Date: 3/29/2022
Author: Mr. X
If there’s one person in the world that investors need to pay attention to, it’s BlackRock CEO Larry Fink. He heads the largest asset management company in the world. He told CEOs in his 2022 Annual Letter that “climate risk is investment risk.” There is video floating around now in which Mr. Fink says that he wants to “force” behavior changes.
Some think he’s talking about some control scheme with COVID-19. Actually, the comments were about diversity in 2017 in a New York Times event. Still, it shows he is willing to use his power.
He said:
“Behaviors are going to have to change and this is one thing we’re asking companies. You have to force behaviors and at BlackRock we are forcing behaviors. Fifty-four percent of the incoming class are women. We added four more points in terms of diverse employment this year. What we’re doing internally is if you don’t achieve these levels of impact your compensation could be impacted. You have to force behaviors. And if you don’t force behaviors whether it is gender, or race or any way you want to say the composition of your team, you’re going to be impacted.”
These comments appear very prescient when we see the way corporate America reacted to social movements like Black Lives Matter. If we interpret Mr. Fink’s comments as a kind of “sneak preview” of what’s to come, we should carefully consider his declaration that the Russian invasion of Ukraine has ended globalization.
In his most recent shareholder letter, he said:
[T]he Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades. We had already seen connectivity between nations, companies and even people strained by two years of the pandemic. It has left many communities and people feeling isolated and looking inward. I believe this has exacerbated the polarization and extremist behavior we are seeing across society today.
“Governments across the world almost unanimously imposed sanctions, including taking the unprecedented step of barring the Russian central bank from deploying its hard currency reserves.” Mr. Fink also said the “peace dividend” the world enjoyed from the end of the Cold War is gone.
“The World is Splitting In Two,” Michael Schuman writes in The Atlantic. He notes that the Russian invasion of Ukraine and China’s insistence on a “zero-COVID” policy is making international economic relationships untenable. The sanctions on Russia also sent a message to Beijing that it needs to become self-sufficient.
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China’s leaders have already been unwinding their ties to the world. In recent years, Chinese President Xi Jinping has set in motion policies aimed at creating a new Pax Sinica—an altered world order built by Beijing. With a newly aggressive foreign policy, Xi has apparently come to see the U.S. as China’s chief strategic and economic adversary, and the U.S.-led global system as a constraint on Chinese power. He has taken steps to decrease his country’s reliance on (and thus vulnerabilities to) the U.S. and its allies, stressing a “self-sufficiency” campaign to ensure that China controls the production of items key to the economy by securing supply chains and replacing imports with homegrown alternatives, including microchips and jumbo jets.
Russia has been moving in this direction for some time. Unfortunately for Moscow, China may now see Russia as a strategic liability rather than a powerful military ally. Still, China hardly wants to see President Putin go down and Russia be dismantled. The collapse of the Russian state would almost certainly lead to several predominantly Muslim areas of the Federation breaking away. That could destabilize Xinjiang. Indeed, Chinese media have promoted the idea that the United States is planning to destabilize China by inciting Muslims against the government. China and Russia have also been working together on creating alternatives to the dollar… and India is not exactly aligning with the Anglosphere.
President Vladimir Putin recently delivered a speech in which he claimed that Russia was “forced” to launch its “special military operation.” He claimed that the operation was being carried out successfully “in strict conformity with the approved plan.” As I’ve said before, if that’s true, it’s a dumb plan.
Of more interest to us where Putin’s comments on the dollar and its position as the world’s reserve currency. According to a translation from Dr. Michael Rossi, President Putin said the following:
Imposing sanctions is the logical continuation and the distillation of the irresponsible and short-sighted policy of the US and EU countries’ governments and central banks. They themselves have driven up global inflation in recent years, and with their actions caused rising global poverty and greater inequality around the world. The question now arises – who will answer for the millions who will die of hunger in the world’s poorest countries due to growing food shortages?
Let me reiterate, the global economy and global trade as a whole have suffered a major blow, as did trust in the US dollar as the main reserve currency. The illegitimate freezing of some of the currency reserves of the Bank of Russia marks the end of the reliability of so-called first-class assets. In fact, the US and EU have defaulted on their obligations to Russia. Now everybody knows that financial reserves can simply be stolen.
And many countries in the immediate future may begin – I am sure this is what will happen – to convert their paper and digital assets into real reserves of raw materials, land, food, gold, and other real assets which will only result in more shortages in these markets. Let me add that the seizure of foreign assets and accounts of Russian companies and individuals is also a lesson for domestic businesses that there is nothing as reliable as investing in one’s own country. I personally have said that a number of times.
We appreciate the position of those foreign companies who continue working in our country despite the brazen pressure from the US and its vassals. They are sure to find additional opportunities for growth in the future. We also know those who cowardly betrayed their partners and forgot about their responsibility to employees and customers in Russia, rushing to earn illusory dividends from joining the anti-Russia campaign. However, unlike Western countries, we will respect property rights.
The speech touched on many other issues, most notably that Ukraine was preparing an “ethnic cleansing” in the east. This is absurd, but that’s not what we need to focus on. This speech received widespread circulation on social media and it wasn’t because of Russian “misinformation” campaigns. The only part that people were listening to was this selection, where Putin talks about challenging the dollar.
The Russian president’s take on recent history may seem bizarre, but he’s right about commodity prices. The Wall Street Journal reported earlier this month that companies are having a harder time securing credit for commodity purchases, with exchanges, brokers, and banks demanding more money up front. This will become especially difficult as the Federal Reserve moves to increase interest rates in order to stomp out inflation. That won’t work well if it also strangles economic growth and takes us back to 1970s style stagflation.
President Putin’s claim that Russia will respect “property rights” is also questionable. Leading global companies such as Coca-Cola, McDonald’s, IBM and others may have their assets outright seized. Russia reportedly allows patent theft from any countries it deems “unfriendly.” Russian media is also admitting the scale of Russia’s operation, openly challenging the independence of Ukraine as a whole. President Joe Biden called for regime change in Russia (despite the Administration’s clumsy attempt to walk it back) and influential Republican Lindsey Graham has hinted at Putin’s assassination.
A reported crackdown on President Putin’s inner circle suggest the Russian leader is becoming more paranoid and militant about what needs to be done. He reportedly responded to a letter from Ukrainian President Volodymyr Zelenskyy by saying that he would “thrash” him.
China is taking note of all this. While Beijing is too savvy to destroy itself by trying to prop up Russia against the rest of the world, it just got a sneak preview of how the West would respond to a move against Taiwan. “Crippling sanctions imposed on the Russian economy remind countries just how vulnerable they are to U.S. government policies, so long as they hold so many dollars,” said Manhattan Institute fellow Allison Schrager in City Journal. Schrager says the dollar will still remain the world’s currency, but its position is less secure than it was even a few years ago.
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Meanwhile, George Magnus at Oxford, author of Red Flags: Why Xi’s China is in Jeopardy, argues that though decoupling China from the West will be difficult, the process “has started and is likely to gather momentum in years to come.” “The consequences of the war in Ukraine,” he said, “and the threat of secondary sanctions against China over its support for Russia, or perhaps one day, its actions on Taiwan, mean that for companies the prior alignment of corporate and national interests is pretty much over.”
The lesson from all this is something that should have been clear after World War I. Globalization, international trade, and the benefits from peaceful cooperation are not enough to prevent conflicts. Politics trumps economics. Going a bit farther, we might even say that politics determines economics. After all, the ultimate guarantor of the dollar’s states as the reserve currency is the military power of the United States.
To draw on Bismarck, the ultimate outcome of these economic battles will be determined by blood and iron, not sanctions and speeches. Russia’s military has underperformed so far, but Moscow has no way out but a slow grind and China can’t let Russia completely collapse. For that reason, raw materials, rare earth elements, and companies that either have a reliable supply chain or can fill gaps in existing supply chains are the best places to be right now.
Barring regime changes in both Russia and China, globalization is over. We can think whatever we want about this ideologically. However, as investors, we are driven by economic factors. We take the world as we find it. This is the way things are now – and the division of the world into hostile geopolitical blocs will only intensify. Wil the dollar be displaced? The question will be settled on the battlefield more than in corporate boardrooms and government offices.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.
