Buyer beware: the Russian invasion has changed the investing landscape

In only a few short weeks, the investing landscape has changed, triggered by Russia’s invasion of Ukraine and the cosying-up by President Vladimir Putin to China’s Xi Jinping.  How this plays out, only time will tell. But it seems likely that the deepening divide between these dictators and the west will need to be factored into our investment decisions.

At the beginning of March, Russia ‘temporarily’ stopped foreign investors from selling Russian assets. The action was ostensibly taken to ensure investors make a “considered” decision, rather than one determined by politics. The truth is more likely a retaliation for Western sanctions imposed in response to the invasion of Ukraine.

It may seem a stretch now, but Russia’s invasion of Ukraine could have ongoing direct and indirect implications for Australian investors if China delivers on its reported willingness to equip Russia with weapons for its invasion of Ukraine.

Driven by broadening sanctions, a deeper and wider separation would emerge between western democracies and emerging market autocracies, isolating China, Russia and others and potentially fostering an even deeper hatred as well as ongoing disruption to supply chains as adjustments and readjustments become a permanent feature of business in this new world order.

Some years ago we warned investors about the risks of investing in Chinese companies listed in the US and Australia when even auditors were prevented from performing their routine work on corporate accounts. When transparency is absent, laws unfair and unbalanced, and contracts dishonored with impunity, it is as Warren Buffett once observed: you can’t conduct good business with bad people.

And then of course we have the very real possibility of autocrats and kleptocrats simply confiscating the assets of foreign owners.

Markets have a habit of staring blindly into the headlights of black swans, even as they roll slowly but steadily towards impact. Investors are either blind to their effects or hope it will all resolve itself with minimal carnage. Of course western democracies are partly founded on hope and a very large dose of trust, but these characteristics are seen as weak by many cultures and taking advantage of such ‘opportunities’ confers a mark of respect.

We should not then be surprised when dictators are edified and lauded when they stomp on the weak.

Buying the dip has yet to give way to anything else and it may be the case that buying the dip is right. But it is also important to appreciate very real changes are underway for business and we are only just beginning to appreciate the impacts of these changes.

Overnight, Russia must pay US$117 million in interest on its debt in US dollars. It has indicated that because of sanctions, it can only pay in Rubles. Sanctions imposed by the United States, the European Union, and their allies froze more than 50 per cent of Russia’s Central Bank’s US$300 billion in assets and while a Russian default will make the headlines, it is the deepening divide between dictators and the west that investors must realise could become a permanent part of the investing landscape.


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