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The implications for investors of the Ukraine conflict

Philip Saunders, Director, Investment Institute, Ninety One

While the Ukraine conflict remains unresolved, we can already draw some important conclusions about some of its longer-term macro and geopolitical impacts.

Russia effectively becomes a vassal state to China

China is fast becoming a near monopsonist for the former’s resources. Under most scenarios Russia has been significantly weakened by its failed attempt to control Ukraine and it is now very much the junior partner in its relationship with China.

China benefits from access to cheap adjacent and so secure energy supplies as well as certain key Russian technologies plus a dominant position in Russia for its manufacturing industry.

This allows China to achieve land-based primacy in Eurasia, Russia having previously been the dominant power in Mid-Asia. China’s approach will contrast to the US’s more navally-directed military strategy.

The US will aim to be the dominant sea power in the Pacific Ocean but also – if India can be co-opted and via its base in Diego Garcia – in the Indian Ocean too.

A reinvigorated and enlarged NATO

Putin’s objective was to take advantage of a weakened and disunited West, to reshape the security structure of Europe in Russia’s favour.

This has backfired, resulting in a reinvigorated and enlarged NATO plus Finland, Sweden, Moldova and Georgia. The so-called ‘peace dividend’ of reduced defence spending is over and the global trend towards rearmament has been strongly reinforced.

American defence equipment manufacturers in particular stand to benefit, given the inferiority of many Russian defence systems as has been demonstrated in the conflict.

One corollary of greater prioritisation of geostrategic security is more persistent inflationary pressure. Turkey, however, may yet seek to distance itself from NATO.

Acceleration towards a multi-polar world

This key trend is being reinforced as strategic imperatives drive policy. Beneficiaries of ‘friend-shoring’ as China moves up the value chain and Western countries seek to reduce their reliance on Chinese manufacturers are the likes of Vietnam, Bangladesh and Mexico.

High-end manufacturing where a high degree of automation is feasible is likely to be ‘re-shored’, leading to higher capital investment. Automation service providers and related component manufacturers experience strong demand. AI will play a role here too.

China benefits nonetheless because of its strong positioning as a manufacturer of the principal products that the ‘Global South’ needs to develop its economies as well as its dominance in the manufacture of the inputs needed for a ‘greener’ world.

These developments concentrate China’s mind regarding the internationalisation of its currency, but the Dollar’s supremacy remains intact for the foreseeable future. That said, alternative ‘currency atmospheres’ are likely to come into being, perhaps with the soon-to-be-expanded BRICS Club taking the lead here.

A faster energy transition

Energy security has always been a driver of the energy transition in China and this has now become a more immediate imperative in Europe – to reduce rapidly the dependence on Russian gas – and India, amongst other countries.

The United States enjoys conventional energy security as it benefits from its position of being a major exporter of gas and oil. That said, participation in a global renewables boom will also be a focus for the country.

Germany by contrast suffers from the loss of its industry’s access to cheap sources of energy, representing a very significant challenge to the German economic model.

The rebuilding of Ukraine

Depending on the eventual outcome of the conflict, the rebuilding of Ukraine may see a Marshall Plan-style reconstruction funded by the West.

Proximate Europe will be the major beneficiary, with the emphasis on its neighbours. This would especially reinforce the growing significance of Poland in the EU.

Cold War 2

Despite its claims, China is not neutral and will not abandon Russia because it is not in its geo-political and especially geo-economic interests to do so: the vacuum created by a weak Russia in Eurasia is being quickly filled by China and Eurasia is becoming China’s heartland.

The major tail risk is that competition between the two great global powers intensifies, resulting in a starker bifurcation of the global economy into economic zones. Trade flows will happen between multiple blocs but capital flows would become increasingly bi-polar.

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