The end of global economic integration

The story of the post-Soviet era has been one of constant economic integration. But that's now over, says Merryn Somerset Webb. And it's going to cost us dear.

Russians queueing to go to the country's first McDonald's
Better days: McDonald’s 1990 Moscow debut
(Image credit: © Peter Turnley/Corbis/VCG via Getty Images)

Russia is a poor country. Its GDP is just 10% that of the European Union, and there is much speculation about how its low levels of economic activity are translating into the various logistical failures of its war with Ukraine. So you’d think that deglobalising Russia using sanctions wouldn’t really matter. Poor Russians aren’t big consumers and the world’s factories aren’t in Russia.

The problem here is twofold. First, we have clearly been mispricing the things Russia is rich in – metals, grains and fossil fuels. These may have all been so cheap for so long that we have taken them for granted. But without them none of us has much of an economy at all. Who is richer, the countries that control the building blocks of modern life, or those that need those building blocks to run their seemingly superior economies? And if those countries are no longer economically linked, how much poorer will we all be?

The story of the post-Soviet era has been one of constant economic integration – from the opening of the (now-closed) first McDonald’s in Moscow in 1990 to the expansion of the EU and the admission of China to the World Trade Organisation. It’s had its downsides (such as the shift in the balance of power from labour to capital, and the hollowing out of UK manufacturing). But overall it is hard to argue that it hasn’t felt pretty good.

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The concerns were already there

Well, it’s over. There was already concern brewing pre-Covid-19 as firms – worried about their environmental, social and governance (ESG) profiles – wanted more transparency over supply lines. That got much worse during the pandemic as it became clear that the “just in time” supply line was horribly vulnerable. This war takes all this another step forward (or backwards) – the world may soon be made up of two blocs. Where it had been just manufacturers wondering about whether to make things closer to home, we now have governments everywhere realising that they shouldn’t – can’t – rely on other countries for energy, food, or, for that matter, peace.

The result? There will now be a sharp shift on the part of governments to boost defence spending and to work towards both food and energy security (public opinion has already shifted towards both nuclear and fracking in the UK). There is protectionism and inefficiency ahead – and you are going to notice it.

That’s partly because your taxes will rise (defence is not cheap) and partly because inflation will stay high (food and energy security are no longer cheap either). The latter might not stay at 8%-9%, but it won’t return to reliably knocking around 1%-2% either. Pre-war we liked to think inflation wouldn’t be all bad – more “boomflation” than “stagflation”. We aren’t so sure any more, particularly given data from the Office for National Statistics suggesting that 35% of UK households already spend more than they have in disposable income.

Either way, it’s going to be tough for markets. Costs are rising. That will push margins down. Rates are likely to rise – central banks can’t ignore inflation over 6%. That will push valuations down. There isn’t much positive to say, I’m afraid. But there are still opportunities for the proactive: defence stocks, energy as a hedge, pet care, and commodity-rich emerging markets.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.