Ukraine: the blackest of black swan events


16 / 05 / 22 - 5 minute read

When Russian tanks crossed Ukraine’s border early on February 24, it took the world by surprise. United States intelligence had been warning of the increasing dangers of an invasion, but few in the markets took the threat seriously, so when it happened, it was, in finance jargon, a black swan event. Mahdi Mokrane gives his view of the business impact.

Black swans are rare or improbably events that can have enormous consequences in the short and long term. In the case of Russia’s war on Ukraine, it delivered a massive external shock to financial markets and to the real economy that may reverberate for decades.

Before the T-72 tanks rolled and paratroopers dropped onto Kyiv’s Hostomel airbase, the Western world had been enjoying a peace dividend since the early 1990s. This meant an globalising economy with no supply chain barriers in the face of which central banks had no issue maintaining inflation below their target of 2%.

But Russia’s invasion is a historic turning point. The geopolitical tensions stemming from the invasion and subsequent economic sanctions have inflamed inflation (particularly so its energy component) and added to the already COVID-constrained supply chain bottlenecks. It also exposed the perilous position of the European Union, which had adopted policies that made it highly dependent on the US for defence and on Russia for its energy supply.

Disruptor trends

In the last Business Update Call in April, Mahdi Mokrane, Head of Investment Strategy & Research at PATRIZIA, again touched upon the events in Ukraine and their impact . The Ukraine war has no direct effect on PATRIZIA as it neither has assets in nor investors from the region. However, it does impact the capital market environment.

From a business perspective, the Ukraine war is a disruptor, a series of trends accumulating since the COVID-19 pandemic struck. These can upset midterm plans regarding growth, profitability and achieving investment returns to satisfy investor requirements.

“We are witnessing what we believe to be an increasing frequency of disruptors,” Mokrane said. “These can be trends or kinks or changes in patterns that could significantly disrupt businesses. Think of just inflation spikes or deflationary busts.”

At the end of March, inflation in the US was 8.5% year-on-year. It was propelled by surging costs for food, housing and, particularly, energy, and was the sharpest inflation spike since 1982. In the Euro area, energy prices have exploded because of the war, surging by 44.4%,  contributing to a total inflation reading of 7.4%.

“Inflation is here to stay for another year or more before it's expected to peak,” Mokrane predicts.

According to his description, increasing inflation volatility has and will continue to impact interest rates, which will in turn impact business plans for assets and businesses. “We've seen a number of deals challenged based on having to put debt in place in the next year or two because who knows what the interest rates will be. And if you look at the forwards rates, they could potentially kill some deals.”

Once there is a resolution in Ukraine, the US-China rivalry will no doubt re-take the front stage. We need to consider what this means in terms of how economies will grow and shift their interdependence and how we invest in this new sort of equilibrium.

Mahdi Mokrane

Slowbalisation, geopolitical tensions and soaring debt levels

Mokrane described another disruptor trend, deglobalisation, which emerged after the global financial crisis (GFC). By some measurements, trade has declined since then, bringing 25 years of strongly accelerating international trade to an end. Instead, regionalisation in a more contested world, is increasing.

The Economist predicted in January 2019: “The new world will work differently. Slowbalisation will lead to deeper links within regional blocs. Supply chains in North America, Europe and Asia are sourcing more from closer to home. In Asia and Europe, most trade is already intra-regional, and the share has risen since 2011.”

For all its tragedy, Ukraine is only of a growing number of geopolitical flashpoints emerging, including in the Middle East and Asia. Mokrane added: “The US-China rivalry sparked by the Trump administration is still very much there. And I think we shouldn't overly be focusing on the US-Russia or Western Europe-Russia situation.

“Once there is a resolution in Ukraine, the US-China rivalry will no doubt re-take the front stage. We need to consider what this means in terms of how economies will grow and shift their interdependence and how we invest in this new sort of equilibrium.”

The other disruptor trend he flagged was the massive private and public debt levels that have accrued since the Covid pandemic. “The sheer magnitude of those debt levels will create volatility in capital markets, and there may be attacks on some currencies and on risk spreads in some countries, which may see a repeat of the eurozone crisis (2012/2013) in other parts of the world Europe.”

This would be highly disruptive because it will not just affect the regions where creditworthiness is under scrutiny. It will impact banks operating in these markets. These could be lenders in a completely different part of the world, and their interbank lending costs could increase, affecting their general willingness to lend and their lending terms.

Set against the disruptor trends we have some very strong long-term stabiliser trends on which our business has and will continue to build and grow. These are demographics, urbanisation, digitalisation and decarbonisation.

“Our challenge is to map out the stabilising and disrupting trends and then marry the two – sometimes with conflicting implications for our business – to try and chart the best route to the future,” Mokrane explained.

London, United Kingdom

Dr. Mahdi Mokrane

Head of Investment Strategy & Research

About the author

Mahdi Mokrane is the Head of Investment Strategy & Research at PATRIZIA. He joined the company in 2020 after six years at LaSalle Investment Management in London, where he was Head of European Research and Strategy and a Member of its European Management Board. Before joining LaSalle, he worked at AEW Europe, where he was Head of Research and Strategy and a member of the company’s European investment committee as well as the global securities allocation committee. He also worked closely and extensively on real estate debt and equity transactions in both UK and Continental European markets.