The Impact of Geopolitics on Financial Services

The invasion of Ukraine kicked off historic policy realignments across global markets that will have ramifications across the entire globe. In addition to its humanitarian toll, the war is expected to have a range of consequences for businesses and the global economy. This article focuses on the implications on the global financial system, the firms within it and the long-term effect on macroeconomic indicators.

As a result of the Russian invasion of Ukraine, we can see the macroeconomic impact the sanctions against Russia have created. The conflict has highlighted the complex, interdependence, and interconnected nature of existing supply chains, where a disruption in one part of the world can have a significant impact globally. Furthermore, the war has caused supply chain shocks, fuelling elevated commodity prices and ultimately increasing prices and therefore inflation. This is likely to cause a reassessment of existing monetary policies.

The conflict has also sparked serious debate around ESG.  Reports suggest that many ESG funds have moved to suspend or remove Russian holdings.  The conflict also highlights the many ambiguities of ESG investing and how fluid the definition of ESG can be.  Armaments and munitions, for example, are considered an unethical investment.  Given the sensitivity surrounding the topic, the defence sector is often subjected to exclusionary screening . However, with Germany agreeing to an £85bn increase in defence spending and Switzerland dropping its infamous neutrality, the argument has been put forward that weapons could now be considered a ‘good’ investment.  According to Sustainalytics and Morningstar, in the aftermath of the invasion of Ukraine, the defence industry’s lobbying groups have been highlighting the importance of comprehensive national defence strategies to ensure international peace and stability. As a result, the lobbyists have been advocating for the industry’s inclusion under the EU social taxonomy for its contribution to “social sustainability”.  Additionally, the EU published its “Final Report on Social Taxonomy” in February 2022, in which it omitted an earlier reference to defence as “socially harmful”.  However, the EU Commission has yet to decide on whether to include defence organisations in its social taxonomy. The same could apply to nuclear power if gas supplies dwindle or with GM foods if Ukraine’s position as a leading wheat producer becomes unsustainable.

The Russian invasion of Ukraine has also shaken global markets. Inflation and the possibility of higher interest rates were already contributing to market volatility, but the conflict has bought even more instability to markets.  Experts worry that the crisis could produce some surprises, with the financial ramifications still yet to be fully felt.  However, history has shown that while geopolitical crises such as the one between Russia and Ukraine can temporarily stir up markets, they do not typically have long-term consequences for investors.