“There are decades when nothing happens, and then there are weeks when decades happen.”
We experienced this a couple of years ago and here we go again. So much has happened in the past month in the world and the markets that it can get hard to digest all the facts and events unfolding infront of you. In this two part piece, I’ll try to put my thoughts down on what is going on and how it is very different this time, but still somewhat the same.
Its been 25 days now since when a sovereign democracy’s existence was called into question. Millions of lives have been put at stake and thousands have already been displaced or damaged. A toxic mix of shock, grief and fury is taking over us again. A lot of us are drawing parallels to previous instances of war and the times when the world order was shaken at its foundations. From what little I have read about those past instances, this one is a bit different.
The physical battle is being supplemented by digital tools. Social networks have amassed such scale that winning the information warfare is turning out to be a better way to defeat the aggressor. The entire world’s attention, which is harvested by the means of these networks, is now probably as powerful as ammunition. Propaganda was an important weapon in the arsenal in the past, and was used quite frequently to rally your troops and citizens. But now information travels at warp speed, and lays bare the facts on the ground. To control the narrative, you need to win the digital battlefield first. The arsenal today looks much different.
Controlling the narrative
Ukraine got an upper hand early by controlling the narrative on social media which helped it amass the entire world’s support. This was crucial for them allowing them to add to the sheer will power and strength to resist the aggression and fight back. This is a tactical battle being fought with your thumbs on Twitter, Meta and the rest of the platforms using the one of the potent tools in your pocket broadcasting war in real-time.
The flow of information is astonishing, which is helping everyone pitch in. Its like a crowdsourced support of the global community with donation accounts being set-up in an instant for financial assistance. Platforms and technologies are being used to provide critical support to the forces battling it out and the citizens enduring this catastrophe.
Its very hard for the dictator to create a domestic propaganda and falsehoods to justify the treachery when you have no control over the narrative.
Social networks are stronger than ever and one might start to see social media as an active component of geopolitical conflict going forward.
The online battlefield
Hacken, a cybersecurity company based in Kyiv is running bounty programs to identify vulnerabilities in Russia’s online infrastructure. It claims to have recruited 10,000 hackers from 150 countries.
“The hacker community is so well organised. It is a real army,” says Dmytro Budorin, Hacken’s founder and chief executive.
Its not only about boots on the ground, but also bits in the cloud. Ukraine’s deputy prime minster now has more than 150,000 recruits joining the cyber army.
Digital warfare has been brought out in the forefront this time around. The more connected you are, the more vulnerable you are, but attacking a country’s online infrastructure means having enough digital capabilities and skills. Can you do that in a closed society?
Bad for business
According to Rosstat, 6.5% of Russian workforce are employed in foreign-owned businesses. Many western companies have shut their operations permanently, suspended them or left or sold of their Russian assets. Apple, Mcdonalds, Microsoft, Spotify, Netflix, Google and many other global consumer brands have left (albeit temporarily). But this time its slightly different. Reputation risk is real and can be a real threat to their market capitalisation. A show of solidarity and support goes the other way, helps them brandish their credentials of supporting where support was needed. For some of these businesses, this will actually have a non-trivial impact on their bottom lines, and for a change they have strayed slightly away from principles of capitalism that have dictated their behavior in the past.
This turns into an indirect attack on the country’s economy and society. These trillion-dollar business are as powerful and influential as their governments (if not more) and wield a level of power on the society not seen in the past. Their products govern all aspects of our lives, and are not immediately replaceable. Russia plans to build its own internet like their friends in the east, but easier said than done.
What does it mean for private enterprises now for doing business in countries in conflict? Is this peak globalisation?
Weaponisation of finance
This is economic warfare on a different level. No access to liquid assets, blocking the flow of foreign capital, a currency turning into rubble (:D), sovereign defaults looming, global businesses shutting shop, an economy on the brink of taking a massive hit (via unemployment, no private investments, trade sanctions, shortages, inflation, rate hikes etc.)
Countries in the West have moved at an unprecedented speed to choke of Russia’s financial supply chain. With the help of sanctions on individuals and institutions, almost half of CBR (Central Bank fo Russia) assets were frozen. A lot of its banking system was cut off from the global SWIFT messaging system which facilitates interbank international payments between two parties (from individuals, to institutions and governments).
Finance has been weaponised in a similar way during such conflicts in the past, but the velocity of change and the scale of the impact is different.
The Russian government was on the brink of defaulting on its debt payments on its foreign bonds and go into an artificial default of $38bn. Russia’s credit rating fell deep into junk category which would have a long and damaging impact on its ability to raise capital as a sovereign.
Russian stocks crashed more than 80-90% with funds and ETFs holding these assets writing them off completely. The country has been kicked out of MSCI’s global indices which are tracked by thousands of financial products responsible for trillions of dollars of money flows into financial assets.
The country’s currency fell more than 30% against the USD, which in itself has wide ranging implications. A hoard of foreign companies and businesses have left leaving a gaping hole in the economy, the size of which is expected to take a deep hit. The government doubled interest rates to 20% (!!) to stop the bleeding and banned movement of foreign currency outside the country.
In this globally interconnected economy, financial tools can be used as weapons of mass economic destruction. It might several generations to recover from this mammoth blow.
Does this show that our financial system is very resiliant and has withstood shocks of gigantic proportions without much trouble, or does all this highlight weaknesses in the prevailing financial structures?
All of it is very different indeed, but somehow there are elements that are still the same.
In the next part of this piece I will try to highlight some of these similarities from similar shocks in the past.
Until next time,
The Atomic Investor