Is the World About to Re-align?
It is now more than five months since Russia invaded Ukraine. As all readers will know, sanctions swiftly followed, designed to bring the Russian economy to its knees and choke off funding for the country’s military machine.
Clearly that hasn’t happened: many high-profile Western companies have left Russia, but plenty have stayed, and continue to do business. The West has continued to import Russian oil and gas even though, at the time of writing, Russia is threatening to withhold energy supplies, using them to put pressure on Western politicians.
The war has driven up the price of energy, as UK consumers are all too painfully finding out from their monthly bills. Oil companies – and countries supplying oil – have seen record increases in revenue as the price has risen. It was recently reported that Iran’s oil revenues were up 580% in the first three months of their year.
All these factors add up to one interesting – and potentially worrying – question. Is the world about to re-align? In particular, is Russia about to pivot away from supplying energy to Europe and instead supply that energy to India and China? And will the increasing co-operation between Russia and China see them establish a reserve currency to rival the dollar?
Both India and China significantly increased their spending on Russian oil in the period from March to May, with China spending $15.7bn (£12.9bn) and India $3.5bn (£2.9bn). India specifically rejected an EU/US call to boycott Russian oil, and has been taking shipments of Russian crude which would normally have gone to the EU. Granted, you cannot build a new oil pipeline overnight – but you suspect that China’s engineers could build one very quickly.
The BRICS countries (Brazil, Russia, India, China and South Africa) have long harboured the desire to create their own reserve currency and challenge the dominance of the dollar. Vladimir Putin recently announced that: “The issue of creating an international reserve currency based on a basket of our [the BRICS countries] currencies is being worked out.”
When Russia invaded Ukraine, it was thrown out of the SWIFT system for international settlements, and it immediately started to make much more use of China’s alternative SPFS system – another illustration of its pivot towards China and the developing economies in Asia.
Clients will rightly ask a simple question: ‘what does all this mean for European economies and my savings and investments?’ After all, May saw Germany record its first balance of payments deficit since 1991.
And yet, as all this news was reported in July, European stock markets rose. The FTSE was up 4%, Germany’s DAX index rose 5% and the French stock market was up 9%. In America, both the Dow Jones index and the S&P500 enjoyed very good months.
So the answer to our clients’ question is the same as it always is. There will always be ‘events’, as a former Prime Minister famously described them, and that is true as much in the world’s economy as it is in domestic politics. We will always stay on top of those ‘events,’ as do the fund managers who look after our clients’ savings and investments. It is worth remembering that saving and investing has always been a long-term commitment and – as our clients know – is part of a long-term financial plan that we constantly monitor and regularly review.
Whatever happens in world events, nothing will ever change that commitment to our clients.