Step by step the corporate world is building a fortress to isolate Russia from the international community, writes Hargreaves Lansdown senior investment and markets analyst Susannah Streeter.
Companies around the globe are responding to Russian aggression by freezing Moscow from transactions and ditching investments worth billions.
For anyone caught up in the conflict, the impact has been horrific, and the primary concern will always be for the human cost of this violence and destruction. But the impact has had repercussions around the globe and, in an interconnected world, it is exacerbating the looming cost-of-living crisis.
There’s a risk it could push up prices at a rate consumers and companies haven’t seen for decades. There are predictions that UK inflation will peak above 8%, and higher interest rates will linger for longer.
Rising prices have already been hitting our wallets and a labour crunch is pushing up wages. Inflation in the UK is at a 30-year high and gas prices, already a major issue, have become even more of a problem.
In the immediate aftermath of the invasion of Ukraine, UK gas prices rose 40-60%, and although they subsequently fell back, further disruption may send prices sky high again.
Global cost
As some of the biggest beasts in the corporate world raise their hackles in response to Russian aggression, more companies are expected to follow suit. Excluding Russia’s central back from accessing foreign exchange reserves and cutting off other banks from the Swift payment system has sent the rouble into freefall, only stabilising at record lows. Concerns that Russia could retaliate by weaponising its exports are keeping the price of commodities elevated.
The UK is reliant on Russia for less than 5% of its gas, which means it is less exposed to shortages, but it is still exposed to international markets, so less supply will push prices higher.
With 85% of UK homes heated with gas central heating, it will mean higher energy bills. We’re already facing an eye-watering 54% rise in the price cap in April, but if wholesale prices stay high, there could be yet more rises when the price cap changes again in October.
Oil prices jumped above $100 (£75.11) a barrel after the invasion, and though they have fluctuated since, it is still incredibly high. This will impact the cost of filling up with petrol, but will also feed through into the cost of manufacturing and distributing everything from furniture to food.
Russia and Ukraine are also major exporters of wheat. And while the UK isn’t a major market, it is exposed to international prices, which again shot up after the invasion. Just days after the attack, US benchmark wheat prices in Chicago hit a 13- year high of $9.75 a bushel.
It is all set to put further pressure on people’s finances, at a time when they’re already facing the biggest cost of living squeeze in a generation.
Supply crisis
The Ukraine crisis comes just as some of the supply chain issues inflicted by the pandemic had begun to ease. Gaps on shelves have been a regular occurrence in the past year or so, bringing the reality of supply chain disruption into sharp focus.
Supply chains all over the world have snarled up as we’ve recovered from the initial shock of Covid-19. That’s left businesses unable to get a ready supply of goods, pushing up prices.
Demand cratered early on during the pandemic as people’s spending reduced. At the same time, supply was interrupted by social distancing measures. Then, as we were all stuck at home, demand shifted to reflect our more sedentary lifestyle.
This can be seen in the computer chip shortage. As we bought fewer cars and more laptops during lockdown, supply chains adjusted to reflect this. However, now that people want cars again there aren’t enough chips to go round. That’s sent used car prices soaring and put pressure on everything from cars to gaming consoles.
It is now feared that the conflict could reignite the global computer chip crisis, with manufacturers still grappling for steady supplies after demand rocketed following pandemic lockdowns. High-tech exports of components like chips are among those on the sanctions lists and Japan has said curbs will be imposed on semi-conductors.
Ukraine is home to half of the world’s neon gas, for instance, which is critical for manufacturing semi-conductor chips, which work as the brains of almost every electronic device in the world.
Palladium is also crucial for chip manufacturing, and this has jumped in price over concerns that western sanctions will hit supply from Russia. Companies are taking measures to increase inventories and try and ensure they are not left short.
Spectre of stagflation
With France’s foreign minister warning of an all-out economic war, concerns are rising that shortages could raise further problems during the weeks and months to come.
The spectre of stagflation is once again looming, with inflation staying high while growth stagnates, as countries assess the implications of a drawn out conflict.
For investors, market moves and speculation over just what will happen next can be concerning, but switching and ditching stocks in response to rumour can lead to over-trading and capitalising losses.
What is really important is to work out if your portfolio is well-diversified – with exposure to a variety of geographies and an appropriate asset class mix for your age and risk profile – and then stick with it.
This article first appeared in the March edition of Portfolio Adviser magazine.
