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Leviathan, a book written by Thomas Hobbes in 1651, posited that because individuals at their core act in their own best interests unsentimentally, governments should do the same in relation to other countries. Today, we are watching a conflict where this idea is being tested, with larger ramifications globally.
- The current environment looks to be a realignment of geopolitical expectations across Europe. As Russia marches toward creating a buffer zone between itself and NATO through some level of control of Ukraine, the rest of Europe is adjusting to this reality. Germany’s announcement raising its military budget to 2% of gross domestic product (GDP) is a strong statement considering it has not had this level of spending since 1990.
- The rapid and coordinated efforts of Western nations demonstrates this realignment. Sanctions have been more impactful in magnitude and in a more coordinated effort than what was expected, and implemented much more swiftly than other similar situations, such as the occupation of Crimea. The importance of this cannot be understated as sanctions often require some period of time to provide maximum impact.
- Shorter term, we are likely to see higher volatility across capital markets, primarily due to higher commodity prices. Oil and gas prices will likely continue to see upward pressure on supply concerns. Ukraine accounted for 17% of corn exports in the last trading year, and with the La Niña weather pattern in the southern hemisphere reducing expected production in Argentina this season (22% of exports last year), the impact to both food and feed prices will have broad implications on inflation.1 GDP growth in Europe for 2022 is expected to slow by 0.3%-0.5%, a decline softened by government support during the pandemic.2
- Longer term, we would expect structural shifts in supply chains and infrastructure. Europe had already taken steps to improve its energy security by reducing reliance on Russian oil and gas. In addition to increased use of liquefied natural gas (LNG), the shift toward renewables will likely accelerate progress on its Green New Deal. China could emerge as an incremental buyer of oil and gas from Russia, and Europe could become more reliant on the United States and Qatar for future LNG needs.
- The monetary path of central banks is changing and an important dynamic to monitor. As most countries had already embarked on an interest-rate tightening cycle to combat inflation, the prospect of slower growth is shifting those expectations. The initial response has been a reduction in expectations in terms of the pace and magnitude of interest-rate increases in 2022.
There is a real risk that Russia becomes cut off from the West as a result of these sanctions, which would be disastrous for that country and would speed up the breakup of the “all-terrain” globalisation model that has fuelled global growth for the last 25 years. We are not ready to call the end of globalisation, as it will likely just take on a different shape. While we find ourselves in the fog of war, we remain vigilant and resilient in communicating with our clients and protecting their assets.
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1. Source: United States Department of Agriculture (USDA), as of 2021.
2. Source: Bloomberg. There is no assurance that any estimate, forecast or projection will be realised.