History does not repeat itself
Macro Outlook: History does not repeat itself
The Crimean war of 1853 was the previous large-scale military conflict between Russia and the West. Curiously, the war was started by Emperor Nicholas I under the pretext of protecting of Eastern Orthodox control of the Holy Places. (The pretext for the current war is protecting Russian speakers and Russian interests in Ukraine.) After two and half years of fighting all sides of the Crimean war suffered 500,000 casualties. Russia was defeated and hostilities were concluded in 1856 with the Treaty of Paris, which declared in Article I, that “there will be peace and friendship (between signatories LT) … in perpetuity”. The effects of the Treaty of Paris and The Paris Declaration, which was signed shortly afterwards, were positive for the global trade: the Black Sea was demilitarized, and the Maritime law was strengthened. After the war Russia, led by the new Emperor Alexander II, continued industrialization and introduced many reforms essential for the country’s economic development. Emancipation for the serfs was announced in 1861, and a constitutional reform was introduced in 1881.
It is hard to anticipate anything positive from this conflict once peace is restored. Europe will be stuck with elevated energy prices and elevated levels of defense spending, which is not the most productive use of capital. European efforts to “reduce their reliance on Russia”, will accelerate spending on unproven technologies, like green hydrogen. Ukraine will be left with damaged infrastructure and reduced population. Russia (a nuclear weapon state) will be left isolated, alienated, and generally unhappy with the West. The Russian population will have to suffer from high inflation and high spending on the military. The US will continue to see deterioration of trust in the USD as a reserve currency. Arguably, only China and India will enjoy benefits from access to discounted commodities and Russian military technology. Compared to the situation in 1856, the “friendship” part will be much more difficult to restore…
In the short run, the Russian economy will suffer. The effects of Western sanctions are becoming visible: we can see accounts of shortages of food, car parts, and electronics discussed in the Russian mainstream media. Russian consumers, fearful of high inflation and/or future shortages are stocking up on consumables that are easy to store, primarily sugar and buckwheat. The CBR is expecting lower lending activity due to high lending rates. Employment is likely to decline due to lower export demand and closures of Western businesses. It is hard to assess the impact of these developments on the war in Ukraine, but it is possible that they will encourage the Russian Government to end the conflict quickly.
Looking longer-term, I expect some sort of “normalcy” in four or five years. Less than four years passed from the invasion of Czechoslovakia to the Moscow summit of 1972. It took almost five years from the declaration of martial law in Poland to the Reykjavik summit of 1986. The Tianamen Square sanctions imposed by the US lasted for four years.
Stock ideas
I think that we are going to see an economic slowdown in the US and in the EU because of the negative impact of high commodity prices on top of elevated inflation and rising interest rates. With this assumption in mind, I am looking for inexpensive stocks with good underlying fundamentals and positive relative momentum.
BNP Paribas (BNP FP). BNP is a well-run diversified overcapitalized financial institution, selling at inexpensive valuation. The company is well positioned to redeploy capital after the sale of Bank West in late 2022 and should benefit from interest rate normalization in the EU, which is expected to start sometime in Q3 of this year.
ASML NV (ASML) The company is a provider of semiconductor manufacturing equipment, with a particular strength in lithography. The company will benefit from increased spending on new semiconductor fabs, needed to simplify supply chains and add to existing capacity.