As we write, it appears only a matter of time before Russia launches an all out offensive in Ukraine. Its initial campaign has clearly failed as increasingly absurd Kremlin comments and the facial expression of Sergei Shoigu (Defence Minister) neatly illustrate. It’s a bad career move to be the deliverer of bad news to Putin.
Had Putin kept his ambitions to annexing some eastern Ukrainian territory, a viable case could be made for him timing his move well. Western nations are debt laden, inflation is climbing and energy prices, already high, continue to strengthen. The latter would obviously aid the aggressor. Furthermore, Europe was divided and whether it was the EU’s reliance on Russian energy (especially Germany) or the dirty money funnelled through London, Putin had never been truly pressured.
However, by attempting a full scale invasion, Putin has walked into a catastrophe. Even if he achieves a military victory, it will be in name only. Ukrainian partisans were still active in the west of the country during the 1930s and 1950s and now with a significant NATO border allowing supplies to aid an insurgency, his reckless gamble will eventually be laid bare. He has also galvanized the entire free world to the point where even Switzerland, Sweden and Finland are no longer fence sitting. Germany, too, has re-examined its post 1945 role. He clearly was not expecting such behaviour and the fact that currency controls are now being enforced and interest rates are 20%, shows sanctions are already biting.
From an economic perspective, it is our belief that Moscow’s invasion will delay any meaningful normalisation of monetary policy in free market economies. We were expecting inflation to be a long term feature but recent events amplify that opinion. The present background is extraordinary but in our view it would be an error allowing it to exert undue influence upon investment policy. Nothing has changed for us; we want to own the shares of excellent businesses for an indefinite period of time and our expectation of elevated levels of inflation for some time to come only strengthens that view.