Geopolitics Impact on Emerging Markets (Weekly Insights 2/26/2024)
Two Years Since Russia Invaded Ukraine
Two years ago on February 24, 2022 Russia egregiously invaded Ukraine and it has been deemed the largest attack on a European country since World War II. There have been at least 500,000 troops killed on both sides in the atrocity. It may be much worse given the fact that Moscow has been known to undercount its casualties and Kyiv does not disclose official figures.1 As of now, Russia has control of ~20% of Ukraine and the fighting does not look to be letting up. In this weekly, we focused on some of the major global impacts we have seen as a result of Russia’s invasion of Ukraine.
- Economic impact: Ukraine was likely able to produce low single digit economic growth in 2023. This was after a nearly 30% decline in GDP in 2022. The primary drivers of growth in 2023 were international aid, the ability to get some exports out of the country and stabilizing Ukraine’s electricity supply so that businesses could operate. The Ukrainian government is looking to build on this in the future by finding alternate routes to export their goods, entice international developers to rebuild the country and restore their energy sector. Russia’s economy only fell ~2% in 2022, thanks to their continued ability to export energy products. However, the international sanctions are painful for Russia. The Russian ruble is worthless, inflation has increased 20% from year end 2021 to 2023. In addition, they have had to double their defense spending and €300 billion worth of central bank reserves are blocked in the international markets. Lastly, 70% of assets in the Russian banking system are under sanctions.2
- Grains exports are a global problem: Prior to the start of the war, Ukraine was one of the top five largest exporters of grains. Russia initially blocked all grain exports in the early stages of the war. However, a brokered deal with international allies called the Black Sea Initiative, gave Ukraine the ability to move grains through the Black Sea. Unfortunately, Russia backed out of that deal. Now shipping grains is becoming pricier and taking longer. With food prices up more than 15% because of the pandemic, any disruption in food supply is problematic, especially items like corn and wheat as they make up ~75% of food exports. Emerging and developing countries rely on grains for food given their affordability.
- Natural gas has not been the weapon Putin thought: In the early stage of the war natural gas prices skyrocketed and put Europe at risk given its dependence on Russia as an exporter. However, Europe and the world have shifted to find other energy alternatives, specifically liquified natural gas (LNG). Europe boosted their infrastructure to store and transport LNG and the U.S. became the largest LNG supplier to the EU in 2023.
The Bottom Line:
The pandemic was one of the first drivers that brought the thought of deglobalization to a reality. However, the ongoing war between Russia/Ukraine, Israel/Hamas, China uncertainty and tensions in the Red Sea have made many countries continue to reevaluate where to source the imports that are necessities for their countries. From an investment perspective it has also increased the premium investors require to take the risk of investing in emerging and even some developing nations. Since Russia invaded Ukraine, the MSCI EM Index is up 5%, compared to 28% for the MSCI EAFE and 59% for the S&P 500.
- https://www.nytimes.com/2023/08/18/us/politics/ukraine-russia-war-casualties.html
- https://www.consilium.europa.eu/en/infographics/impact-sanctions-russian-economy/