russian banks from SWIFT*, which will undermine Russia’s ability to defend the Ruble (has already fallen sharply) and to complete trading arrangements. It will also enable the hunting down of assets of sanctioned Russian “oligarchs”. While some Russian banks will be excluded from SWIFT, there are likely to be exemptions for transactions involving the critical energy sector. This sanction on Russian participation in SWIFT is something of a dual-edged sword, and could harm German financial institutions which have extensive exposures in Russia.
  • Apart from Ukraine, Germany is the most exposed of the major economies. Since Angela Merkel has retired, it will be up to new Chancellor Olaf Scholz to manage this crisis. Germany announced it is to send 1,000 anti-tank weapons and 500 Stinger missiles directly to Ukraine, reversing its longstanding policy of banning weapon exports to conflict zones. Also, Germany to boost military spending above 2% of GDP and create a strategic natural-gas reserve in a significant shift of defense and energy policies.
  • Sadly, expect the “peace dividend” that western Europe enjoyed since the Berlin Wall fell in 1989 to reverse. Defense budgets are likely to rise in Europe, the US, Australia and other countries to reflect the increasingly dangerous global situation. This will not reduce GDP growth, but it will reduce people’s well-being, because resources dedicated to defense are resources diverted from consumption or investment in education, health care, infrastructure, culture.
  • Global food prices are spiking. Russia and Ukraine account for the majority of the world’s sunflower-seed oil exports, while Russia is the world’s largest wheat exporter. Russia is also the world’s largest exporter of fertiliser. Combined, Ukraine and Russia were responsible for about 26% of global wheat exports in 2020. Food prices have skyrocketed globally not only because of the war disruption, but also because of the global supply chain issues during the pandemic, adverse weather and rising energy prices. Food price increases are imposing a heavy burden on poorer people around the world and threatening to stoke social unrest.
  • The German government pledges support for two LNG terminals to be built quickly to cut Russian gas dependence, following its cancellation of the $11b Nord Stream 2 pipeline from Russia.
  • We will wait to see if China helps Russia evade Western financial sanctions. US officials said that recent reports that some Chinese banks have stopped issuing letters of credit for purchases of physical commodities from Russia were a positive sign. Chinese banks that do business with Russian banks and other entities could also be hit with sanctions and loss of access to the US financial system.
  • Even with exemptions for energy, Russian exports of all commodities will be severely disrupted by sanctions or by Russian retaliation. For example, if Russia threatens to cut oil and gas exports to Europe by 10%, and the price rises in consequence by 20%, Russia gets a massive net financial gain. Russia possesses near monopolies of many important and strategic metals and minerals.
  • The global computer chip industry, including giant TSMC (Taiwan Semiconductor Manufacturing Company), has begun halting sales to Russia in the wake of western sanctions. Russia will face many technology bans, and it remains to be seen whether it can source alternatives, either domestically or from China.
  • Baltic states – Estonia, Latvia, and Lithuania – will fear they are next on Putin’s list. They were occupied by first the Russian Empire and then by the Soviet Union. Some ultra-nationalists in Moscow have clung to the idea that they have a right to the Baltic states, even after more than 30 years of independence. Other near neighbours such as Finland will be watching events closely.
  • Meanwhile, the flight to “safe havens” continues: the US dollar surged, the euro dipped, the Russian Ruble plunged and gold and silver spike higher. Bitcoin and crypto currencies have been a “no show” during this crisis.
  • US Treasuries were volatile even before the crisis, and that trend will be worsened by sanctions, in particular moves to freeze the assets of the Bank of Russia. The Federal Reserve’s pivot to end bond purchases and raise interest rates in March had been a key driver of fluctuations in Treasuries, but the Ukraine crisis has set off strong downward moves even as it adds to inflationary pressures

We will continue to communicate more details as they come to light along with our thoughts on how this will impact client portfolios and markets more broadly.

John Abernethy

Chairman, Clime



^The following information has been sourced from the New York Times, the Financial Times, the Economist, BBC, CNN, the Australian Financial Review, Bloomberg, FactSet, Reuters, Capital Economics, the Wall Street Journal, the Washington Post, Associated Press, CNBC, Foreign Policy, Project Syndicate, Brookings Institute, International Monetary Fund, ABC.

*Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a secure global messaging network that banks use to make cross[1]border payments




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