A Dangerous Nostalgia

Friday Reflection | March 4, 2022

The shock waves of war are working outwards from Ukraine, and like past geopolitical events and natural disasters, they have both personal and financial impacts. The apparent financial chaos created by sanctions and shutdowns is unnerving and difficult to make sense of. It is a challenge to sit still when there is distress all around. The future feels risky, and in this instance, tension with the past is central to the conflict.

Putin has justified Russia’s unprovoked aggression against Ukraine – an independent country for thirty years – by saying it “belongs” to Russia. Whether we take that to mean cultural similarities or simply a yearning for the status quo of the Soviet Union that Putin was raised in, it remains an invasion of a sovereign nation. Prior to the invasion, Martin Kimani, Kenya’s permanent representative to the UN, publicly criticized Russia’s effort to “stoke the embers of [a] dead empire.” He marked the moment as a backward look into history that constituted “a dangerous nostalgia” and counseled the wisdom of developing working relationships with neighbors, as Kenya and other African countries have struggled to do in the wake of colonial occupation.¹

Putin has not heeded Kimani’s advice. Instead, Russia proceeded to invade Ukraine. In a series of swift and dramatic responses, scores of countries and companies have acted to punish and isolate Russia diplomatically, logistically, and financially. Airspace across Western Europe and North America has been closed to Russian aircraft, and Facebook, Google, and Twitter have been busy removing disinformation by multiple sources in Russia attempting to “disrupt the public conversation” about Ukraine.² The financial response has gone far beyond the conventional economic sanctions common in the past; the modern global system has allowed a consortium of government agencies to exclude Russia from key international electronic payment systems and thus bring a good deal of their financial dealings to a halt.

Russia is also internally aggravating its own isolation. With the ruble down 20% since the invasion began, its domestic stock exchange has remained closed all week. Citizens raced to ATMs to withdraw cash in dollars in order to preserve the value of their savings. Contactless payment systems in the subway are offline, forcing riders to resort to paper tickets. Hotels have asked patrons to settle their bills early in case credit card systems fail. Additionally, domestic censorship has expanded beyond Russia’s historic blacklist of more than 70,000 websites. The country has recently restricted access to social media site Facebook and pressured independent radio and television to discontinue broadcasting.³ This compounding isolation in a world that is more and more interconnected is unlikely to go well for Russia, its remaining allies, or its trading partners.

Stock, bond, and commodity markets have reacted to the situation in Ukraine with volatility; oil and wheat prices have risen most dramatically. Oil prices have topped $115/barrel, with supplies limited as countries boycott Russian oil. Stock price declines in Europe have been more significant than in the US, but overall price declines have been somewhat muted. Bond yields have retreated significantly, with the 10-year Treasury down to 1.72% from its recent peak over 2%. The bond market expects less upward pressure on interest rates as sanctions on Russia – and high commodities prices – lead to broader economic slowdown.

Pressure from sanctions as well as from consumers has led many US and European companies to withdraw or freeze investments and business activities in Russia. Apple has ceased product sales, and Disney will delay releases to Russian screens. Despite ongoing global supply chain challenges and Russia’s dominant participation especially in energy and grain markets, UPS and FedEx have suspended deliveries there, and Maersk and other European shipping companies will not call at Russian ports. Boeing has suspended delivery of parts and provision of maintenance and technical support to Russian airlines.⁴ At home, various US states have banned sales of Russian-made vodka in liquor stores.⁵

Prior to this situation, many investors wondered and worried about the future of the global economy in the context of inflation, supply problems, labor shortages, and the continuing pandemic. Was the best behind us? Morgan Housel, author of the 2021 book Psychology of Money, recently summed up an ironic difference between our view of the past and the future, saying “all past declines look like opportunities and all future declines look like risks.”⁶ In fact, the past was rife with uncertainty and risk as well. When we stand in the present, it is easy to worry that the future will disappoint, or to be unsettled by a backdrop of uncertainty.

And still, we will move forward. During the global pandemic, we have often heard that we will eventually get “back” to “normal.” As time progresses, it is clear that our future will not simulate the past, even if Covid magically disappears. Russia’s future will look different than its past, and the same is true for the financial markets. For clients, we continue a careful investment approach in the context of the current tragedy of war in Ukraine. We have confidence in the long future while remaining attentive for impacts in the present.

Historian Dan Carlin recently wrote that “for all its evil, war sometimes has a tiny silver lining. It can clarify the mind and reboot our ethical compass. It puts less serious things in perspective. It nudges us towards our neighbors and reminds us that our needs and interests are intertwined. It reignites our compassion.”⁷

We are hopeful that the next phase of this conflict in Ukraine indeed reignites compassion, and leads to the resolution of violence sooner rather than later. We can then look ahead not only to risks in the future but also to opportunities, with clearer knowledge of the interconnected needs and interests of the global community.

Resources

[1] Bill Chappell, “Kenyan U.N. ambassador compares Ukraine plight to colonial legacy in Africa,” NPR Europe, February 22, 2022.  This article contains a full transcript of his brief speech; we encourage you to read it.

[2] Ben Collins & Jo Ling Kent, “Facebook & Twitter remove disinformation accounts targeting Ukrainians,” NBC News, February 27, 2022.

[3] Alexander Smith, “How Russia’s war in Ukraine came back to bite Putin at home,” NBC News, March 2, 2022.

[4] Staff, “The Exodus: Western businesses pull out of Russia,” The Economist, March 5, 2022.

[5] Elisha Fieldstadt and the AP, “On the rocks: Governors ban Russian vodka sales in state liquor stores,” NBC News, February 28, 2022.

[6] Morgan Housel, “Now You Get It,” Collaborate Fund Management blog, February 22, 2022.

[7] Morgan Housel, “Surprise, Shock & Uncertainty,” Collaborative Fund Management blog, March 3, 2022.