Initial propositions on the medium-term implications of the war in Ukraine for the economy and the capital markets
A new world order
Russia's attack on Ukraine marks a fundamental turning point and there is already much talk of a new world order. Will a return to competition between great powers become the basis of any such new order? Will there be a change in the pathway to becoming climate-neutral? In six propositions, we outline the impact we expect the war in Ukraine to have on the economy and the capital markets.
“Germany had outsourced its security to the United States, its energy needs to Russia and its export-led growth to China.” These words from German political commentator and foreign affairs expert Constanze Stelzenmüller, quoted in the Economist1, explain in a nutshell why Russia’s attack on Ukraine marks a fundamental turning point for Germany – probably more so than for virtually any other country. The quote encompasses most of the medium to long-term strategic issues that have been at the top of the priority list since 24 February 2022, if not before: security policy, energy supply, how to deal with countries like Russia and China – and the future of globalisation.
From a capital markets perspective, however, the specific challenges facing Germany are not the main focus. The war in eastern Europe has far-reaching global implications. Unlike the coronavirus pandemic, when everything suddenly changed overnight, Russia’s recent aggression did not come out of the blue. To use a musical analogy, there has been a geopolitical crescendo building for years and the Russian invasion is the final cymbal clash. And now a different tune is going to be played.
There is already much talk of a new world order. In terms of geopolitical impetus for a new bloc formation, it is already here. But it is likely to be some time before order is restored. At the moment, there is still a great deal of disorder and the situation is extremely unstable. The risks are immense – and for the capital markets this of course means a high level of macrovolatility.
However, our analysis does not explore the short to medium-term aspects of the Ukraine war, such as the consequences for growth and inflation or for monetary and fiscal policy. Instead, this paper focuses on the anticipated medium to long-term structural effects. Although these are merely initial hypotheses, the overall picture that emerges points towards fundamental changes, including in the capital markets. Although primarily regional in scope, they also relate to sectoral and structural features such as payment systems and reserve currencies.
- 1 The Economist, 5 March 2022 (paywall) https://www.economist.com/briefing/2022/03/05/the-war-in-ukraine-is-going-to-change-geopolitics-profoundly; Quote in the English original: “Germany had outsourced its security to the United States, its energy needs to Russia and its export-led growth to China."
In our research paper, we deal specifically with the following theses and the expected capital market implications:
Proposition 1: Return to an old world order: competing great powers instead of globalisation
Proposition 2: Reduction of strategic dependencies will bring higher inflation – and more growth
Proposition 3: The pathway to becoming climate-neutral will be different
Proposition 4: Europe and the West will move closer together
Proposition 5: The war is fundamentally changing China’s position
Proposition 6: In the long term, the US dollar will lose (some of its) importance as a global reserve currency