The Cross-Border Distribution Conference co-organised by Deloitte and Elvinger Hoss Prussen with the support of the Financial Times in Kirchberg on 25 May 2023 included a discussion that covered the fallout from Russia’s continuing war in Ukraine.

After Russia’s “land grabs” in Crimea and Donbas in 2014, Yuri Bender, editor-in-chief, professional wealth management at the Financial Times, said that the global banks and asset managers that he spoke with said that “surely” there would be no invasion. Or, if Russia were to attack, it would be “localised,” without any consequences to global markets or societal change.

So, how did they get it wrong?

“A bell that cannot be unrung”

“I was a regular participant in the Munich Security Conference, and that, of course, took place four days before this invasion,” replied John Emerson, former US ambassador to Germany and vice chairman of Capital Group. “And I think that if you were to have taken a poll of the participants at the security conference, you probably would have had about 50% of them say, ‘he’s not going to do it.’”

“And the reason is, it didn’t make sense.”

And what has the war accomplished so far? Fifteen months after the start of the full-scale invasion, Russia’s war in Ukraine has led to Finland joining Nato, brought the US and Europe closer together and has demonstrated the “fecklessness” of the Russian military machine.

“I think most people were looking at it rationally,” continued Emerson. “And what they missed was Vladimir Putin’s own words. This is a guy, who for years, had been saying things like, ‘the collapse of the USSR was the greatest tragedy of the 20th century. Ukraine is not a country, it is really part of Russia. It is my responsibility to restore the greatness of Russia.’”

“And it’s also someone who, I fear, that we in the west allowed to boil the frog,” he said. Despite Georgia, despite Chechnya, it was back to “business as usual.” “We created an environment  where Putin thought he could do this, and there would be virtually no significant consequences to it.”

“February 24, 2022 was the last day of the post-Cold War era,” said Emerson. “I don’t know what we’re going to call this era. But this is a bell that cannot be unrung. The world has definitely changed.”

Sanctions not going to be “taken down”

“Six months into the invasion, the banks and financial firms that I was talking to were refusing to discuss the invasion and its consequences,” said Bender. “Is this because they were concerned about alienating lucrative Russian clients?”

“I think there’s no doubt about it,” Emerson answered.

He continued with two points: the first is that a settlement agreement where Russian territory would include what is now part of Ukraine “will absolutely not happen.” The second point is that no matter what happens, “there will not be a time when sanctions are going to be taken down, as long as Vladimir Putin or anyone of his ilk is still in charge of Russia.” 

Responding to a question from Bender as to whether this would still be the case if Donald Trump were to win the 2024 US presidential election, Emerson was firm, pointing to support for Ukraine from senior Republicans, such as Mitch McConnell, who in Munich made it “very clear” that they are “absolutely committed to standing firm against Russian aggression.”

“Our policy under Biden is: nothing about Ukraine without Ukraine,” said Emerson. “I think those [sanctions] are going to be there for a long time.”

Change of mood in financial community

“At the end of last year, we saw a change of mood in the financial community,” said Bender. “We saw Blackrock speaking with Zelenskyy, we saw a policy U-turn in many banks and fund managers, who began to publicly speak about the war. Is this because they felt that Ukraine might actually win this war?”

“It’s an interesting question,” replied Emerson, but “I can’t get into their head.” Emerson said that when the invasion first began, many people--including in the US--expected Russia to be able to subjugate Ukraine. “The intensity and ferocity and effectiveness of the Ukrainian response, as well as the ineffectiveness of the Russian military,” said Emerson, “I think it was sort of a wake-up call.” Ukraine’s victory in the battle for Kyiv caused people to “step back” and “think about it a little bit.”

Investing in Ukraine in the future

There’s been a lot of talk about embracing innovation, technology or climate-friendly business in the reconstruction of Ukraine, said Bender. Are fund managers going to want to invest in these sectors?

“I think so,” said Emerson. But certain things have to happen. He thought that western investment will only come “if there is a legitimate and enforceable commitment of security by the Nato forces and by the United States to defend Ukraine.”

“Nobody’s going to want to--to be blunt about it--put up a building if it can be knocked out by a Russian missile three days later,” he said as an example. On the manufacturing side of Ukraine’s economy,  however, technology like artificial intelligence or robotics may play roles in rebuilding the sector, noted Emerson.

Crack down on corruption

As Ukraine moves forward on its path to becoming a member of the European Union--Ukraine was in June 2022--tackling corruption has become one of the main points on the country’s agenda. Is this the end of the oligarchs in Ukraine?

“They’ve got to deal with the corruption that has been there in the past,” said Emerson. Zelenskyy wants to “show the rest of the world, ‘We are not going to tolerate corruption here.’”

“I think it’ll be more of an evolution,” he added. Some of the oligarchs became oligarchs because “they were favoured by the powers that be,” but some of them are “pretty clever businessmen, and I would imagine, we’ll tend to see those people pop up again.”

Energy transition will speed up

The International Criminal Court has issued an arrest warrant for Putin, noted Bender. Will Russia still play a role within the international community while Putin is there?

“No. Not a productive role, not an impactful role. He could be a disruptor,” said Emerson. “He’ll be an annoyance, but he’s not going to be a consequential player, as long as he’s there.”

Business will not go back to usual, said Emerson. “Let’s recognise the fact that we’re moving into a world where I think the energy transition--in part because of what’s happened--is going to be sped up. It’s going to be a whole lot more investment in that area.”