Private View Blog: Could Russian attack herald a brighter future?

The sight of an authoritarian regime launching a cruel, violent war on its neighbour, deliberately targeting civilians and completely disregarding carefully-crafted international norms, is devastating. The collapse of peace in the middle of Europe and mass exodus of refugees, stark images of which now fill our TV and internet channels, are a reminder of dark times we hoped had been confined to the history books.

As long-term investors, we see this tragedy heralding a paradigm shift, leading to a lasting new world order. We believe the effects of this crisis will be deeper than most investors anticipate, reshaping the investment environment for years to come. The most depressing forecast is of a return to a divided world, composed of competing strategic blocs. But more importantly, this war has highlighted the challenge which authoritarian regimes pose against liberal democracies constituting the West as an ideological entity.

Unless the world quickly returns to the multilateral order crafted during the last 70 years, this struggle will intensify.  The current course, accelerated by Russia’s invasion of Ukraine, is for countries to align themselves with one bloc. This will likely lead to a reversal of globalisation and free flow of trade and ideas across the world. We have also seen substantial rearmament pledges from countries including Germany and China, a trend likely to increase as a direct result of this crisis.

Experience teaches us each bloc will compete more aggressively for influence and resources. Countries within blocs seek more autonomy over their own industrial policies (a trend already started by the Covid pandemic). With the resulting re-shoring of industrial production and increasing competition for essential resources, we will probably witness a decline in global trade, which fuelled immense increases in overall prosperity over the last 50 years. The world is becoming a much more uncertain place and the investment landscape harder to navigate. To quote French microbiologist Louis Pasteur: "In the fields of observation, chance favours only the prepared mind.”

Ray of light?

Still unknown is the position in relation to this crisis of China, caught off-guard by the Russian move, with a leadership still trying to position itself in the new world order. Torn between suspicion of liberal democracies and its alliance to an unpredictable leader that has clearly misled them, the Chinese have not yet given clear signals about their policy towards Ukraine and the conflict. The US is trying to apply maximum pressure, which may not be the most efficient strategy, but the Chinese government will most likely try to extract more concessions from the US before taking sides. Could this signal a thawing of Sino-US relations? The advent of a much-needed reset in the relationship between the world’s two largest economies would certainly make the world a better place for the coming years.

Other consequences may also prove positive. The coming together of Western democracies and strengthening of the European Union will curtail the demagogues pandering to President Putin. Who can still claim today that Russia offers an enviable model? For now, at least, every country in Europe has toed the line and the resolve of Nato has been massively boosted, even in most unlikely places such as Sweden and Finland.

A daring prediction could even be that the new US bipartisanship heralds a calmer political landscape. United against Russian aggression, Republicans and Democrats could find common ground on other subjects and appease the unhealthy level of tension in the political discourse across the Atlantic. This in turn could lead to a more stable US foreign policy and restoration of confidence in the West’s leadership. Although this may prove overoptimistic just ahead of midterm elections, it is not completely out of reach once the chips have fallen and we start looking at 2024 and the presidential elections. In a country united against Russia, it will be much harder for demagogues to survive, and sanity may return to the White House.

But perhaps the most positive lesson from this catastrophe is the graphic realisation of our over-reliance on fossil fuels. With economic sanctions against Russia and the threat of our oil and gas supplies being cut off came the unavoidable truth that we have not moved fast enough towards energy transition. The massive rise in gas prices everywhere has scrambled governments already challenged by inflation to alleviate the pain. However, there can only be temporary measures to soften the immediate blow for consumers. The unavoidable fact is we have been too slow to adapt and we need stronger resolve to enter the carbon-free world. It is no surprise that clean energy stocks have been doing well in current market conditions. We believe this will be one of the most enduring results of the current situation and the transition will accelerate massively in coming years. If there can be one silver lining in this madness, surely this is the best one.

Today missiles are destroying Ukraine, while the ‘civilised world’ pleads for a speedy solution through a return to diplomacy. The scarier alternatives remain totally unacceptable. Even once the tanks have left, the massive damage inflicted by Russian forces on civilian infrastructure will remain a permanent scar on the face of Europe that will be impossible to erase in our lifetime. Our investment considerations seem quite paltry against the massive challenges of healing an entire people.

Jean Keller is CEO of Quaero Capital