Will Ukraine prove to be the catalyst for another crisis?
BY STEEN JAKOBSEN AND MARK BURGESS
Saxo Bank's Steen Jakobsen and Mark Burgess of Threadneedle discuss whether the Ukraine crisis will have much broader implications
http://www.pwmnet.com/Comment/Great-Debate/Will-Ukraine-prove-to-be-the-catalyst-for-another-crisis?ct=true
Steen Jakobsen
Chief Investment Officer, Saxo Bank
Steen Jakobsen, Saxo Bank
The former US Secretary of State Henry Kissinger once said: "Diplomacy is the art of restraining power." If that is the case then diplomacy as conducted by the EU and US is failing and miserably so, setting up a big outlier risk for the world economy and markets. How these outliers pan out is almost impossible to predict, but it is important to realise that everyone loses with this conflict, no one more than Russia.
Russia's economy was already in free fall before the situation escalated. I visited Russia in late January and was surprised to find the mood among investors and CEOs at 1997/98-low levels. Russia's GDP growth will have a hard time staying on the right side of zero for the year. This corresponds to more than 5 per cent growth pre-financial crisis. Their current account surplus peaked in the mid-2000s at 10 per cent of GDP; this year they will barely break even. Vladimir Putin's popularity was at an all time low going into the conflict. Now he makes Russians proud, at least according to the polls.
Russia is clearly misunderstood. No scholars or pundits seem able to understand Russia's viewpoint and put it into a historical context. History tells us how Russia will proceed. A friend of mine put it best: "To deal with Russia and Putin is like playing poker with a robot. It does not know how to blink, leaving no tells."
All this is concerning but the biggest negative from the crisis is much higher energy prices and a desperate rush to fill the energy production gap which we have created through failed green energy investment and by closing down nuclear power generation. The Ukrainian situation will only make this worse.
The biggest consequence of the Ukraine conflict could be a revisiting of the 1970s energy crisis, including energy rationing
Europe is energy deficient. EU dependency on imports is increasing for all fossil fuels. Oil imports reached 83.5 per cent in 2009 and 64.2 per cent for gas, according to the EU Commission.
The April 2011 Fukushima earthquake was a terrible event, but the decision taken by many European countries to close down nuclear power stations could be the biggest strategic mistake since the energy crisis in the 1970s and its consequences will be elevated energy prices stretching into the future.
Moving towards green energy is a noble objective and a correct one over the long term as we have finite fossil resources, but if you run a structural deficit in terms of energy generation then the last thing you want to do is stop your own ability to produce. This goes full circle to the Ukraine-Russia situation.
The Ukraine crisis will go on for much longer than anyone wants, everyone will lose and world growth will disappoint again, but the real issue behind the scenes is Europe's lack of a coherent energy policy. The present green energy policy is a mess. Green energy is inefficient, tax burdening and nowhere near close to meeting rising energy demand from Europe.
The biggest loser will be Germany. There are more than 6,200 German companies engaged in business with Russia. The Economist states that 300,000 German jobs are at risk, German business investment into Russia exceeds €30bn, excluding financing from German banks, but more importantly Germany imports 70 per cent of its energy of which 25 per cent comes from Russia. Angela Merkel and her government have been caught out by a failed energy policy, which has made electricity a luxury good for many German households. But even worse, she decided that she would rather be dependent on Mr Putin than on nuclear power.
The biggest consequence of the Ukraine conflict could be a revisiting of the 1970s energy crisis, including energy rationing. After close to 30 years of doing this job I am realising that energy is everything in explaining growth, investment, sentiment and market returns.
Understand energy and its marginal price of production and its delivery and you have the keys to predicting the world. Sadly Europe and the US is stuck in using Sir David Frost's definition of diplomacy: "Diplomacy is the art of letting somebody else have your way."
Med venlig hilsen | Best regards
Steen Jakobsen | Chief Investment Officer
Saxo Bank A/S | Philip Heymans Allé 15 | DK-2900 Hellerup
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