Ukraine update

Mar 3, 2022

“The first casualty of war is truth”      

 Hiram Johnson


Deciphering what is happening on the ground in Ukraine, or Russia for that matter, is difficult. Not just because the veracity of the reports or news has to be examined (on every side), but because the narrative attached to it differs depending on the perspective. The tightening grip on media and freedom of expression in Russia has been effective. It appears most Russians believe the narrative about the invasion being merely a “special military operation” to combat neo-nazi aggression against Russia. The Roskomnadzor, the organisation responsible for censoring the media, told journalists that they are “obliged” to solely use information provided to them by the Russian state. There is no independent journalism anymore in Russia when the use of the non-approved words “invasion” or “war” can have you jailed. Leaving aside the complexity of the human situation, two elements have emerged that were unexpected.

Firstly, that Putin, perhaps recognising that his playbook was by now pretty well understood, abandoned his usual tactic of oblique, incremental militarism. There was a cursory day or two of the usual military feints with the Russian media reporting of atrocities inflicted on Russians in Ukraine etc, but this was swiftly given up and a direct full-on assault on Ukraine was launched. No pretence at guile or misdirection. Perhaps Putin believed his grip on the narrative within Russia was so tight he could simply ignore the reaction of the western world. Whatever the reason this is definitively a different approach by Putin towards his clear goal of recreating Imperial Russia.

The second element that has surprised has been the severity and depth of the sanctions deployed by the west. This is the first time a western nation that is interconnected with trade and commerce has had the blood vessels of international financial systems severed. The results are profound. For example it took a couple of days for analysts to work out that the commercial aviation industry in Russia would be dead within weeks. Like all airline industries it leases planes (usually from Irish based leasing companies); these leases will be immediately terminated. Russian planes are insured in London; the absence of insurance means no international flights. Most of the engines are made by GE or Rolls Royce, so there are no operation manuals or spare parts, never mind the cessation of the service agreements. Pretty much every international contract is written in London, this is likely to stop or be heavily curtailed.

Now the airline industry is but one example of where Russian production or value-chains cross their borders. With the exception of Chinese supplies most of these non-Russian services or physical components will no longer be available. Even with an economy that in truth exports only two things (resources and cybercrime) the consequences will be severe.



Putin felt secure that his cash and gold reserves of $630bn [WSJ] would cushion Russia against any reprisals but it appears that it can only access around one third of this total. Of the gold only 21% [statista] is in Russia. Over 75% of Russia’s central bank reserves are foreign currency assets with around half being foreign currency securities. These are predominantly held in the country of issuance. Even if these reserves were liquid the tools of transportation (SWIFT, credit cards, online payment systems) are denied him. Putin’s deep reserves are considerably less helpful than was anticipated.

These sanctions are “blowing holes” [FT] in the Russian economy. The rouble has dropped 30% and Moscow is unlikely to be able to avoid a sovereign bond default. The stock market has been shut down to eliminate the headlines of what will be a devastating loss to their owners when they reopen. Some commentators have suggested the Russian economy has already shrunk by one third in less than a fortnight.

Putin has never been a believer in soft power. The prodigious force of the soft power that has been unleashed on him compels a rethink.



From an investment perspective what has changed? Certain commodities have soared: oil, gas and wheat. The US$ has strengthened as have other defensive assets such as gold and equity markets have tumbled. It is likely that the US Federal Reserve will take the “easy” option of delaying and diminishing interest rate rises, as has been evident from sovereign debt yields falling, which will further stoke inflation. The impact on inflation of rising energy prices is mostly temporary – they wash out in a year – rather than wage increase expectations which linger. However inflation will continue to rise to levels not seen for a generation. In the UK the gap between inflation and interest rates has never been higher.

As we have previously discussed we face a set of circumstances that are reminiscent of the 70’s and we should expect similar problems to emerge:

  • sustained high inflation
  • higher asset price volatility
  • wage increases
  • increased union activity / strikes
  • higher inventories and working capital
  • shorter, more local, supply chains
  • lower return on capital employed (ROCE), profits and margins
  • higher energy costs

The likelihood of a US recession in 2022 has risen sharply.



We started 2022 with a highly defensive position: high levels of cash, low credit risk and duration, significant gold reserves and a focus on cheaper equity markets. We have been extending these defensive positions over the last two months and have done so again today.

Our original rationale for the defensive position was not based on any foresight of this conflict emerging, but more on a simple understanding that when equity markets look stretched and macro-economic risks are mounting then the reward for taking risks is likely to be low. Our analysis suggested that a period of “battening down the hatches” would be prudent. When markets and assets tumble it is usually impossible to fully insulate portfolios against all losses. Our goal is to minimise losses where possible and be ready for the opportunities that emerge and we are well positioned in this regard.

In view of the changing circumstances created by the Ukrainian conflict we have taken further risk off the table:

  1. We have sold your exposure to US healthcare innovation. It remains an attractive long term investment theme but is likely to be exposed to weak market sentiment.
  2. We have reduced emerging market equity holdings. So far in 2022 the UK and Emerging markets have been the strongest equity market performers, they have also been our largest “overweight” positions.
  3. We have also reduced our small European equity investment in light of  the exposure of the central European economy to Russian trade, particularly Germany.
  4. For reinvestment we have again sided with defensiveness: more gold and more short duration UK gilts.

These are preoccupying times for investors and if you would like to speak to any of the Partners please feel free to do so.