Modern conflict is fought on multiple fronts: as well as physical combat, the role of media and information has never been more central. But war in Ukraine has also introduced another, powerful protagonist: the spreadsheet warrior.
A substantial raft of Western sanctions agreed against Russia over the weekend had an immediate impact on the markets on Monday morning. While sanctions are not a new tool, the unanimity of NATO and other international actors in squeezing Russia’s finances may prove to be unprecedented.
More so than economies engaged in other, recent conflicts with the West, Russian wealth is cemented into global financial market mechanisms, and the first round of penalties drove the rouble down 28% on the morning of 28 February.
Banking insolvency
As Deutsche Börse and others suspended trading in a range of Russian securities, warnings grew about the solvency of Russian banks, with the country’s largest, Sberbank, flagged for bankruptcy risk after its shares plunged more than 60%. An MSCI index tracking Russian shares trading in London and New York slipped 55%, compounding its losses to 70% for the year, despite being priced in US dollars.
But it’s not just Russian investors facing losses. Considerable pressure continues to grow on the international business and financial community – not only due to trading vetoes – but due to governments directly asking the private sector to take action on holdings and step back from Russia.
BP in the UK made no bones of the fact that its decision to dump its 20% Roseneft stake came amid intense pressure from the British Government to exit its alliance with the Russian state. UK business secretary Kwasi Kwarteng said on Sunday: ‘I welcome BP’s decision to exit its shareholding in Rosneft oil company. Russia’s unprovoked invasion of Ukraine must be a wake-up call for British businesses with commercial interests in Putin’s Russia.’
That ‘wake-up’ call has reverberated across stock markets and hit a range of international firms holding Russian interests. Austrian bank Raiffeisen led the European banking slump as its shares fell 18% on Monday, due to one third of its profits deriving from its Russian business. The firm’s real estate holding, RPHI, develops, manages and sells real estate in 14 CEE-focused countries, including Ukraine and Russia.
But how great is the Russia effect likely to be on the West’s wider real estate firms and funds? Beyond clear market shocks including worsening inflation and supply chain interruptions, effects may be reasonably contained, experts have suggested.
Bearish real estate investors
That is largely because geopolitical tensions in Russian and Eastern Europe didn’t ramp up overnight, and many investors have been bearish on Russia for some time.
In 2014, as Russia annexed Crimea, Blackstone Group changed its strategy in the country, the Financial Times reported at the time. According to the British newspaper, the private equity giant ceased renewing employment contracts with its consultants in the country and stopped seeking fresh investment opportunities there.
Blackstone’s mindset shift echoes an international consensus over the last eight years to cool on Russian deals, even amongst the most opportunistic investors.
While Atrium European Real Estate, like many of its CEE-focused peers, dabbled in Russia in its early years, it put its seven Russian malls up for sale in 2017, two of which were in Moscow. Its decision to exit those non-core holdings was influenced by Western sanctions and the weakening of the rouble; however, the sales were not quickly achieved, with the company’s exposure remaining at around €250 mln today, or 10% of the company.
Yet, as Atrium was absorbed into parent company Gazit Globe earlier this year, its Russian holdings are currently regarded as a negligible risk for the group.
The Jerusalem Post reports too that for many other Israeli real estate firms, the “golden age of Russian development” on which many Israeli firms embarked in the first decade of this century, is now long gone.
Russian action in the Crimea in 2014 proved pivotal. One exception is Mirland, a commercial investor with offices in Moscow, retail in the provinces and residential assets in St Petersburg. The firm said its profits from its Russian business fell 30% in 2020, and its shares dropped 13% on Monday.
Cautious outlook
Yet, despite a broad lack of direct property exposure to Russia, real estate companies throughout Europe remain in cautious mode as the conflict continues to unfold. Soaring inflation and supply-chain difficulties caused by the pandemic are due to be compounded by other business and energy sector woes in the coming months.
In Asia, leading chipmakers in Taiwan and South Korea warned that their stockpiles of critical industrial gases could be eventually affected, as some 70% of the world’s supply of neon is controlled by Ukraine. Taiwan’s TSMC supplies almost all the leading global chip developers, including Apple, Google, Qualcomm and Nvidia, relying on noble gases and precious metals to do so.
While the risk of chip development slowing is slight at the moment, the tech world - including proptech firms - will continue to monitor developments.
The plot twist is just another example of the interconnectedness of global trade and how business prospects can change in a flash.
Meanwhile, Europe’s reliance on Russian-supplied fossil fuels has renewed the spotlight on discussions around energy transition, and real estate’s prime challenge to address its carbon impact. Just as oil and gas prices continue to rise, so DWS has suggested that global food prices could go up in the coming weeks and months, given the significance of Ukraine and Russia for crop and fertilizer production. Consumer confidence and tourism flows, two other issues which were just recovering from Covid-19, may also take a hit amidst soaring energy prices, escalating conflict fears and increasing flightpath complexity.
These are likely to be just be the first of further ripples set to shake up global trade and employment markets, raising the spectre of recession once again in a number of territories.
