It is hard to imagine a better opportunity for Airbus. Its rival Boeing has been in crisis for years. Its 737 MAX was grounded following two crashes in 2019 and 2020 and then again in 2024. Whistleblowers revealed safety issues. It overhauled its management. Even so, in a brutal 2024, the share price fell from $260 to as low as $155 as the firm racked up annual losses of more than $11 billion. A firm that once seemed impregnable appeared to be spiralling into irreversible decline. In the last few months, Boeing staged a remarkable comeback. In April, it recorded its first lead in deliveries since 2023, shipping 143 aeroplanes for the first quarter of the year, 29 more than Airbus, and its widest quarterly lead since 2018.

For Airbus, the French-based consortium of which Britain is a crucial part, that must have been disappointing. With its great rival in so much trouble, it had the perfect opportunity to take a dominant position in the global market for passenger jets. It should have been seizing that, delivering more and more aeroplanes, and booking long-term orders, until it had 60% or more of the global market. Instead, it got snarled up in production delays of its own. Now it is paying the price. Boeing is back on level terms again and may well be ahead of Airbus for the rest of this year.

It is not all bad news for Airbus. Last month, the A320 family became the best-selling commercial jet of all time, overtaking Boeing's 737, with 12,260 deliveries since it was introduced in 1988. Airbus still has a strong range of fuel-efficient, modern, safe aeroplanes that are popular with airlines around the world. Even so, investors are starting to feel the impact of Boeing's recovery. Its share price is up by 5% over the last six months, while Airbus's is down by almost 20%. Airbus lacks the killer instinct.

It's not going to get any easier over the next few years. Few people are taking it seriously right now, but China is putting huge resources into the commercial aerospace industry. Comac, its national champion, has already launched the C919, a direct competitor to the A320 and the 737, and it is now in service with Air China and China Southern. It's planning the C939, a competitor to the larger A350 and Boeing 777, for long-range routes. Earlier this month, it landed its biggest export deal so far with a major order from Vietnam. Comac is guaranteed a huge domestic market and it can probably do just as well in countries where China has a lot of political and commercial influence.

Airbus won't have another opportunity like this

Russia is trying to get back into the industry too. Last week, it announced it was planning a new jet from Tupolev, a relic of the Soviet era now trying to stage a comeback. Under sanctions, Boeing and Airbus have stopped supplies of parts and new aeroplanes to Russia, so it either has to start making its own, or else would eventually have to start buying from Comac instead. Either way, the days when the industry was a cosy duopoly between Airbus and Boeing are now in the past. It is about to become a three-way, and possibly four-way fight for every order.

Airbus should have been entering that era from a position of dominance. It could have seized on Boeing's woes to take a clear lead in the industry, tying up the major airlines with long-term contracts for new aeroplanes, and locking them into its range so that it would be too expensive for them to contemplate switching to new suppliers. It could have ramped up production and replaced orders Boeing was not able to deliver on. It could have taken the opportunity to launch new models, which would have sewn up the market for years to come. The chance to dominate the industry for a generation or more won't come again.

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How is Russia's economy doing?

Before the Iran war oil shock – meaning a jump in oil prices and a jump in revenues for the Kremlin – things were looking as bad as they have done since Russia's invasion of Ukraine in February 2022.

At that time, many Western politicians and economists expected Russia's economy to collapse under the pressure of sanctions and fiscal implosion. “The Russian economy is on track to be cut in half,” said then US president Joe Biden a month into the war. “It was ranked the 11th biggest economy in the world before this invasion – and soon it will not even rank among the top 20.”

How wrong was Joe Biden about Russia?

Very wrong. By 2025, Russia had nudged up the table to become the ninth biggest economy globally, overtaking Canada and Brazil, and lying just behind the UK, France and Italy. In response to sanctions, Russia ramped up state spending on its war machine, driving an unlikely economic mini-boom, and predictions of collapse proved wide of the mark.

A shallow recession of 1.4% in 2022 was followed by solid positive growth in 2023-2024, partly facilitated by high oil prices and partly fuelled by the rise in war-related spending and corporate credit growth. The fiscal position deteriorated, but remained in relatively safe territory, while a consistent current-account surplus “helped soften the impact of approximately half of Russia's international reserves being immobilised”, explains Marek Dabrowski of the Bruegel think tank. All told, the post-2022 Russian economy demonstrated striking resilience.

How is Russia's economy so resilient?

Essentially, Russia has resources and products that other countries want to buy. If the price is right that trade will happen, albeit with Russian oil and gas trading at a discount to pre-war prices. Western sanctions, which have in any event been supported by nations making up less than half the world's economy, were too telegraphed, slow, and easy to circumvent via third countries, given the weak enforcement of secondary sanctions. And China's role in ramping up Russian imports and exports was crucial: it has taken the place of Europe as Russia's biggest trading partner.

Second, the Russian regime was ready for war. It had planned for sanctions for years, stockpiling dollars, and when the crunch came it forced many foreign companies to sell their Russian entities at low prices. And third, the de facto creation of a war economy has not only fuelled growth, but also entrenched a network of supporters of the regime among the business class.

Is Russia's economy a war economy?

Over the past four years, Russia's economy has been growing, but only because civilian industry has been “progressively cannibalised” to feed dramatically ramped-up military production, say Emma Sage and Savannah Taylor on War on the Rocks. Germany's foreign intelligence believes that the war accounts for 10% of GDP and for more than 50% of government spending. Russia's Centre for Macroeconomic Analysis and Short-Term Forecasting attributes 60%-65% of Russia's increased industrial output from 2022-2024 to the sectors most implicated in the war on Ukraine, while showing that unrelated industries are declining. Meanwhile, domestic consumption is underpinned by Smertonomika, or “Deathonomics”, whereby wages for soldiers willing to brave the war – and compensation payouts to their families when they are killed – have soared. Pay for soldiers is six times what it was in 2022, while death payouts have risen to the equivalent of $130,000-$180,000 – more than the expected life earnings of many of the young men who die. In short, Russia has mortgaged its future to pay for the war. Eventually, that will have to be repaid.

What is the current situation in Russia?

Stagnation has set in and the government is $320 billion in debt. Growth fell sharply last year from 4% in 2024 to less than 1% in the fourth quarter of 2025. This week Russia's president, Vladimir Putin, announced that GDP declined 2.1% in the year to January, with industrial production also falling by 0.8%, even as unemployment remained low at 2.2%, while inflation stood at below 6%. Many Western analysts suspect the reality is worse. The economy will not collapse, says Alexandra Prokopenko in The Economist. “But nor will it recover. It has entered what mountaineers call the death zone: the altitude above 8,000 metres at which the human body consumes itself faster than it can be repaired.” Russia is sustaining a “negative equilibrium”: it has the ability to hold itself together at the cost of steadily destroying its own future capacity. Export revenues are falling and economic weakness means budget gaps cannot be filled with additional tax revenues.

Will the Iran war rescue Russia's economy?

Obviously no one knows how long the oil price will remain elevated from its pre-war levels. But Putin himself – sometimes touted in recent weeks as the “real winner” of the conflict – isn't exactly celebrating the dawn of a free-spending new paradigm. This week, he called on oil and gas companies to use additional revenues from the current rise in global hydrocarbon prices to reduce their debt burden and repay obligations to domestic banks. Clearly, Russia is a beneficiary of the conflict in the Persian Gulf and Middle East, with higher prices and (perhaps) higher export volumes to Asia able to narrow its budget deficit. “But unless disruption to global energy supplies is prolonged, this is unlikely to materially alter Russia's macroeconomic outlook,” says Liam Peach of Capital Economics. The country will remain a war-driven, low-growth, low-productivity economy that's dependent on hydrocarbons – a waning resource in the long run – and under chronic fiscal pressure. “Russia can probably continue waging war for the foreseeable future,” says Prokopenko. “But no climber can survive the death zone indefinitely – and not all climbers who attempt the descent survive it.”

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Barings Emerging Europe trust was dealt a hammer blow by Russia’s invasion of Ukraine. Around 28% of its assets were invested in Russia and instantly became worthless. The share price slumped to barely half its early 2022 peak by late 2023.

Yet Barings and the board decided to soldier on. They widened the investment remit to include the Middle East and Africa as well as Eastern Europe and Central Asia, and renamed the trust Barings Emerging EMEA Opportunities (LSE: BEMO). The share price has since climbed back almost to its high of four years ago, although it still trades at a 17% discount to net asset value (NAV). The board has persistently bought back shares, leaving a trust with net assets of £110million.

How Barings Emerging Europe trust diversified its portfolio

BEMO’s catchment area is a curious collection of markets. Asia accounts for over 80% of the MSCI Emerging Markets index and Latin America is 8%, leaving around 11% to Emerging Europe, Middle East and Africa. Many of these – the Gulf states and the northern half of Eastern Europe – can hardly be called emerging any longer. There is no geographic, political, economic or social homogeneity across the disparate region at all. However, that makes it very well diversified across sectors, companies and opportunities.

South Africa was a key driver of last year’s 26% investment return, making up 31% of the portfolio at year-end. This included over 5% in each of two gold miners – AngloGold Ashanti and Gold Fields – and over 6% in Naspers, an internet, technology and multimedia investor that indirectly owns 31% of Chinese tech giant Tencent. South African banks have also been good performers, thanks to an improving political and economic backdrop.

Eastern Europe, especially Poland (13% of the portfolio) has been another bright spot, helped by rapid growth that leaves it on a path to overtake much of Western Europe in prosperity. Investments in Hungary and the Czech Republic have also performed well, while Greek banks have benefited from the country’s recovery. With oil prices depressed, relative performance has been helped by avoiding Saudi Aramco. The 22% allocation to Saudi Arabia more broadly held performance back, but not the 10% exposure to the United Arab Emirates.

Turkey, accounting for just 5% of the portfolio, would be an area of opportunity if its government’s economic mismanagement were to improve. The fund is not currently invested in Central Asia, or in Africa other than South Africa. An end to the Ukraine war could be a potential future bonus. While BEMO’s investments in Russia are valued at zero, they could at some point be valuable. The managers have been able to sell a few of them in recent years.

Deserving to survive

Last year’s performance built on a good recovery in 2024. The discount has scope to fall further, which would enhance performance. The shares yield a reasonable 2.5%, with dividends having been raised 5% in 2025. The trust has no borrowings at present, but does not rule out gearing to enhance performance.

BEMO is of a similar size to BlackRock Latin America (LSE: BRLA), which returned 44% in 2025 after five miserable years. It is unfortunate that both trusts are in danger of disappearing as a result of being regarded as “sub-scale” by the big wealth managers. While BEMO passed a continuation vote in October, 33% of votes cast were against the resolution.

A wind-up of either trust would leave their region unrepresented except as an after-thought by the emerging markets generalists that are heavily focused on Asia. The last year has shown that this would be a terrible mistake; there is every chance that these two neglected regions will outperform Asia over the next few years. Both trusts deserve to be at least twice their current size.

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Donald Trump’s attempt to hammer out a truce between Russia and Ukraine remains in the balance, but defence shares are already slipping at the prospect of the three years of bitter fighting finally coming to an end. It is not hard to understand why. Defence has been one of the few stars in a generally dismal European economy, with shares soaring on expectations that governments across the continent would spend a lot of money in the years ahead on rebuilding their armed forces.

The big German defence contractors were the stand-out performers on the back of the huge increases in borrowing and spending, much of it directed to the military. Rheinmetall shares were up 170% over the last year, before the latest sell off. Yet with the European Union also planning a €150 billion common defence fund, all the continent’s major companies were expected to get a lot of lucrative contracts. So Italy’s Leonardo had doubled, while France’s Thales was up by more than 70%. Even environmental, social and governance (ESG) funds were starting to invest in the sector.

A ceasefire in Ukraine could change all of that very quickly. Trump is pushing hard for a deal and it will prove hard for Ukraine to hold out against that. The war has reached what looks like a stalemate, with huge losses on both sides. Sure, it would be better if Ukraine could achieve a victory and Vladimir Putin were removed from power in Russia. But there does not seem to be much chance of that happening. An end to fighting would save a lot of lives and might be the best option available. And so investors are right to reassess.

If there is a peace deal, governments across Western Europe may very quickly go back to spending more money on welfare, or trying to bring their deficits under control and keep the bond markets happy. If there is no security emergency on their doorsteps, it will be hard to persuade voters to keep spending money on defence that could be spent on healthcare, social security or infrastructure instead. That is what they did after the Cold War ended, and it is very easy to think that the same thing will happen again. If it does, the defence giants may find their order books starting to dry up very quickly.

Peace in Ukraine would not end the need to rearm

Even so, there are two reasons why this is not the most likely outcome. To start with, any peace deal will almost certainly include some security guarantees for Ukraine. It is not likely to be allowed to join Nato, but there may well be a peacekeeping force that is drawn from Europe, as well as help for restoring its own armed forces so it can defend itself from further attacks. All of that will mean that money has to be spent on kit for the soldiers who will be keeping an eye on the new border between Russia and its neighbour.

Next, and more importantly, if the Ukraine war is settled, at least for now, then the US will inevitably accelerate its withdrawal from Europe. This had already started under previous presidents, but Trump has made it very clear that the US does not intend carry on paying for the defence of the continent. Trump wants all the major countries to commit to spending 3% or more of their GDP on their armed forces, while the US turns its attention elsewhere. The war in Ukraine has kept America engaged in Europe for the past three years, but without that emergency, it will focus instead on the far larger contest with China for the dominant role in the Pacific. The result? Europe will have to carry on paying much more for its own defence. It won’t have any other choice. Russia will remain a hostile, threatening opponent, and with less support from America, Europe will have to remain in a high state of alert.

European governments, including of course the UK, might want to cut spending – there will be plenty of demand for more spending elsewhere. If the peace holds between Russia and Ukraine, it will be very tempting to make savings. But in reality, that won’t be possible. Military spending will have to keep rising – and that means the boom in defence shares will carry on for many more years to come.

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After World War II, America and its allies put in place a set of alliances, institutions and power structures to rebuild war-ravaged countries, create geopolitical stability and generate global economic growth. This post-war order has endured – with one important change – for much of the following eight decades.

The fall of the Berlin Wall and the dissolution of the Soviet Union seemingly marked the end of any alternative to Western capitalism and liberal democracy as the main global economic system. However, in recent years, it has become increasingly obvious that the ties holding this US-dominated system together are fraying and are likely to break.

We are heading into a new world that is likely to be more unstable. In a symbol of this change, on 5 September this year, US president Donald Trump signed an executive order renaming the Department of Defence as the Department of War. This restores the name that it carried from 1789 until 1947 and points to the rising risks of conflict in the years ahead.

So how should investors position themselves for what comes next? What areas that are currently under-represented in most portfolios should they consider for diversification and protection?

Rivalry and conflict between the US and China

The main question is how the shift from a single superpower to two contending nations – the US and China – will affect global supply, demand and the efficiencies of comparative advantage. Free trade has generated huge gains since the end of the Second World War, and even more so since the end of the Cold War. This is now clearly under threat.

With the end of the post-war order comes the new “Great Game”. This name was originally given to the struggle between Britain and Russia for influence in Central Asia (Afghanistan and Persia). This time, the strategic rivalry and political conflict is between the US and China. Paradoxically, it is America that is now pursuing a more inward-looking strategy under Trump’s Make America Great Again (MAGA) banner, while China aims to build economic and political alliances through its Belt and Road (BRI) and Global Development Initiative (GDI) projects.

While America strives to bring its manufacturing base back onshore, Europe is now having to divert budgets from social welfare to rearmament. Both are now in stiff competition with China to electrify the planet and build digital infrastructures. This will inevitably lead to global competition for resources across energy, metals and critical minerals.

This is leading the two superpowers to weaponise their core strategic advantages. For America, this is the US dollar, still the world’s global reserve currency. For China, it is a stranglehold on rare earth elements and critical minerals.

China needs an alternative to the dollar

Freezing and confiscation of assets and denial of access to global payments systems is forcing non-US aligned countries to look for an alternative store of wealth and means of exchange. Herein lies the potential significance of the Brics+, the informal name for the original group of five key emerging-market powers – Brazil, Russia, India, China, South Africa – plus other countries that have begun joining them for summits and policy coordination. Some see this group as a counterpart to the G7 group of developed economies. Initiatives by the Brics+ members so far include work on a development bank, central-bank cooperation and an international payment messaging system.

Any alternative to the dollar looks increasingly likely to be a form of tokenised, asset-backed digital currency. This explains why many central banks closely aligned with the Brics+ nations have been large buyers of gold and other precious metals.

If the creation of a new currency system seems far-fetched, it is worth a quick review of the genesis of the post-war order: the Bretton Woods Agreement of 1944. China is a great student of history, and this agreement provides an template for how new world orders are created. While World War II was still raging, more than 700 delegates from 44 countries met at Bretton Woods in New Hampshire in the US to work on a new global monetary system. The goal was to create a globally efficient foreign exchange market, prevent competitive currency devaluations and promote global economic growth.

John Maynard Keynes, one of the principal economists at the meeting, proposed creating a new international reserve currency called the “bancor” and setting up a global central bank called the “Clearing Union”. However, these proposals were eventually watered down by the US Treasury in favour of a more prominent role for the US dollar, whereby the dollar would be pegged to the price of gold, and other participating currencies would be pegged to the dollar. The agreement was fully implemented in 1958, pegging the US dollar to gold at $35 per ounce.

This system functioned until the early 1970s when it became evident that US gold reserves were not adequate to sustain the peg. This caused a run on gold, forcing first a temporary suspension of the dollar’s convertibility into gold followed by complete collapse of the agreement in 1973. US president Richard Nixon also imposed a 10% tariff on all dutiable imports to force its major trading partners to adjust their currencies upwards and trade barriers downwards. Does this sound familiar?

China has already taken the strategic initiative to convene the Brics+ group of nations. It has established the Shanghai Gold Exchange – and associated physical storage – and now holds a significant percentage of its reserves in gold. It has shown little desire to replace the dollar with its own currency – internalisation of the renminbi would erode the ability to operate capital controls – but it and its allies need an alternative to the dollar.

Given China’s embrace of technology and advanced domestic digital-currency adoption, it does not feel far-fetched to envisage it launching a Bretton Woods-style gold-backed digital currency for those unable or unwilling to access the US dollar system. Crypto tokenisation is the vehicle, not the asset.

China's control of strategic resources

China’s strongest bargaining chip lies in its control of rare-earth elements (which are used in magnets, electrification, lasers and optical devices, catalysts and emission controls and radar/guidance systems), as well as critical minerals, that have broader energy, industrial and defence applications.

China has this control because, while the West focused on the comparative advantage of outsourcing its production to countries with lowest costs, China focused on building an end-to-end supply chain comprised of exploration, mining, refining and industrial manufacturing. With its looser environmental controls, it has come to dominate the global supply of these critical minerals.

In the tit-for-tat game of tariffs and sanctions, China is able to leverage its position in the one area where the US is completely vulnerable. So just as China and its allies have no alternative but to develop a competitor to the US dollar as a store of wealth and means of exchange, the US and Europe now see they have no choice but to develop alternative sources for mining and processing capacity to break this reliance. Exacerbating the situation, America’s prioritisation of its own MAGA agenda over historical alliances has left Europe and other previously US-aligned countries to build their own rather than collective resources.

If investors believe the post-war order is irretrievably compromised, they should consider investments that give exposure to these themes. Gold and precious metals for hard assets. Tokenisation and chips to enable digitalisation. Energy and power generation, rare earth elements and critical minerals, which will be in demand as both sides try to secure supply chains. And US and European defence stocks as the West joins in the new arms race.

Investors have many ways to access these ideas, including individual stocks, thematic exchange-traded funds (ETFs) or exchange-traded commodities (ETCs) that hold physical metals. Listed commodity futures and options are also becoming increasingly accessible, as major exchanges such as the Chicago Mercantile Exchange (CME) roll out mini and even micro contracts, which are 1/10 or 1/100 of the size of standard contracts and require less up-front capital. Such instruments are only suitable for experienced investors, but they offer a way to quickly add hedges or speculative positions to a portfolio – something that will become more valuable in a fast-changing world.

James Proudlock is managing director of OptionsDesk.

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Air defences shot down 11 Ukrainian drones targeting Moscow on Wednesday, one of the largest such strikes against the Russian capital, says The Guardian. The attack follows Ukraine’s invasion of Russian territory, which began on 6 August and has now reached 17 to 22 miles into the Kursk region. Russian president Vladimir Putin promised a “worthy response” and made an unannounced visit to inspect troops in Chechnya readying to fight Ukraine. 

Ukraine had been on the back foot in the war for more than a year until its 6 August offensive took everyone by surprise, says Lawrence Freedman in the Financial Times. The initial response, even from some Ukrainian analysts, was that this was “more madness than genius”, “sacrificing precious troops for a showy but pointless operation instead of bolstering the hard-pressed defences in Donetsk”. But the mood changed as the operation in Kursk made rapid progress, taking territory and prisoners and overcoming Russian strongholds. 

Ukraine now claims to have taken more territory in a matter of weeks than Russia has managed in eight months. To what end? The invasion has “clearly demonstrated significant weakness in Russia’s border defences, set off confusion in Moscow’s chain of command and proved Ukraine’s continued talent for surprising moves,” says Carl Bildt in Foreign Policy. “But wars are political as well as military, and it’s in the political arena where Ukraine’s incursion has fundamentally changed the course of the conflict.”

A Ukraine or Russian victory? 

Following the failure of Ukraine’s 2023 counteroffensive, Putin has been seeking to convince the world of the inevitability of a Russian victory. The Kursk offensive is a “mortal blow to the narrative and political line he has carefully and at great cost been trying to build since last summer”, and he is “clearly rattled”. The invasion has shown that the war is still an open question and that there is “every reason for the West to intensify its support of Ukraine”. Continued Western support for the war remains politically contentious, however, and the German finance ministry has been accused of a “disguised retreat” from its support for Ukraine, says Oliver Moody in The Times. 

Weapons deliveries have become a “bargaining chip in the power games within Germany’s governing coalition”, which is trying to close a €12 billion budget deficit. Much-needed military kit is at risk of being blocked. “War weariness and pacifist sentiment” are widespread in the eastern states of Saxony, Thuringia and Brandenburg, where the mainstream parties are facing substantial losses to the radical fringes in elections next month, and the ruling coalition is under pressure from both its fiscally conservative right wing and its anti-militarist left. It doesn’t help that Germany was the victim of a “terror attack” from the very country it is seeking to help fight a war, says Owen Matthews in The Spectator. The Wall Street Journal published compelling evidence last week that it was Ukraine, not Russia, behind the attacks on Germany’s Nord Stream gas pipelines links to Russia.

Is an end to the conflict in sight? 

A surprising intervention from Belarus’s Aleksandr Lukashenko could be the key to ending the conflict, says Matthews. In an interview on Russian state TV, the country’s dictator and close Putin ally called for negotiations to end the conflict and questioned key parts of Putin’s war aims. He said that only the West wants the war to continue and that allowing it to do so only serves their interests. Sun Tzu recommended building your enemy a “golden bridge” across which he can retreat. That bridge could be built out of Lukashenko’s “useful falsehoods”.

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The price of natural gas has boomed in the past two years, leaving investors asking which are the best natural gas stocks to buy to profit from this boom?

Indeed, until early 2022 it was assumed that the days of gas – and other fossil fuels – as an energy source were numbered.

However, the Russian invasion of Ukraine and the economic consequences of the upheaval in energy markets have “increased the amount of attention paid to energy security”, says George Grant of Stag Energy.

This in turn has “led to a greater acceptance of natural gas” as an energy source. However, the surge in interest in gas isn’t just a short-term trend.

It is a response to a growing awareness that it will play a key role in the transition to renewable energy, a shift that will take longer than widely expected.

Renewable energy remains unreliable

Renewable energy is getting cheaper and more efficient, while it also stands to benefit from the determination of governments around the world to meet ambitious targets for reducing carbon emissions.

However, it will be some time before they can completely replace traditional sources of energy.

In some cases, even building enough capacity to meet peak demand may be difficult, says Dominic Whittome, economist at Prospect Law.

The limitations of renewable energy means that until the problems with long-term storage are finally solved, most countries will still need a transitional fuel to provide “standby capacity for times of low renewable generations as an insurance policy”, says James Smith of the Premier Miton Global Renewables Trust.

The energy crisis – and the increasing realisation that gas is set to play an important role in at least the short and medium term – is also forcing governments around the world to reduce restrictions on drilling.

Moffatt thinks that North Sea drilling should be encouraged and expects the windfall tax to be revised downwards.

He also expects that prime minister Rishi Sunak will ultimately be forced to follow the policy of his predecessor Liz Truss, who removed restrictions on fracking during her brief premiership.

The rise of LNG

Globally, the big story is the rise and rise of liquefied natural gas (LNG). This process cools natural gas to -162ºC so that it can be turned into a liquid, enabling it to be economically and safely shipped over large distances in giant tankers, before being turned into a gas again when it reaches its destination.

With Europe now trying to eliminate its dependence on Russian gas, which still accounts for around 10% of its supplies, this should continue for the foreseeable future.

Not only will the rise of LNG be good for the companies that are building infrastructure, such as terminals, but it will also change the nature of the market for gas, reckons Catachanas.

Natural gas stocks to buy now

Energy giant Shell (LSE: SHEL) is the seventh-largest producer of natural gas. However, it has ambitious plans to increase production of gas while reducing its oil output, believing oil to be a declining sector.

It is also putting money into liquefied natural gas (LNG), with 18 carriers and 65 chartered vessels, which jointly comprise 11% of the global LNG shipping fleet.

The stock is on a 2024 price/earnings (p/e) ratio of seven and yields 4.2%. Norwegian energy giant Equinor (Oslo: EQNR) is Europe’s second-biggest producer of natural gas, with a large number of fields in development.

In an attempt to reduce its carbon emissions it is investing large sums of money in carbon capture and storage, most notably the Northern Lights project.

This aims to store carbon emissions from onshore industries in a terminal on the Norwegian west coast, and then inject it 2.5 kilometres below the sea bed. Equinor trades on a 2024 p/e of 6.7 and offers a dividend yield of 8.2% (which is more than covered by its earnings).

Another energy giant worth investing in is TotalEnergies (Paris: TTE). Total “is well positioned to benefit from the switch from delivering natural gas via pipeline to transporting it through LNG”, as it has made large investments in this area, says Dominic Whittome of Prospect Law.

It is now one of the top three LNG sellers in the world. Even though Total’s revenue grew by 75% from 2017 to 2022, and its earnings per share jumped by 350% during the same period, it still only trades at 6.7 times 2024 earnings and comes with a dividend yield of 5.2%.

A purer play on the rise of LNG is through the US natural gas producer Cheniere Energy (NYSE: LNG). The group was originally set up to import LNG into the US.

But now, thanks to America’s shale gas boom, it buys gas from local producers, liquefies it, and then exports it to 30 countries on five continents.

It is currently the largest LNG producer in the US, and the second biggest globally. Since 2017 sales have risen nearly sixfold and profits have soared by 1,350%. Cheniere Energy trades at a 2024 p/e of 12.5.

Another way to benefit from the boom in LNG is Excelerate Energy (NYSE: EE). Excelerate owns a portfolio of ten floating storage regasification units, ships that store and transport LNG and also turn it back into a gas, as well as three flexible integrated terminals (E-FIT) that facilitate the import of LNG.

It also works on building terminals and LNG infrastructure for third parties, with a presence around the world, from Brazil to Germany.

Although its earnings per share have doubled since 2019, with sales nearly quadrupling, the stock still trades at only 18.5 times 2024 earnings. Golar LNG (Nasdaq: GLNG) is another company that designs, builds, owns and operates infrastructure to turn natural gas into LNG, and then back into gas again.

It is currently focusing its operations on floating LNG facilities that allow gas produced by offshore rigs to be changed into liquid form.

One for value investors, it currently trades at only 7.7 times expected 2024 earnings, and is priced at a discount of 5% to its tangible assets.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

At the start of 2022, many investors were looking forward to a brighter year ahead after the turbulence of the pandemic. Even though the world economy appeared to be on a bumpy path to recovery, the outlook was still better than it had been for two years.

Then Russia’s invasion of Ukraine fundamentally changed the outlook, ushering in one of the toughest years for financial markets on record.

Prices had already been pushed higher by supply chain disruption, a direct result of the pandemic, and the Russian invasion brought a spike in energy prices, contributing to mounting inflationary pressures.

Central banks acted decisively, raising interest rates, and withdrawing quantitative easing measures. In doing so, they reversed the decade-long low-interest rate regime. That regime had helped support both bond and equity markets. Its withdrawal saw considerable disruption across financial markets.

These actions created the perfect storm for investors. Stock market volatility exploded, particularly in the previously-strong technology sector. And bonds, which are traditionally seen as safe havens, failed to provide their usual support. Both equities and bonds sold off significantly in 2022.

Only a narrow range of companies and sectors escaped the carnage and managed to make progress. The energy sector benefited from strong commodity prices and higher profits. This has also helped commodity-dependent countries, such as Latin America.

There have been some anomalies as well, such as India. The region has recovered well from the pandemic and the equity market has outperformed compared to other emerging markets.

But despite these bright spots, it has been a gloomy year for most other asset classes.

The year ahead

There are relatively few signs of the environment improving in the near term. As such, ISA investors may need to accept assets will remain volatile for some time to come.

The Federal Reserve has made it clear that its priority is to tackle inflation, whatever the impact on short-term economic growth. This is echoed by other central banks around the world that recognise the need for price stability.

Nevertheless, financial markets have fallen a long way in 2022 and valuations are much lower than where they started the year.

What’s more, there are plenty of good companies out there with strong growth and income potential.

At BlackRock, we continue to look for those companies that can deliver value in all economic conditions.

Investment discipline

In this type of febrile market, we believe investors need to fall back on sound investment disciplines. Holding a wide range of assets is particularly important at a time when traditional diversification strategies, notably holding bonds and equities, have not worked as well. This means looking beyond traditional markets such as the UK or the US, to those markets that have their own self-sustaining growth stories.

Emerging markets risk: Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore, the value of these investments may be unpredictable and subject to greater variation.

Diversification: Diversification and asset allocation may not fully protect you from market risk.

This applies not just to capital growth, but also to income. In BlackRock’s investment trusts, we use the full powers of the investment trust structure to explore ideas in overlooked areas, which open-ended funds have to ignore due to liquidity constraints. These may be illiquid frontier markets, royalty investments or option writing strategies to boost dividend income. We may also reserve income in buoyant markets to pay out in tougher times.

Strong stock picking is also key as a difficult economic environment exposes weak companies. Those with high debt levels could see their repayments rise, while those without pricing power may not be able to put up their prices to cover higher costs. Strong companies can grow even stronger during a downturn by taking market share from struggling rivals.

At BlackRock, we draw on our global analyst network to pick up the most compelling ideas.

The investment trust structure can be important in allowing us to take full advantage of those opportunities. In difficult markets, liquidity can be a problem. It can be tough to move in and out of positions. Open-ended funds may be forced to sell holdings to meet redemptions. In contrast, closed-ended funds have the flexibility to invest as they see fit.

Good risk analysis is also an important discipline in febrile markets. It is important for a fund manager to understand their exposure to different areas: to a rise or fall in interest rates, for example, or a spike in the oil price. This risk discipline is integral to everything we do at BlackRock. We arm our fund managers with all the risk tools they need to understand the decisions they take on investors’ behalf, such as the Aladdin platform which provides sophisticated risk analytics.

Risk Warning: While proprietary technology platforms may help manage risk, risk cannot be eliminated.

2023 could be another difficult year, making it hard to choose the right investments for an ISA, but there are opportunities in all market conditions. We aim to put ourselves in the strongest possible position to take advantage of those opportunities.

For more information on BlackRock’s range of investment trusts, please visit www.blackrock.com/its

Risk Warnings

Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

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BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at www.blackrock.co.uk/its. We recommend you seek independent professional advice prior to investing.

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MKTGH0123E/S-2647934

Six months ago, Cornwall Insight, a consultancy that nobody had previously heard of, was forecasting that the energy price cap would reach £6,616 per year.

Mainstream media accepted that without question. In fact, the price cap was set at £2,500 and although the government has said that it will be lifted to £3,000 in April, gas prices have fallen so far that the same firm is now forecasting that the cap will be only £2,200. Gavin Law from the McInroy & Wood division of leading energy consultants Wood MacKenzie remains cautious.

“It is too simplistic and too short term to think that the energy crisis is over,” he says. Oil prices fell back below those prevailing when Russia invaded Ukraine, after more supply came on- stream and Russian oil was rerouted.

Prices were moving higher before the Ukraine war

Gas prices in the UK and Europe were rising before the invasion, but the spike in prices, fear of a shortage and the closure of nuclear plants in the summer led to a panic. They have since fallen 80%, as a result of several factors – the panic premium disappearing; lockdown in China; mild weather over the new year; a 20% fall in use due to high prices; and new sources of supply.

Most significantly, gas from Russia was replaced by liquefied natural gas (LNG), which has risen from 12% to 35% of the European market. LNG is liquefied at low temperatures at atmospheric pressure to a density 600 times that of gas. It is then transported by ship and regasified at the destination.

This involves a great deal of upfront cost – typically $10bn-$20bn, but $60bn for the giant Gorgon facility in Australia. However, LNG is economical over long distances, and more flexible as ships can be rerouted. Before the advent of LNG, gas was often a waste by-product of oil production and vented or burnt. The cost of pipelines meant that gas had a lower value than oil for its thermal content.

The costs of producing energy are prohibitive

Much has changed, but gas is still inflexible compared with oil. High upfront costs require long-term contracts, usually for 20 years, to justify the investment. That puts LNG out of the reach of all but the largest companies. These are “utility- like, but plants throw off a lot of cash”, says Law.

“Optimisation is the key to the process – you can’t afford spare capacity or inefficiency.” Start this year, deliver in 2026 European demand for gas starts to fall in spring, so the crisis appears to be over. However, Chinese demand is likely to recover, 2023-2024 could be a cold winter and supply disruptions other than from Russia are possible, says Law. Russia doesn’t have the infrastructure to export gas from western Siberia to China and new LNG projects will take three years to come on-stream.

Decisions made in 2023 won’t increase flows until 2026. This means that “higher prices could be with us for a few more years”. It could be longer if governments disrupt the oil and gas majors through tax, regulation, or obstruction. At some point, gas will flow from Russia again, but LNG developers will tie buyers into long-term contracts. Eventually, there will be a glut “if markets work properly” and prices will revert to $8-$9 per million cubic feet, where they now are in North America.

The pick of the global energy funds

Oil and gas companies don’t make money from high prices, as governments will always intervene to extract the windfall gain through taxation. They make money, like any business, from investing well, operating efficiently and managing their finances conservatively.

Still, firm prices reduce the risk of new investment, enabling producers to increase revenues and profits. The risk is that high prices encourage commodity producers to overinvest, resulting in excess supply, lower prices and poor returns on capital.

John Bennett, manager of the Henderson European Focus Trust, raised his exposure to the energy sector significantly in mid-2022 due to favourable valuations, companies becoming more fiscally responsible and the aversion of many investors leading to an attractive outlook being ignored.

“One of the unintended consequences of the ESG (environmental, social and corporate governance) movement is that it enforced capital discipline on an industry that has historically – like mining– been ill-disciplined when it comes to capital investment,” he says. “These companies are in long-term run- off, but not as quickly as the market thinks.”

The European energy crisis creates additional opportunities

Higher demand for LNG should favour big companies with the financial resources to invest the huge sums of capital required. There has been a glut of gas in North America, keeping prices down, but additional LNG exports should sustain gas prices and encourage an expansion of output. Equipment and services providers should also benefit.

Some firms have moved heavily into renewable energy, outside their core area of expertise and so, perhaps, misallocating capital.

In jurisdictions such as the UK, the popular and political environment is so hostile to conventional energy companies that it adds the additional risks that they will ignore investment opportunities for public-relations reasons; that they will be subject to global windfall taxes; that they will be unable to attract the skilled staff they need and that their operations will be obstructed by legislation and protestors.

This makes a global energy fund far more attractive than the stalwarts of the FTSE 100, BP and Shell. John Bennett is being proved right, but it’s not too late to buy into the sector.

There are several funds to choose from, but the Guinness Global Energy Fund, managed by the highly experienced team of Jonathan Waghorn, Will Riley and Tim Guinness, is my pick.

The pandemic might be all but over, but its spectre continued to haunt the UK economy in a tangible way in 2022, and it now looks as if the economy is heading for a recession.

The spectacular collapse of Tory politics and economic policy also hasn’t helped. Political stability could have provided the support so desperately needed.

High inflation, a squeeze on corporate profits and the ensuing cost of living crisis are a direct result of the imbalance caused by the lockdowns.

Russia’s war on Ukraine further only added to inflation as imports of Russian gas were reduced leading to a surge in energy prices. Food prices also rose as Ukraine’s exports were impacted. Along with Russia, it supplies half the world’s exports of vegetable oils.

As prices of everything from energy to tomatoes have surged, the Bank of England has rushed to increase interest rates. They now sit at the highest level in 14 years (this is great news for savers).

These developments have hit the UK economy hard. While UK GDP grew by 0.5% in October from the month before, it shrunk by 0.3% in the three months to October, compared to the May-July period.

The challenges facing the UK economy in 2023

There’s no sugarcoating it, the next year is predicted to be another tough one for the UK economy.

Inflation is likely to remain high, and it’s unlikely to return to the Bank of England’s (BoE) target rate of 2% anytime soon.

Sanjay Raja, Chief UK Economist at Deutsche Bank says, “We see CPI landing around 6% by the end of next year.”. For the full year 2023, the bank’s analysts expect CPI inflation to average 8.1%.

With inflation high, interest rates will stay firm too. As Nomura UK Chief Economist, George Buckley and his team said in a recent report, BoE policy rates will rise “to a peak of 4.50% by end-Q1 2023”. This is another percentage point increase from the current rate of 3.5%. The bank also expects it to stay at these levels until early 2024.

As both inflation and interest rates stay high, the economy is expected to spiral into a recession, if we are not in one already.

Nomura thinks “the UK entered recession in Q3 2022 and [we] see growth contracting until the end of 2023 (by just over 2%).”

Deutsche Bank also believes that a recession is coming, though it expects a more modest decline in GDP of 0.9% next year.

How does the UK economy compare to other nations?

The UK isn’t the only economy heading for a recession next year if that’s some comfort.

Other nations, such as Germany and Italy are also expected to see a contraction in economic activity next year. However, Goldman Sachs’ projections estimate that the UK economy will contract by 1.2% in 2023, double the decline expected for Germany and far worse than Italy’s expected contraction of 0.1%.

The only large economy that’s expected to print a worse performance is Russia.

On the other hand, Goldman reckons the US and Japan are expected to grow by 1% and 1.3%, respectively.

It’s a matter of individual forecasts though. Nomura forecast recessions for the US, big EU economies of Germany, France, Italy and Spain along with the UK for 2023. In fact, it sees the euro area shrinking by 1.4%, similar to the 1.5% decline expected for the UK.

What do these projections mean for you?

Whichever way we look at it though, for people like you and me, none of this sounds like good news. Household budgets will get tighter as prices continue to rise and the cost of credit remains high.

However, the unemployment rate remains low at 3.7%, close to the lowest level in five decades.

What’s more, businesses are still desperate for staff and this is resulting in labour market tightness, which is driving earnings higher. Deutsche Bank says “the UK’s labour supply shock has been nothing short of historic”.

It adds “In the last 12 labour market reports, AWE Regular Pay has outshot consensus expectations 10 times.”, where AWE refers to average weekly earnings. Further, wages have seen “the strongest growth outside of the coronavirus (COVID-19) pandemic period” according to the Office of National Statistics (ONS).

So, despite all indications to the contrary, it would appear that if you are looking for a new job, the time to go job hunting is now.

Still, according to the Office of Budget Responsibility (OBR), the unemployment rate is expected to rise in 2023, hitting 4.1% by the end of the year.

Analysts also believe that rising interest rates will put pressure on house prices. The OBR expects them to start falling modestly in 2023 and faster in 2024, after a 10.7% increase this year, although if your earnings are rising, this could be a good time to buy a house.

What’s the long-term outlook for the UK economy?

The good news is that from 2024, the OBR expects things to get better. The government body is expecting GDP to rise consistently by over 1.1% between 2024 and 2027.

Moreover, according to Raja inflation too will decline to the BoE’s target level by “around late 2024 or early 2025”.

However, there are notes of caution too. As Buckley and his team point out “the measures announced by the Chancellor to tighten the public purse strings only really start to bite in 2025-26” and spillover beyond that too.

Further, Nomura expects the spectre of Brexit will also continue to play a big role in how the UK economy performs.

Nomura points to the sluggish post-Covid recovery in international trade for the UK compared to the G7, and foreign direct investment has also suffered. Less low-cost labour from Eastern Europe could also make it harder for businesses to grow and keep costs low.

Following Putin’s invasion of Ukraine at the beginning of 2022, gas prices in Europe jumped as the region’s energy supply became a major casualty of the conflict. When European leaders scrambled to find alternative supplies – to reduce dependence on Russia – Putin started to turn off the taps. After reducing flows during the summer, Russia cut off gas supplies through Nord Stream 1 – the largest single supply route for Russian gas to Europe – at the end of August.

Prices surged following the move by Putin to strangle Europe’s energy supplies. UK natural gas futures hit 670p a therm in the fourth week of August, up 460% in a year. TTF, Europe's wholesale gas price, jumped above €330 per megawatt-hour in the fourth week of August, up 650%.

Over the last few weeks, natural gas prices across Europe have slumped

Gas prices have fallen rapidly since the summer peaks. At the time of writing the European gas benchmark is back below €100 – the lowest level since June – while the UK’s benchmark sits around 180p.

This slump in prices is due to the expectation that Europe will manage to avoid the worst this winter. While 80% of Russian gas supplies to the block are now offline (some gas is still flowing to Europe via the pipelines that transit Ukraine and Turkey) traders have managed to fill the gap with LNG (liquefied natural gas) imports.

The Lex column in the Financial Times has put some numbers on the scale of the shift. Russian supplies are down 80bn cubic metres this year, but Europe has managed to secure 50bn cubic meters of LNG imports. On top of this, demand is expected to fall by an equivalent of 60bn cubic meters. That gives 30bn cubic meters of headroom.

European leaders have done a pretty good job of encouraging users to reduce demand (high prices have also helped). Milder-than-expected weather has also played a roll in reducing demand this year.

As a result, Europe now actually has too much gas – its storage tanks have reached planned capacity weeks ahead of target (in fact the region’s storage facilities are almost full). But, and this is a big but, there is no guarantee this will continue. A cold winter could push up demand, something the region can ill afford right now. The FT estimates that a cold winter will lead to an additional 30bn cubic meters of demand, which will eat into that headroom.

Gas prices could jump again in 2023

Next year is a different case altogether. Supply to the region is likely to fall a further 40bn cubic metres next year even if the pipelines through Ukraine and Turkey remain operational. Filling this gap will be a tough ask.

The LNG market is already very competitive and there’s no guarantee that Europe will be able to muscle out deeper-pocketed Asian buyers. There’s also an infrastructure challenge. Europe lacks the infrastructure to turn LNG from a liquid back into a gas and move it across the continent, although Germany is spending billions to try and change this.

On top of these challenges, France’s ageing nuclear fleet can no longer provide a backstop to Europe’s power market that it has done in the past. This places more pressure on other power providers (mainly gas power plants) to fill the gap.

All of these factors suggest that while wholesale natural gas prices might be falling in Europe today, there’s no guarantee this trend will continue.

The market is still very volatile and uncertainty will persist throughout 2023. It does not look as if consumers and businesses will see any relief from sky-high energy prices any time soon. It could be 2024 before the market returns to some sort of normality or longer if we have two successive cold winters.

Gold and gold miners are back in a downtrend. Occasionally, there are glimmers of hope, only for the sellers to come piling back in. The slide began shortly after the commodities spike in the spring following Vladimir Putin’s invasion of Ukraine, and it has been relentless. Your author shakes his head. Isn’t gold supposed to go up during times of war? Isn’t it the go-to asset in times of inflation? Apparently not.

However, if one views gold as simply another currency, then its performance has not been as bad as the headline numbers suggest. It has not done as well as the dollar, but it has outstripped the pound and the euro. Even though gold is quoted in US dollars, the dollar price of gold is irrelevant to us British investors. If you pay pounds to buy gold, and you will eventually sell for pounds, all that matters is the sterling price of gold.

The chart below shows gold in pounds over the past ten years. Gold cost £700-£800 an ounce (oz) in 2014 and 2015, and is now just shy of £1,475/oz. It is not far off its highs around £1,575/oz and remains in a clear long-term uptrend. In other words, gold has done its job and hedged investors against the mess that has been sterling these last five years.

The ideal backdrop for gold

But, really, you want to see gold rising against all currencies. Panicking capital has been fleeing to the US dollar, which has been occupying the safe space that might normally belong to gold.

The US is tightening monetary policy faster than the UK, Japan or Europe and the prospect of higher yields on US assets has made the dollar more attractive. The US is ahead in the rate-rising cycle and until Japan, the UK and Europe start tightening as aggressively, the dollar is going to remain strong.

The ideal macroeconomic environment for gold is for equities to be weak and for government bond yields to be lower than expected inflation. At present we have the former, but not the latter. Longer-term inflation expectations are still below 3%. If they were at 8% or 10%, but rates were 5%, then capital would seek out the alternative that is gold. That is when so-called real (inflation-adjusted) interest rates are negative.

You want to be at a point where central banks are reluctant to raise rates and yet inflation won’t go away – in the US, at least, we do not have that. Yet. How permanent is this inflationary episode? How much will central banks raise rates? These are all questions we must answer if we are to make the decision to buy gold. Inflation might come down a little as weaker oil and metals prices filter through, but I think we’ll remember pre-Covid inflation numbers as halcyon.

Another issue to ponder is whether gold is an analogue asset struggling to adapt to a digital age. Gold is perhaps the oldest substance on earth. It was present in the dust which formed the solar system four-and-a-half billion years ago and its origins are thought to lie in supernovae and the collision of neutron stars. It came to earth via the asteroids that then bombarded the planet.

While highly malleable, it is also the most permanent substance, thought to be indestructible. All the gold that came to earth all those billions of years ago is still intact. You can batter it into a film just one atom thick but you cannot destroy gold. As a result, all the gold that has ever been mined, save that which has been dissolved in aqua regia, is thought to still exist, even if lost.

That’s why gold has been such good money. It lasts. Value today, however, is almost entirely digital. Money itself is digital: just 2%-3% of Western money exists as cash. The bond market is mostly digital. Software, intellectual property (IP), cryptocurrency – digital is where the value is. It’s also where most of Western growth has been these past 30 years.

Russia and China could develop a new global currency

Rapid recent geopolitical developments, however, suggest that gold is far from irrelevant. A new gold-backed currency could emerge. With Putin’s invasion of Ukraine, I was quite amazed by the speed at which the US weaponised the dollar and the banking system. Some $300bn in Russian central bank assets were confiscated (about one fifth of Russian annual GDP) and Russia was frozen out of SWIFT, the international payments system. Putin retaliated by demanding roubles for Russian gas. The currency wars well and truly began.

If Russia is not to be isolated internationally, it needs an international currency it can trade with. Just last month Putin said, “The issue of creating an international reserve currency based on a basket of currencies of our countries is being worked out.”

Sergey Glazyev, a former Kremlin adviser, now minister in charge of integration and macroeconomics of the Eurasia Economic Union (EAEU), is, it seems, supervising a new money system for the EAEU and China. “The world’s new monetary system, underpinned by a digital currency, will be backed by a basket of new foreign currencies and natural resources”.

“All interested countries will be able to join. The weight of each currency in the basket could be proportional to the GDP of each country, its share in international trade, as well as population and territory size. In addition, the basket could contain an index of prices of main exchange-traded commodities: gold and other precious metals, key industrial metals, hydrocarbons, grains, sugar, as well as water and other natural resources.”

Western nations may have shunned the “Russian Davos” in June – the St Petersburg International Economic Forum – but key representatives from China, India, Iran, Turkey and many Arab nations were there. The recurring theme was trade between non-Western powers in a US dollar-controlled world of sanctions and a new, non-Western international currency.

Meanwhile we have the The Shanghai Cooperation Organisation (SCO), which had its latest summit last week in Samarkand, Uzbekistan. In terms of geographical scope and population, it is the world’s largest regional organisation, covering 40% of the world population and over 30% of global GDP. Its members are China, Russia, India, Pakistan, Iran (which just joined), Kyrgyzstan, Tajikistan, Kazakhstan and Uzbekistan. And Turkey’s president Recep Tayyip Erdogan says he is considering membership. These are not exactly pro-Western nations.

Both Putin and Xi Jinping of China called for a reshaping of the international system. Various infrastructure projects being developed, notably a trans-Afghan railway to link Uzbekistan to Pakistan, a China-Central Asia natural gas pipeline and a China-Kazakhstan-Uzbekistan railway. China, which, as we know, is beholden to both Europe and the US for its exports, clearly wants to open up new markets.

Are these nations seriously going to want to trade in dollars? You can bet your bottom dollar that many of China and Eurasia’s brightest minds are plotting an alternative system. But it’s a lot easier said than done.

The problem of trust

To back a currency with commodities would raise all sorts of problems relating to storing raw materials. And if you use futures, you need to trust your trading partner. It is the same with systems based around government debt, GDP and fiat currencies, too.

The record of the regimes involved is hardly unblemished. The body language between the various leaders, especially China and Russia, does not suggest total trust. How then to make a money system that is practical and that everyone can trust?

The answer is an obvious shiny yellow material, analogue asset in a digital world or not. It is often bandied about that among China’s many ambitions is for the yuan to be the global reserve currency. But every international reserve currency in history started out backed by gold. Whether it was the pound, the dollar, the florin or the currencies of the ancient world, they were all at least as good as gold, if not gold itself.

They may have ended up debased into oblivion, but they started off backed by gold and sometimes some silver, too. It was only because the money was sound that it won global trust in the first place. Even John Maynard Keynes (who in 1924 declared the gold standard a barbarous relic) in 1942 proposed a supranational currency backed by gold: the bancor. Would such a system be practical today? I think so.

Who owns the gold makes the rules

We know that many countries in the SCO have plenty of gold and have been increasing their holdings. In the 14 years between 2006 and 2020, Russia’s central bank more than quintupled the country’s gold holdings, from around 400 tonnes to today’s 2,300 tonnes or so. It’s now world’s fifth-largest gold owner.

Then there is China. It has been quietly de-dollarising. Since 2021 China has lowered its holdings of both dollars and US Treasuries by 10%. Its holdings in US Treasuries have dropped by over $100bn since 2021, and it now has less than $1trn in US debt for the first time since 2010.

Its US dollar foreign-exchange reserves have come down from $3.25trn to $3trn over the same period. Having seen what happened to Russia, China will not want to be too vulnerable to a banking system that is run by the West.

Then there are China’s gold holdings. I consider this the most important story in world finance, yet it is largely ignored. China has far more gold than it says. China’s stated reserves are 1,948 tonnes of gold (barely 3% of its foreign exchange reserves). America’s are 8,100 tonnes (over 65% of national reserves).

Now we consider Chinese mining and its imports. China is the world’s largest producer of gold. This past decade it has produced about 15% of all the gold mined in the world. Since 2000, China has mined roughly 6,830 tonnes. China keeps the gold it mines. Over half of Chinese gold production is state-owned, and the export of domestic mine production is not allowed.

Given 6,830 tonnes of production, its official 1,948 figure already looks dubious. Chinese mining companies have also been buying assets across Africa, South America and Asia, and international production now exceeds domestic production (by approximately 15 tonnes in 2020).

China is also the world’s top importer of gold. Imports via Hong Kong alone, never mind Switzerland or Dubai (for which we don’t have numbers), have amounted to more than 6,700 tonnes since 2000.

Most of the gold that enters China goes through the Shanghai Gold Exchange (SGE), so the SGE is a proxy for demand. We know that since 2008, 22,000 tonnes of gold has been purchased by and delivered to physical gold buyers in China.

There is also gold that enters China that isn’t accounted for by SGE withdrawals. The central bank oversees the SGE, but its purchases do not go through it. It likes to buy 12.5 kilogram (kg) bars, which do not trade on the SGE, and it often uses dollars on exchanges in London, Dubai and Switzerland, while the SGE sells its gold in yuan. So there is plenty of tonnage we cannot account for.

Add to this gold held in China, whether as bullion or jewellery, prior to 2000 – the World Gold Council estimates 2,500 tonnes in privately-held jewellery – plus domestic mining and official reserves, you get a figure of around 4,000 tonnes. Cobble it all together – cumulative production, imports and existing stock – and you arrive at a figure around 32,700 tonnes. That’s just what we know of.

I have spoken to numerous analysts and they all arrive at similar estimates. Alasdair Macleod of Goldmoney thinks it is higher still. How much of this gold is state-owned?

Remember there are numerous other state bodies besides the central bank that own gold: the army, the State Administration of Foreign Exchange and China Investment Corporation, the sovereign wealth fund. Precious metals analyst Bron Suchecki, formerly of the Perth Mint, says 55%.

Even at 50%, the implication is that China owns more than 16,350 tonnes – double the US figure. I can’t see how its national holdings are anything like the 1,948 tonnes they say they are. To declare markedly larger holdings would cause an unwanted surge in both the yuan and the gold price.

The state’s US dollar reserves would be devalued. It would be a direct challenge to US supremacy. China is probably not yet ready for that. For now it follows Deng Xiaoping’s doctrine: “We must not shine too brightly.”

But if that Russia-China axis wants to weaponise money, as the US has done, all China has to do is declare its gold holdings, and perhaps even partially back the new currency it plans to launch, a central bank-backed digital yuan, with them.

Unbacked Western fiat money risks losing a great deal of its purchasing power in such an event. It could create chaos in the West. But that is the card China now has with its 20 years of relentless accumulation.

In short, any new money whose aim is to get SCO trading with each other outside of a US-controlled banking system is going to need to involve gold for it to work. It wouldn’t surprise me to see them attempt the Glazyev system described above and for it not to work because of the trust problem, and because most of those nations are going to want to retain the right to print. They could then try a second time, giving gold a more prominent role, and this time it might work better.

Where to invest in gold now

Far from being an irrelevant, antiquated asset, then, gold could well prove the key to a new currency spearheaded by China and Russia in the medium term. In the meantime, as MoneyWeek often points out, inflation could well become entrenched (see page 5), so the scenario of bond yields lagging inflation expectations may be with us before too long. Hedging your portfolio with gold remains a good idea.

There are several ways to gain exposure to the yellow metal. You can buy gold bullion via the Pure Gold Company or Goldcore (tell them I sent you), or you can put an exchange-traded fund (ETF), which tracks the spot price, in your portfolio. One to consider is the iShares Physical Gold ETC (LSE: SGLN).

If China plays its gold trump card, miners are going to see a dramatic upward revaluation of their properties. My favourite two companies are: Moneta Gold (Toronto: ME), which, with 11.8 million ounces(m oz), has the largest undeveloped gold project in North America and is valued at just US$11/oz in the ground. It’s right in the heart of Canadian mining country and must be a takeover candidate for a major looking to replace lost ounces.

Minera Alamos (Canadian Venture exchange: MAI) is building three mines in Mexico with production from the first already online. The operation will surely benefit from a rerating from development play to mid-tier producer in the next couple of years.

A royalty company gets a slice of gold production or revenue in exchange for an upfront payment. A cheap royalty play is Elemental Altus Royalties (Canadian Venture exchange: ELE), the result of a recent merger between Aim-listed Altus Strategies and Elemental Royalties.

I think a great deal of the Altus Management, but for all the good work they were doing on the ground, they were never able to get much market recognition. Elemental has several billionaire mining VIPs on its shareholder roster, including Rick Rule and Ross Beaty, which is usually a good sign.

Soaring natural gas prices have been one of 2022’s big headline grabbers. However, those with longer memories will recall when producers could hardly give their output away. So, what’s the deal with its renaissance and is now a good time to invest in natural gas?

Is it time to invest in natural gas?

Natural gas – which is colourless, odourless and the cleanest burning fossil fuel – developed underground millions of years ago.

Its usefulness is magnified by converting it into liquefied natural gas (LNG), a liquid form of the gas that equates to about 1/600th of the volume of natural gas making it easier to store and transport.

And because there are so many different ways the fuel can be produced, stored and transported, there are plenty of options available to invest in natural gas.

For many years before 2020, global natural gas values had been depressed by plentiful supply. Yet from April 2020 until August this year, they rose almost 7.5 times. In February 2021, UK gas was trading at 38p per therm (a measure of gas consumption). In August this year, the price reached 537p per therm!

The initial catalyst for these price explosions was the easing of Covid-19 restrictions. As people returned to work, energy demand surged while supply was slow to respond. With natural gas accounting for about a quarter of global electricity generation, its price began to soar. Then Russia invaded Ukraine on 24 February.

The world’s most important fuel

Prior to the invasion, Russia had supplied 40% of the EU’s gas, says the BBC.

Russia has now cut supplies to Europe by shutting the key 745-mile Nord Stream 1 natural gas pipeline – from near St Petersburg to north-eastern Germany – for the second time in recent months.

Despite this development, natural gas prices – in particular in Europe – have dropped back in September. Russian pipelines now account for just 9% of EU gas imports, according to European Commission president Ursula von der Leyen. And the Commission is trying to cap the price of Russian natural gas exports to Europe. For those looking to invest in natural gas, this potential cap could be the biggest risk to investment performance.

Meanwhile, “today’s record prices and supply disruptions are damaging the reputation of natural gas as a reliable and affordable energy source, casting uncertainty on its prospects particularly in developing countries”, says the 2022 third-quarter Gas Market Report by the International Energy Agency (IEA).

Over time and with sufficient political willpower – admittedly not guaranteed with the EU – Europe will wean itself off Russian gas. The IEA’s base case anticipates Russian pipeline gas exports to the EU declining by more than 55% between 2021 and 2025.

“Global gas consumption is forecast to contract slightly in 2022, with limited growth over the next three years… well short of the exceptional jump in demand seen in 2021”, says the IEA. “The Asia Pacific region and the industrial sector are the main engines of growth, accounting for 50% and 60% of the growth to 2025 respectively, although both are subject to downward risks from high prices and potentially lower economic growth.”

In other words, natural gas prices may have passed their near-term peak, even if they later hit new highs.

So, those looking to invest in natural gas need to exercise caution. Rather than buying into direct, mainly price-determined, natural gas and oil suppliers, it may be better to plump for shares in companies that could make much more money if overall demand for gas remains firm.

How to invest in natural gas

Nasdaq-listed Golar (Nasdaq: GLNG) – market cap $3bn – designs, builds, owns and operates marine infrastructure for the liquefaction and regasification of LNG.

As at 11 August 2022 the firm had two FLNGs (Floating LNG vessels that recover, liquefy, store and transfer LNG from subsea wells). Golar also owns 31% of gas carrier Cool Co, into which it transferred eight modern LNG tankers in January 2022, and 6% of LNG supplier New Fortress Energy.

Global demand for LNG tankers is set to remain strong in coming years as the EU and other nations grapple for gas supplies. The flipside is the size of the world LNG tanker order book, which stands at 38% of the current operational fleet (though shipbuilding capacity constraints mean that some of these ships may never be delivered).

So there are risks in buying Golar, though these have been cut by this year’s balance sheet restructuring. Net of debt, the company now has cash plus listed securities totalling $500m and expects Ebitda (earnings before tax, depreciation and amortisation) from its FLNG assets to grow by three to four times between last year and 2024.

On forward price/earnings multiples of 13 to the end of December 2023 falling to 12.4 for the following year, according to average analyst forecasts compiled by MarketWatch, the stock offers a cheap way to invest in natural gas and potential upside in the LNG sector.

Russia has finally cut gas supplies to Europe via the Nord Stream 1 pipeline.

Initially, a maintenance issue was blamed for the delayed reopening of the pipeline after three days of scheduled maintenance.

But today Dmitry Peskov, President Vladimir Putin’s spokesman, stated that gas supplies will not resume in full until the “collective west” lifts sanctions against Moscow over its invasion of Ukraine.

While the full shutdown has come as a bit of a shock, it wasn’t totally unexpected. Europe has been planning for this worst-case scenario since Russia invaded Ukraine at the beginning of the year.

Russia’s gas war with Europe has been a long time coming

The good news is that Europe has not been caught completely off guard. Last week, after several frantic months, the German authorities announced the country’s gas storage facilities were filling up faster than expected before winter, and had reached the 85% full target a month ahead of schedule.

Gas consumption has also slumped. Industry gas consumption fell by 21% in July year-on-year, according to Germany's BDI industry association. Other European countries have also announced plans to reduce gas and energy consumption, which should help improve the overall picture on the demand side.

On the supply side, Germany has contracted five floating LNG regasification vessels to diversify its energy sources. These vessels are coming online over the next 12 months and have the capacity to meet around 20% of the country’s natural gas needs.

The UK and Norway have both stepped up their efforts to replace Russia’s role as Europe’s leading gas supplier. Gas production from the North Sea jumped by a quarter in the first half of 2022, and the UK has become a net gas exporter to Europe (around 50% of the country’s gas demands are covered by North Sea production). Norway has also increased supply volumes to the region.

Avoiding the fallout will be very difficult

Europe is far less dependent on Russian gas than it was a year ago, but this move will almost certainly hit European economies.

Gas consumption is falling in Germany due to demand destruction. Factories cannot afford to keep operating with prices where they are today. There are also growing concerns that volatility in the power market will lead to stress in the financial system (electricity producers tend to hedge prices using derivatives, which means they are exposed to margin calls if volatility jumps).

European gas futures jumped 30% after Russia’s announcement (UK futures jumped a similar amount) reflecting the market’s nervousness. Prices are trading around the €258MWh mark, up 2,066% from this time in 2019, although they’re still below the record high of €332MWh last week.

I’m an optimist at heart, and I genuinely believe that this crisis will produce some positives.

Renewable energy initiatives are being turbocharged, and governments as well as customers are rushing to come up with ways to reduce energy consumption. And if the Western world can reduce its dependence on fossil fuels and countries like Russia, then that’s only going to be good for economic growth and democracy in the long term.

Still, even as an optimist, I can’t see how the world, and in particular, Europe, is going to escape a period of economic hardship following this energy price shock.

It’s not just Europe that’s feeling the pain. The mad scramble for gas has sent the price of all fuel types rocketing around the world. Tight gas markets have sent buyers back to coal, and surging demand has pushed up prices by more than 700% in the past two years.

Only two years ago analysts were predicting coal mines would have to close the world over due to terminally declining demand. Now they’re making record profits.

Finding the companies and sectors that will profit

The big challenge for investors is how to deploy capital in this environment. Hydrocarbon producers are an obvious bet, although as we’ve seen in Europe, the threat of windfall taxes is now becoming a reality.

And it’s the same with renewable energy producers. Windfall taxes and energy price caps are on the table, making it difficult to value these businesses.

Elsewhere, many industrial companies, especially in Europe, are facing terminal price pressures. Consumer goods companies, retailers and banks may also all suffer as inflation saps consumer purchasing power. In fact, there are not many sectors that I think are unlikely to escape the coming storm.

One sector that might come out stronger is the oil services sector.

The companies that supply the nuts, bolts, pipes and survey services for both the oil and gas and coal industries are unlikely to face as much backlash as their peers (primarily because they tend to be less profitable). Nevertheless, high energy prices are stimulating more activity in the sector, and this is leading to rising profits at service companies.

Oil field services company Haliburton (NYSE: HAL) reported a 55% increase in profits during the first half of 2022. UK-listed John Wood Group (LSE: WG) reported a strong profit in its first half up from a loss in the same period last year following significant contract awards from the likes of INEOS, Chevron and Equinor.

It might also be worth taking a closer look at companies in the renewable energy sector that fulfil the same role.

XP Power (LSE: XPP) makes transformers that help transmit power from the generators to the grid. Copper miners such as Teck Resources (NYSE: TECK) or Antofagasta (LSE: ANTO) could also benefit from rising demand for copper in renewables projects (copper prices have been under pressure recently but that appears set to change).

For investors willing to take a bit more risk, Glencore (LSE: GLEN) could be a great option. The company is generating record profits, (and returning a large percentage of this income to investors) but more importantly its well versed in dealing with political risks, such as windfall taxes and regulations.

When Russia invaded Ukraine in February, the prices of agricultural commodities shot up. Wheat gained 59%, sunflower oil rose 30% and maize rose 23%. Both countries are major exporters of these crops, thanks to the belt of highly fertile chernozem (or “black earth”) that covers much of Ukraine and extends into Russia. Together, they accounted for 28% of globally-traded wheat, more than the US and Canada together, 29% of the barley, 15% of the maize and 75% of the sunflower oil.

Their share of global production is smaller, but as major exporters they are crucial in meeting international demand. There were widespread fears about the impact this would have on global food supplies and the risk of widespread shortages, especially when prices of other crops grown elsewhere began to soar at the same time. Yet since then, prices have fallen back significantly, often to pre-war levels. In wheat, for example, strong exports from Brazil, Canada and the US help plug the gap. Much of the discussion about a food crisis has been replaced by concerns about the energy crisis, at least in wealthier economies.

Yet the risks haven’t gone away. Many of the underlying factors that drove the surge in prices remain highly concerning. Some predate Russia’s invasion, others have been exacerbated by it. All point to a greater likelihood of volatile prices, food shortages and the dangers that they bring in the years ahead.

Rising insecurity

Food production has risen strongly in recent years. Global production in primary crops has risen by 52% since 2000, to 9.3 billion tonnes in 2020 (roughly half of that consists of staples such as wheat, rice and maize, plus sugar), according to the United Nations Food and Agriculture Organisation (FAO). Food security was not really a source of concern in the Western world. Indeed, in some areas such as Europe, the focus was on limiting the impact of farming on polluting rivers and aquifers and adversely affecting the diversity of birds, insects and other wildlife. However, in other parts of the world, the situation was deteriorating. Droughts, wars and the pandemic mean that around 770 million people went hungry in 2021, the highest number for 15 years, according to the FAO.

Although agricultural commodity prices have fallen back since the start of the year, in most cases they remain significantly higher than they were two years ago. And higher costs for other inputs – most obviously energy – mean that the price of processed food stuffs has risen substantially. In fact, in many cases these are more significant. Food prices are driven by general inflation more than raw-material costs. Cocoa producers get less than 2% of the price of the chocolates we buy. Wheat represents 5%-7% of the cost of a baguette. You’re certainly already noticing the impact of that in your shopping basket, but it will be blunted by the fact that food is just a small proportion of most people’s spending in wealthy economies: food represents only the fifth-largest expenditure of UK households, at 11% of income after housing, recreation, energy and transport. (In 1957, it made up one-third of household expenses.)

However, for lower-income countries – and for those on low incomes in wealthier countries – the current situation is already severe. In many African countries, food accounts for 50%-60% of spending, and thus a 50% rise in the price of bread or cooking oil is completely unaffordable. Hence António Guterres, the UN secretary general, warned in May that in the coming months we may see “the spectre of a global food shortage” that could last for years.

The role of the energy crisis

Yet the outlook for next year could be even worse, partly because of energy costs. Natural gas is used to make nitrogen fertiliser, which is a crucial crop nutrient within modern farming. Higher gas prices mean higher fertiliser prices, which are up fourfold, and also lower supplies as European makers cut back in response to the exceptionally tight European gas market.

For example, Norway’s Yara International, one of the world’s largest fertiliser makers, began reducing ammonia production earlier this year and announced another round of cuts last month. It now says it’s using just 35% of its European ammonia capacity. CF Industries, the biggest UK firm, has paused production at its site in Billingham. In total, around 50% of Europe’s ammonia capacity is out of use, reckons industry researcher CRU.

While fertiliser makers can import ammonia – and distributors import finished fertiliser – that will still mean higher prices. The pressure on crop nutrients doesn’t stop there: the market in other fertilisers is also under pressure. Belarus and Russia are major exporters of potash (potassium) and phosphorus fertilisers, and so supplies from them have been disrupted by sanctions. All told, this is likely to affect how much farmers plant for next year and the types of crops they plant (they might shift to ones that require less fertiliser).

On top of that, there’s the wider impact of higher energy costs. Earlier this year, the National Farmers’ Union warned of a huge drop in crops that are grown in glasshouses in the UK – such as peppers, cucumbers and aubergines – because heating them had become too expensive. The wholesale price of chicken – also raised indoors in heated barns, and fed on wheat – has risen by around 50% in some situations. Another factor we are all too aware of this year is the climate.

Farmers have always moaned about the weather, but this year droughts from the US to France to China have hurt harvests. In my own fields in the south of Brittany the heat in early June scalded the wheat and yields have been mediocre at 55 quintals per hectare (five tonnes per hectare) instead of the usual 75, though the quality is satisfying. UK farmers also indicate mixed results, although nothing compared with the 40% drop in 2020, the worst harvests since 1981. The world may experience better conditions next year, but this summer is a reminder that climate change is a severe threat to our food security. And just as energy prices and fertiliser shortages will have an impact that continues into next year, so too will these droughts.

Pastures are not growing, so farmers are feeding cattle and other livestock on hay and silage that had been cut and set aside for their winter food. That potentially means greater pressure on supplies of other food stuffs later in the year when these supplies are exhausted.

No focus on security

On top of this, we can add politics: both misguided long-term aspirations and panicky short-term responses. Let’s take the former first, as it provides yet another example of why we’ve ended up in such a mess. In Europe, the focus of agricultural policy has long been on climate change and the environment, rather than food security. Farmers had been subsidised to limit production. Now, the reduction in subsidies, the level of taxation, the high investments required to respect new regulations, and the relentless inspections have combined with freer trade in agricultural products, and so European farmers struggle to be competitive with other countries that do not have such constraints and costs (while having to sell at highly volatile prices). Consequently, the number of farmers has reduced sharply over the last 30 years in Europe.

For a long time their traditions, inheritance and culture made farmers accept their fate, but as their children decided against going into the sector, farms consolidated. France reflects this trend the most. A farming powerhouse in the sixties – Europe’s common agricultural policy was agreed to compensate France for German industrial strength – it now produces less milk than Germany and is a net importer of food (excluding wine and spirits). This summer, French restaurants have even been running out of Dijon mustard because most mustard seeds are imported from Ukraine and Canada (where a heat wave last year ruined the crop).

The number of farms has fallen by 21% over the last decade and the number of dairy and meat farmers is expected to halve over the next decade as they are unable to generate enough income, according to Les Echos. Than there’s the recent drive to reduce pollution sharply. The most notable example of this is the Netherlands’ aim to reduce nitrogen emissions from livestock by forcing farmers to reduce the number of pigs, chickens and cows by about 30%.

The government estimates that 11,200 farms will have to close entirely and 17,600 significantly reduce their livestock. This has sparked widespread protests among Dutch farmers, but the wider problem is whether it will have any net benefits for the environment. Much food production is already offshored: for example, over half of chicken consumed in France is imported from Brazil and Ukraine. Often this means importing from countries where the protection of the environment is much weaker, or where animal welfare standards are lower: think of Brazil deforesting the Amazon or of beef production in the US and Canada.

Thus by reducing production, you can make your domestic industry look greener, but you are simply shifting the high cost to the environment and the economy elsewhere. At the same time, it drastically reduces your food security and makes your supply chains more complex and fragile. Thus the Dutch proposals look frankly reckless for a continent that is already struggling with the disaster created by being too dependent on Russia for energy, even setting aside the question of what it is supposed to achieve. Emissions are often arbitrary figures – what should be of concern are the dwindling numbers of insects, birds and overall wildlife. Previous policies led to the construction of factory farms – to redress this, farmers should be (and are) developing new ways of farming: ploughing less frequently, seeding new types of cultures sometimes solely to preserve the ground during winter from erosion and curbing the use of chemicals (pesticide, fungicide, fertiliser) to preserve the topsoil.

Promoting this is sensible. Consciously cutting food production when heading into a world in which food security is clearly going to become an ever-greater issue is not. The best that one can hope for is that the events of this year will lead to a change in thinking. In the aftermath of the invasion of Ukraine, French president Emmanuel Macron spoke of adapting the EU’s Farm to Fork strategy, which currently calls for halving the use of pesticides by 2030 and reducing the use of chemical fertilisers by 20%, and was projected to lead to a 13% fall in agricultural production. “Europe cannot afford to produce less,” he said in March, arguing that “agricultural independence” must be a priority.

Triggering social unrest

If the state of agriculture in the EU is an example of poor long-term strategy, the response to supply disruptions this year shows the problems that can be done by short-term measures. We’ve seen multiple examples of countries banning or curbing the export of agriculture commodities and of the impact that has on prices. For example, in May Indonesia banned the export of palm oil to improve supplies of domestic cooking oil.

Palm oil is widely used in the food business, it’s a key and controversial ingredient in many processed foods and also in other products, such as toiletries. In response, the price of palm oil briefly soared, before falling back due to optimism that Malaysian production would help plug the shortfall and signs that Indonesia’s ban would be short-lived. We can expect to see a lot more incidents like this if food supplies remain disrupted, which will add to price volatility.

Why governments are quick to do this is understandable: food shortages are a major threat to public order. Take Sri Lanka’s ongoing crisis. Last year, the government banned the import of fertilisers in order to conserve foreign-currency reserves and told farmers to switch to organic farming. Yields plummeted, both in crops such as rice (a domestic staple) and tea (a key export and source of earnings).

Combined with other problems such as fuel shortages, the result was an economic crisis and widespread protests that forced out the president and prime minister. This is an example of what makes investing in food difficult: if prices get too high, the consequences can be social unrest rather than profits. Thus all investors should be alert to what the food crisis may mean for society, the economy and markets. Meanwhile, in the box below, I look at some of the firms best placed to manage food-price inflation and those that can benefit from helping boost production

European energy prices are reaching astounding heights. Wholesale gas prices, as measured by the Dutch TTF benchmark, hit €337 per megawatt hour (MWh) last week, a more than sixfold increase on the price a year ago. That is as if oil cost $500 a barrel. Electricity, whose price is closely linked to gas, has also surged. German and French power prices for delivery next year have topped €1,000 per MWh, says Bloomberg. “UK day-ahead electricity is trading at ten times its two-decade average.” The price spike is being driven by pressure to fill gas storage before winter, says Stanley Reed in The New York Times. The prospect of a Russian embargo means energy firms want to buy up gas at virtually any price.

The Nord Stream 1 pipeline between Russia and Germany is running at only 20% capacity, with Russia’s Gazprom repeatedly scheduling downtime for supposed “maintenance”. UK power for December 2022 “is fast approaching £1,000 per megawatt hour”, says Javier Blas on Bloomberg. Conversations between traders and managers of the national grid are “getting scarier by the week”, with talk of “shortages” and emergency planning for the winter.

A multi-year problem

The energy picture has improved since panic set in earlier this summer, says George Saravelos of Deutsche Bank. Firstly, European liquefied natural gas (LNG) imports have surged, leaving German gas tanks more than 80% full and “on track to completely fill up capacity” by October. Secondly, the country has done an unexpectedly good job at encouraging gas-intensive industries to switch to other fuels, sending gas use down about 14%. “If these trends continue, outright gas rationing may be avoided over winter even without any Russian gas volumes”. Indeed, TTF gas futures tumbled by 21% on Monday, although prices remain volatile and historically elevated.

Morgan Stanley analysts say Europe’s LNG import surge has been helped by weak demand from Asia owing to China’s Covid lockdowns, says Anviksha Patel for MarketWatch. They think that this winter may prove “manageable” even “if Nord Stream 1 flows fall to zero”. Yet “if those flows don’t recover, the accumulating loss next year would then create an exceptionally tight winter 2023-2024”.

“We won’t see ‘normal’ prices... for at least three to four years,” Jonathan Stern of the Oxford Institute for Energy Studies told Euronews.

The “Putin shock” is being felt around the world, says Ambrose Evans Pritchard in The Telegraph. High LNG prices are prompting South Asian nations to switch to coal and Japan to turn back to nuclear power. While stoppages at “gas-guzzling” zinc smelters and fertiliser plants will unleash more “supply-chain horror”, they should also take the edge off the gas crisis. “Gas futures in Europe have essentially discounted a full gas blockade” by Russia, prompting some to wonder if we are close to the peak. “Hedge funds are already itching to short gas futures”, says Ole Hansen of Saxo Bank. For the UK, this winter’s energy crisis should be “bad but manageable”.

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It was advanced technology that did it. Until around 1,100BC, the biggest guy in armour with the longest sword was always going to win. But David’s new-tech catapult put paid to Goliath’s career and the Philistine army. By contrast, three millennia later Britain’s most successful general ever, the Duke of Wellington (who never lost a battle) lacked any technological edge. Yet he defeated three much larger French armies when liberating Spain during the Napoleonic wars. A vital factor was his focus on detailed and up-to-date intelligence on all aspects of the enemy and terrain. Technology and good intelligence explain why Russia singularly failed to subdue Ukraine in a handful of days, as many initially expected.

I would like to see the Russian army both humiliated and pushed out entirely, even though the latter seems unrealistic. Yet even though the invasion began just six months ago, it is already clear that the huge leaps in electronics, artificial intelligence (AI) and cyberspace over the last 30 years have radically changed the way governments, their military and businesses will operate in future.

Even before the invasion was official, US and other sources were trumpeting the timing, location and strength of the Russian incursions into Ukrainian territory. Their accuracy was extraordinary (yet derided beforehand as alarmist). Part of this information would have come from “old tech”, but ever-improving, satellites. Much more must have stemmed from successful hacking into government computer systems – not just Russia’s, but those of allies such as Belarus too.

When the war began Russia used some of its cyberwarfare capabilities to close down Ukraine’s internet and communications; crucially, it hacked into and shut the US-based Viasat satellite system used by Ukraine’s armed forces. The surprising hero of the hour was Elon Musk, best known for Tesla cars. One of his other companies, SpaceX, managed to rapidly position 50 of its low-orbit satellites over Ukraine, while it also distributed more than 11,000 Starlink receivers and necessary ground stations (one will fit easily onto a truck) across the country. Mobile, flexible and technologically adaptive, they have proved impossible to shoot down or jam, which is why key Russian aims of making the Ukrainian military “blind” and silencing communications in and from Ukraine have had very limited success. President Zelenskyy and all broadcasters rely on Starlink.

Russia asleep at the wheel

It is hard to understand, however, why Russia failed to fully deploy its considerable cyber capabilities. Possible reasons, think-tanks surmise, are that cyberwarfare took a back seat to battle planning; that to make it effective takes several years of preparation; and that Moscow thought it would win quickly. There is also evidence that the Kremlin wanted to keep communication, transport, energy and other networks open for its own imminent use.

Another factor may be the cyberwarfare conundrum, a lesser version of nuclear deterrence: the risks of retaliation. It is certain Russia could still inflict considerable “electronic pain” and even destroy vital networks, but that would invite reciprocal attacks closing down, say, its own power stations, airports or water systems. Even so, Russian cyberattacks outside Ukraine against all of its allies have soared from an already high base. The UK has seen a 72% increase in cyberattacks on its private-sector national infrastructure since the start of the war, according to the security company Bridewell.

Surprisingly, given Ukraine’s economy is dominated by heavy industry and agriculture, it has a large and vibrant community of software engineers and developers on and offshore. One of President Zelenskyy’s first moves after his election victory in 2019 was to ramp up Ukraine’s technological abilities; he put the 28-year-old Mykhailo Fedorov in charge of the Ministry of Digital Transformation (he is now also vice prime minister).

Fedorov initiated and accelerated two vital developments. Firstly, the government decided to digitise each department as much as possible to make public services cheaper and more efficient, and to reduce corruption and the overall size of the bureaucracy. Data was to be accessed by the entire population via a mobile-phone app known as Diaa. Take-up was rapid and widespread, so key data such as passports and driving licences are now held by individuals on their phones.

Secondly, the government changed the law to encourage all ministries to upload their data into the cloud. So the government’s capacity to function normally endured, thanks to companies such as Cisco, Microsoft and Google providing continuing cybersecurity for the government and business. Some servers were also moved to safe areas overseas when the invasion began.

Teenagers’ endearing derring-do

Cyberwarfare has its limits. No cybersystem will allow you to gain territory. Yet what the war has also highlighted is a wholly novel approach using inexpensive equipment requiring minimal training. An endearing story of derring-do in the first weeks of the war provides a good example.

As the Russian army closed in on Kyiv, a 15-year-old boy crept into a field one night and using his personal drone (available on Amazon and in many other stores) tracked down a military column. His father entered the GPS co-ordinates into a social-media app. Ukrainian artillery then pounded the convoy. There are thousands of civilian drone operators and no shortage of mobile phones with GPS.

If this blurs the lines between civilians and combatants, then consider anti-tank and anti-aircraft weapons. In the preliminary stages of the war these became symbolic of Ukraine’s resistance. Next Generation Light Anti-Tank launchers (NLAW), designed by SAAB of Sweden, have been sent in their thousands, along with the portable MILAN tank destroyers and longer-range Javelin and similar makes. The equally portable Stinger anti-aircraft rockets have proved highly effective. The training required to operate them is minimal, so after a few hours of instruction that 15-year-old and his father could have completed part of the destruction of the convoy themselves.

The upshot is that hyper-sophisticated electronics and design have potentially turned me and my young grandchildren into lethal Davids against the two key traditional Goliaths of attack: the battle tank and the warplane. Point it vaguely in the right direction, pull the trigger and home for breakfast. The AI and electronics will do the rest.

Moreover, these weapons come relatively cheap: $40,000 for the SAAB missile and around $140,000 for the Stinger. A modern battle tank costs $7m; the Eurofighter Typhoon $120m. The mathematics of attack and defence are stark in their imbalance.

How drones have developed

These cyber-cum-electronic weapons have suddenly become well known, although they have been around for a couple of decades. Yet the weapon that is really changing warfare has been around for 50 years, but only now has been developed to a stage where it is either useful or terrifying: the drone, officially known as an unmanned aerial vehicle (UAV).

UAVs’ first successful military use was in the 1973 Arab-Israeli war when the Israeli Air Force commander General Peled had the brilliant idea of flying them over Egyptian lines. The Egyptians shot off all their anti-aircraft rockets to bring them down, thus allowing the Israeli air force then to strike with impunity. But these were slow, simple, dumb drones. Now they come in a variety of sophisticated forms. Initially designed only for surveillance (Ukraine is said to have more than 6,000 of this type), many new variants are weaponised, of which the largest single shipment to Ukraine has been the US-supplied Switchblade.

This is portable in single units or comes in multipacks. The advanced version weighs only 50lbs, can be set up in ten minutes and has a range of 50 miles. It can loiter around while the faraway operator looks for a target, or be preprogrammed. It has the same punch as a Javelin anti-tank missile and is classified as a “kamikaze drone”: it is not designed to return.

Very recently America agreed to send 580 Phoenix Ghost kamikaze drones – similar to the Switchblade, but more lethal. This model is so new that little public information is available, save that it can fly faster, for longer and has a heavier payload. Before this US support Ukraine’s best drone was the reusable Turkish Bayraktar TB2, which with its 12-metre wingspan, long range and laser-guided bombs is a far larger and deadlier weapon. It is unknown which type of drone successfully attacked a Russian oil refinery over 100 miles behind the front line, but that incident is one of many examples of how far these erstwhile toys for hobbyists have developed.

However, drones will no more win the war for Ukraine than cyberattacks. Already Russian anti-drone jamming systems and rockets are proving successful. The reality is that the war has become a huge slogging match. Neither side is using its air forces much nor sending forward tanks, as both have proved vulnerable, while each is running out of manpower. As a result, Russian forces are relying primarily on heavy artillery firing over 20,000 large shells a day to flatten whatever is in front of them and then inch forward.

Meanwhile, Ukraine’s government has urgently demanded ever more heavy weapons to compensate for its relative artillery weakness and has just started to receive and deploy new systems, such as the lethal HIMARS long-range multiple-rocket launchers. The war is now reminiscent of trench warfare in the Great War overlaid with hi-tech as both sides become exhausted. It is difficult to see how either can make sufficient advances to declare victory.

Military technology is accelerating

Just as World War II massively accelerated technology, design and efficiency in both the military and civilian spheres, including aeroplanes, ships, vehicles and computing, so events in Ukraine are having a significant impact today. Unmanned vehicle and ground systems hint at large improvements in driverless vehicles. SpaceX has shown how rapidly communication networks have evolved. Some drones are now as large as commercial aircraft and are easily transferable for useful civilian purposes.

Strategists have already noted the potential for drone swarms, with dozens or perhaps even hundreds co-ordinating their operations. It sounds like science-fiction, but it is likely to be a reality within a few years. In cyberspace Russia had been pummelling Ukraine for over a decade, but since the war began Ukrainian and foreign hackers have accessed “an avalanche of data”, according to the successor group to Wikileaks. They have also disrupted banks and accessed data belonging to the FSB (the successor to the KGB).

There are already lessons to be learned or relearned from current events. I’m intrigued by the return of the barely trained citizen soldier and the huge importance of the private sector in battlefield communications. Armaments remain vital, but that granny wheeling her shopping trolley could be taking her Javelin missile home to launch; that teenager in the attic may be taking down communication systems in cyberspace or sending drones to attack the enemy. The key lesson is that however cautious you may be, there is always a nutter on the bus who wishes you ill, so it’s best to be prepared. While president Putin is now in plain sight, the adversaries you can’t see are more dangerous. Countries such as Iran already have drone-manufacturing capability; these are used frequently in the Red Sea by Yemeni pirates attacking shipping, or by other allies such as Hezbollah in Lebanon, which last month attempted to damage Israeli offshore-gas platforms.

Over the two decades to 2021, the EU’s defence expenditure rose by a fifth from a low base; America’s jumped by 66% from a higher level. China’s increased by 592% and overtook the EU’s. Its spending is now second only to America’s. China is far more advanced in cyberspace, AI-drone and automated fighting machines than Russia and in some areas able to match America. Two dominant themes of the current decade, then, both in politics and markets, will be cybersecurity and electronic warfare, both propelled by advances in AI and machine learning. Investors need to work out where the new advantages lie.

The defence stocks to buy now

In January 2022 I recommended several cheap defence companies, all of which I owned; they took off when the invasion commenced. I will keep holding these shares and buy more on any downturns for two reasons. The first is that in January the sector was too cheap, and although prices are now higher, so is earnings visibility. Defence expenditure, and hence companies’ order books, will rise significantly for many years. Most Western militaries are short of either basic armaments or sufficient stockpiles – or they own outdated or useless new equipment (the alarmingly bad next-generation Ajax tank ordered by the British Army doesn’t work).

I suggest staying with the sector’s leaders. The easiest pick is still BAE Systems (LSE: BA), which despite trading close to an all-time high is still on a forward price/earnings (p/e) ratio of 14 times and yields more than 3%. Its businesses run the gamut of the sector, from submarines to rockets. There are many catalysts for growth such as next-generation fighter aircraft. BAE is the lead partner in the nascent Tempest programme, a joint venture with Japan and Italy. The group will also benefit from its cyber and unmanned-aerial-vehicle (UAV) capabilities. In Europe, where defence expenditure will rise proportionally more than here, I continue with my two large favourites; Sweden’s’ Saab (Stockholm: SAAB) and Italy’s Leonardo SpA (Milan: LDO). The latter looks cheap on a sub-ten times p/e partly due to fears over Italy’s solvency. The former stock is expensive but politics justifies the price. The EU will want to re-equip as much as possible using European firms, and there aren’t many choices.

Two defence-related companies I recommended much longer ago than last January, by contrast, have been outright blunders: Rolls-Royce Holdings (LSE: RR) and Babcock International (LSE: BAB). They are either bust or recovery plays. On Rolls-Royce I am more comfortable as the civil and military-engine markets are recovering, while its potential in mini-nuclear power stations remains intriguing. Babcock isn’t really a defence company at all. It provides a range of logistical support, such as docks and military bases. It appears to be stabilising, but don’t bet the farm. When it comes to cybersecurity, MoneyWeek rightly cautioned investors against jumping into the largest UK firm, Darktrace (LSE: DARK), after its successful 2021 flotation, when it briefly traded above 925p. But at 378p, many of the risks are in the price.

There are still very few defence funds and exchange-traded funds (ETFs). How virtue-signalling fund managers keen to burnish their environmental and social governance (ESG) credentials expect to protect liberal capitalism without armaments remains a mystery. The few cybersecurity ETFs available have all traded lower in the general tech bear market, but the iShares Digital Security UCITS ETF USD Acc (LSE: LOCK) and the L&G Cyber Security UCITS ETF (LSE: ISPY) provide some insurance.

Drone companies? No thanks. There are dozens listed, but a mere handful will survive. The long-term winners in this sector are likely to be America’s top contractors, such as Lockheed Martin, General Dynamics, Raytheon Technologies and Northrop Grumman.

The eurozone is fighting “fires on all fronts”, says Mehreen Khan in The Times. Squabbling in Italy’s governing coalition has left the bloc’s third-biggest economy heading for “a summer of political paralysis”, with the future of prime minister Mario Draghi in doubt.

Between record energy prices, the threat of Russian gas being switched off and the prospect of recession in Germany, policymakers in Brussels and Frankfurt already had enough to deal with.

European governments have begun to work under the assumption that Russian energy will be cut off entirely this year, say Ewa Krukowska and John Ainger on Bloomberg. The European Commission is reportedly preparing a plan for “a voluntary 15% cut in natural gas use by member states starting next month” to conserve stocks for winter. The Commission thinks a Russian gas cut-off and a harsh winter could wipe 1.5% off EU GDP.

Germany has reduced its dependence on Russian gas from 55% to 35% since the invasion of Ukraine, says Philip Oltermann in The Guardian, but that still leaves it heavily exposed to Putin’s whims. For now, politicians hope to spare households from rationing while imposing restrictions on industry, which accounts for roughly one-third of gas use. Yet the chemical and pharmaceutical industries are warning of unintended “domino effects” from more supply-chain disruption.

“The good news is that the EU’s tanks are now almost 60% full”, more than this time last year, Leslie Palti-Guzman of data firm Leviaton told The Economist. Europe has also become a major importer of liquefied natural gas (LNG), with imports up 70% year on year in the first quarter. “To the chagrin of greens” European governments are also granting waivers for “filthy coal” plants to “crank out more power”.

“Recession in the eurozone is priced in,” say analysts at Japanese banking giant Mizuho. On Tuesday the euro slumped to parity with the US dollar – the lowest the euro has traded against the US currency since 2002. The selloff followed growing concern that the shutdown of the Nord Stream 1 gas pipeline to Germany for annual maintenance could turn into a more permanent closure.

“The ECB [European Central Bank] is fiddling while the currency burns,” Neil Wilson of Markets.com told Julia Kollewe and Graeme Wearden in The Guardian. “Inflation above 8% and interest rates remain negative … it’s madness.”

The euro’s slump could be a foretaste of what is to come if a Russian gas cut does materialise, say Lynn Thomasson and Farah Elbahrawy on Bloomberg. Economists at UBS think that the single currency could hit €0.90 to the dollar in that scenario, with corporate earnings falling by more than 15% and a 20%-plus drop in the Stoxx 600 index of pan-European stocks. German equities are already feeling the chill after tumbling 11% since June. Shares in gas giant Uniper, which is seeking a government bailout, are down 77% this year.

Considering the circumstances – “the worst geopolitical crisis in Europe since the World War II” – the euro isn’t holding up all that badly, says Ambrose Evans-Pritchard in The Daily Telegraph. This is not so much a story of euro weakness as of the dollar’s strength against nearly all other big currencies.

Note that the Japanese yen and the Swedish krona have fared even worse against the greenback this year. The dollar index, which tracks the US dollar‘s value against a basket of six major trading partners’ currencies, “has gone mad as the US Federal Reserve engages in frenetic triple-decker rate rises, belatedly scrambling to contain the inflationary blow-off of its own monetary creation, and to rein in the greatest fiscal expansion since Roosevelt’s New Deal”.

Economic logic

The dollar’s rally is a matter of “economic logic”, says James Mackintosh in The Wall Street Journal. At a time of soaring global energy prices it makes sense for investors to head for America – a country that is “self-sufficient in energy” because of fracking – rather than Japan or Germany, which need to import oil and gas from elsewhere. At some point the current dollar bull trade will flame out, but “without a trigger – a peace deal in Ukraine [that] might restore cheap gas to Germany, or perhaps a dovish turn by the Fed – it is hard to see what could prompt the dollar to turn”.

The dollar looks to be trading somewhere “between 10% and 20% north of fair value” at present, say Themistoklis Fiotakis and Sheryl Dong in a Barclays note. In the medium term that overvaluation should unwind, but don’t bet on it happening anytime soon. The dollar’s current strength rests on its role as a haven in uncertain times. Another “Covid-19 flare-up in China” or “more disruptions to the flow of Russian natural gas to Europe” could yet drive the greenback even higher.

The “Long Peace”, otherwise called the Pax Americana (America’s peace), has held sway since the end of World War II. It commemorates a period of more than 75 years without wars between major economic and military powers. Over this time, the amount spent on defence gradually declined in relative terms.

In the early 1950s Britain spent more than 11% of its GDP on its armed forces. By the early 1990s, the share of the UK economy devoted to defence had declined to 4%. And by last year, military expenditure had decreased to just 2% of national output.

But the global geopolitical game has changed. With Russia’s invasion of Ukraine, world stability is no longer assured. The Long Peace is history. Now, the UK – one of the biggest weapons suppliers to Ukraine – is being forced into a rethink about how to defend itself. The government will increase spending on the armed forces to 2.5% of GDP by 2030, prime minister Boris Johnson announced last week.

At a time of considerable uncertainty in the stockmarket, this is clearly good news for one sector: defence companies. And one firm in particular tends to fly under the radar.

A crucial UK defence firm

Babcock International (LSE: BAB) is a FTSE 250-listed international aerospace, defence and security firm. Its main markets apart from the UK are Australasia, South Africa, France and Canada. It operates in four sectors: marine, land, aviation and nuclear. These divisions do both civil and defence work, but 56% of 2021 revenues were defence related. Two-thirds of overall revenue came from the UK.

For example, the marine division supports the Royal Navy (and other world navies) via delivery of ship and submarine sustainment programmes. It provides defence and maritime training. And it owns and operates marine engineering facilities at Devonport (Plymouth) and Rosyth (Scotland) that include large-scale docks able to accommodate Queen Elizabeth-class aircraft carriers, along with several other services.

Babcock undertakes around 75% of UK surface warship fleet refits and upgrades, and 50% of fleet maintenance, along with 100% of deep maintenance for the UK’s nuclear-powered submarine fleet. It is also working on delivering five Type 31 frigates that will be at the future core of the Royal Navy’s surface fleet. Non-defence contracts include work for the oil and gas industry.

The land sector maintains vehicles and equipment for the British Army, including fleet management of over 50,000 vehicles ranging from quad bikes to battle tanks. Aviation, which has worked with the Royal Air Force for more than 100 years, supplies training and maintenance services, and aerial emergency medical aircraft. The nuclear sector decommissions nuclear power plants and maintains the nuclear submarine fleet.

Expensive write-downs

Despite Babcock’s importance to national security, it has been a poor investment in recent times. The share price has plunged by 75% over the last eight years. That’s no great surprise when you look at its financial performance. For the 12 months to 31 March 2014, earnings per share (EPS) before asset write-downs – adjusted for a cash-raising rights issue – were 62p. By contrast, for the 12 months to 31 March 2021, it made a loss per share of -337p.

That resulted from a huge write-down of the value of some of its contracts. A new CEO took over, carried out a review of contracts and the balance sheet, and put aside £1.7bn to cover potential losses.

This was painful for shareholders at the time, but it’s good news for new investors. The share-price collapse should have factored in all the financial damage, leaving Babcock as a cheap and potentially exciting recovery stock in a growing sector.

Clear signs of improvement

Babcock’s financial fortunes began to improve last year. The interim results for the six months to 30 September 2021 saw revenue rising by 8% to £2.22bn. Headline operating profit was £75m, versus a £785m loss for the equivalent period a year earlier. And underlying EPS – ie, before one-off items – amounted to 15.3p.

What’s more, the firm’s financial position was recovering too. Net debt dropped to £1.35bn from £1.6bn as at 30 September 2020. In addition, three disposals were announced in the period to the end of September 2021. These were set to generate proceeds of £400m that were earmarked for further debt repayment. And a new group-wide operating model is targeting around £40m of annualised cost savings.

Babcock also disclosed that its contract backlog (ie, its order book) was £10.9bn as at end-September 2021 (this compares with full-year revenue of £4.2bn last year).

In its latest update in February 2022, the company said that overall trading for the first ten months to 31 January 2022 was in line with expectations. Its full-year outlook was unchanged. In addition, a fourth disposal in the year to end-March 2022 has lifted asset sale proceeds to £448m from £400m.

For the current 12 months to the end of March 2023, the average of analysts’ turnover forecasts is £4.3bn, putting the stock on a price/sales ratio of just 0.37. The average EPS estimate is 36p, implying that Babcock is on a prospective price/earnings (p/e) ratio of below nine. Analysts also forecast a dividend for the current financial year of 8p per share.

Babcock has become cheap due to its past problems. But with these in the rear-view mirror, there’s the potential for a re-rating. This out-of-favour stock could prove to be a very profitable play on higher UK defence spending.

“This is very worrying,” says George Saravelos of Deutsche Bank. Last month Russia reduced Nordstream 1 gas flows to Germany by 60% as part of Moscow’s ongoing dispute with Europe. “While the immediate availability of gas in Germany is not an issue, the energy market is starting to price a risk of a complete disruption to gas supplies for winter.” That would mean energy rationing and almost certain recession in Europe’s biggest economy.

“Russian supplies to the European Union are down more than 40% from last year,” says Craig Mellow in Barron’s. That has sent European gas prices up 70% in three weeks. Prices for 2023 delivery of electricity have followed, tripling since the start of the year. EU gas storage is 57% full – more than this time last year – and Europe has “energetically scoured the world for non-Russian gas” in recent months.

Still, “Germany and other EU economies could face natural-gas rationing as early as October if Russia maintains its current squeeze”, according to Jonathan Stern of the Oxford Institute for Energy Studies. While governments will protect residential users, “a broad range of manufacturers may face energy quotas”.

France has begun to prepare for “a total disruption of Russian gas supply”, say Vincent Collen and Sharon Wajsbrot in Les Echos. A draft law would give ministers the power to override market forces and issue direct orders to gas-fired power plants, taking France one step closer to “a war economy”.

Natural gas prices have risen by 700% in Europe since the start of 2021, say Gerson Freitas, Stephen Stapczynski and Anna Shiryaevskaya on Bloomberg. Once a “sleepy commodity”, natural gas now “rivals oil as the fuel that shapes geopolitics” and dictates the economic fortunes of nations.

SEE ALSO:

Why energy prices are so high right now

The transition to renewable energy is easier said than done

Get ready for the coming oil glut

“The oil price says a trans-Atlantic recession is almost nailed on,” says Russ Mould of AJ Bell. “Since 1970, the oil price has doubled year-on-year six times and on four of those occasions the US and UK have gone into recession within the next two years.” At around $116 a barrel, Brent crude is up by 475% since its March 2020 nadir. “Everyone is waiting nervously to see if 2021 makes it five out of six.”

Prices got an extra boost this week as G7 leaders discussed plans to impose a price cap on Russian oil. That may exacerbate existing supply problems. “About two million barrels a day of Russian oil and refined-product supplies” are unable to enter global markets at present because of sanctions, says Myra Saefong in Barron’s. “US production, meanwhile, hasn’t climbed back to pre-Covid-19 levels” because of “pandemic-related labour shortages and supply-chain constraints”.

Don’t expect Opec+ to ride to the rescue either, says Pavel Molchanov of bank Raymond James. The producer group, which includes Saudi Arabia and Russia, underproduced its output target by 2.616 million barrels a day in May. There is “very limited spare capacity in the Middle East, and none outside the Middle East”. Iran has capacity, but its exports are subject to sanctions.

Enthusiastic oil bulls dominate online conversations about energy, says Jared Dillian on Bloomberg. Many “predict oil will rise to $200 a barrel. In fact, call options with a $200 strike price have traded rather briskly in recent weeks”. Yet fears of a recession have seen oil prices fall 7% since they topped $124 a barrel in early June.

When oil prices rise, people start to reduce consumption. “The only constant in financial markets is that when bullish or bearish sentiment becomes crowded, it is usually profitable to go the other way.”

It is unlikely that Barbados, Lebanon or Sri Lanka ever enters your investment thinking. Perhaps now they should. For although all are minnows in a sea of whales in financial terms, they are – to mix animal metaphors – dead canaries in the coal mine. In the last four years, each has gone bankrupt. Barbados defaulted on its foreign debt when a new government took office in 2018, Lebanon stopped paying after a series of economic crisis in 2020 and Sri Lanka did the same amid an economic meltdown last month.

All three went bust for what are effectively identical reasons, as did Argentina – which in 2020 defaulted for the ninth time in its history – and others. Economists would vigorously disagree, citing various theories instead, but the core problem in all cases is gargantuan government corruption – from elected politicians to lowly bureaucrats – robbing their treasuries and misspending whatever is left, along with woeful tax collection systems. Couple this with a complete lack of confidence in their legal systems and governance by domestic and foreign investors alike, and money flees abroad while economic activity plunges. Thus Sri Lanka, long self-sufficient in food, is now begging for foreign supplies as farmers can no longer afford to buy seeds or plant crops.

Sovereign default is a vague term, but one that can be defined as the failure by a government to pay the interest or capital on its foreign currency debt (usually bonds) when due. There are many sub-definitions of default, such as failing to repay local government debt, changing interest terms on loans, or radically debasing the currency. However, there are four immutable rules: sovereign default is normal, cyclical and (with very few exceptions) inevitable for every country; the contentious fourth rule is that sometimes it is the best option. These rules have been forgotten and although the world is slowly drowning in debt, investors are remarkably and foolishly unconcerned.

An unprecedented bubble

The huge growth in access and availability of credit dating from the World War II has stimulated an unprecedented level of real economic growth and wealth. There are multiple benefits to the ability to borrow. For governments, it allows them to build necessary infrastructure. Companies can invest and expand, and thus employ more people. People get the opportunity to enjoy a once inconceivable lifestyle, from home ownership to foreign holidays and a host of consumer goods. However, problems arise when the interest, the capital or both cannot be repaid.

We are in an unprecedented credit bubble. Before the pandemic, the numbers were already alarming. The total stock of global debt had already more than doubled between the 2008 financial crash and 2020 to $226trn or about 2.5 times the world’s total GDP. Partially because of the costs of the pandemic it has since soared to more $300trn (3.5 times global GDP), according to the Institute for International Finance. Notable within these numbers is that government debt has overtaken all the rest combined for the first time and that, unsurprisingly, China has roared into the room to the extent that the increase since 2007 in money terms in its non-financial-sector corporate debt and household debt has been greater than all the advanced economies combined.

Debt is always a high-wire balancing act, requiring a combination of being able to pay the interest, giving an impression you can repay the capital and, most importantly, convincing lenders you’re a good risk so that will pony up more loans. The spectacular surge in debt was possible primarily because interest rates persistently declined to zero and were even negative for several major countries. This allowed governments to issue bonds in record quantities not just for new borrowing, but also to replace older, more expensive loans with larger but overall cheaper new ones. Thus despite ever-rising debts, their interest costs tumbled.

This has reversed. Central banks have under-estimated inflation and are rushing to catch up with a rapid series of interest-rate increases. Suddenly new debt becomes more expensive. At the end of 2021, the governments of heavily indebted developed economies and raggedy republics alike were paying peanuts in terms of the interest cost as a percentage of their revenue, such as France at a mere 3.3%, or Sudan at 5.2%. Globally, interest costs were about 6% of all government revenue last year.

Yet as rates rise, the annual cost of borrowing reverts to the more normal level of low double digits, and higher for many countries. For the first time in nearly 20 years governments globally are going to find new funding for healthcare, pensions, education or infrastructure difficult, while painful cuts in previously untouchable areas will be required. The popular and electoral reaction to this situation is unlikely to be one of calm acceptance.

Japan leads the way

The financial strength of a given country is often measured by its debt-to-GDP ratio, the level of general government debt relative to the size of the economy. As a rule of thumb, over 90% is a default red flag. Yet it is an imprecise tool, as demonstrated by Japan. Its debt-to GDP has been above that level since last century and is a world-beating 260%, yet it’s having no problem in paying its interest bill or raising new loans. Many other advanced economies are also well above red-flag levels, such as the UK, US and many eurozone countries.

Japan offers a clue as to how some developed countries will – for a while at least – mitigate the inevitable squeeze. In Japan, the largest holder of bonds is the central bank and because it is a government subsidiary, the government doesn’t have to pay these back. It also now purchases 70% of all new bonds. Most of the rest are bought by banks, insurance and trust firms, not because their directors are especially dim or patriotic, but because they are forced to by the government for their core reserves and key ratios. It’s a brilliant three-card trick, which to date has allowed “stagnant” Japan to enjoy an enviably high standard of living and for decades to keep interest rates ultra-low.

Other developed countries belatedly imitated Japan, witness the “independent” Bank of England, which owns around a third of all UK government bonds. But, like all three-card tricks, eventually the sucker punters realise the con. In the case of Japan, the yen has been tumbling because of low interest rates. In the UK and US, inflation, an end to quantitative easing and other factors are pushing interest rates higher.

However, there is one further trick that these countries have left, which will be the last throw before governments must either slash borrowing – leading to recession – or default. These central banks will simply write off the bonds they have bought from their governments. Purists will be appalled because their books will no longer “balance”, but does anyone really believe the books of central banks balance anyway? Meanwhile, bondholders will love it, since the risk of them not being repaid diminishes because debt-to-GDP ratios will have been slashed.

These options are available only to some of the G20 advanced countries. Most other nations are already being squeezed, despite the reality that interest rates remain far below long-term averages and massively negative in real terms, even after recent rises. Thus many economies are in for a battering.

Rising rates not only affect the price of credit, but also its availability. Suddenly, once-feted borrowers are finding their friends have disappeared. Meanwhile, the surges in commodity and food prices are shredding personal incomes. These are unlikely to revert to previous levels for many years, even if the invasion of Ukraine were to cease tomorrow, so there is no hope of relief to be had there. Since commodities and food account for a far higher proportion of personal expenditure in developing economies than in the wealthiest economies and domestic consumption is the key economic driver in most countries, this will weaken economic growth and thus tax revenue. A few commodity-producing countries will escape, but the economies of many commodity producers perceived as “safe” have become more diversified, so benefit less.

A holistic view of the risks

I mentioned that high debt-to-GDP ratios are only a rough guide to financial strength. There are several reasons why they should be treated with caution. First, many countries may have a low ratio at the government level, but corporate- and personal-level borrowing in foreign currencies has been growing. Such mismatches – borrowing in one currency to invest at home in another – are notoriously destabilising.

Next is capital flows. Smaller countries are usually very dependent on foreign investment. This is always fickle and can swing on election results, threats from neighbours, or a rise in, say, energy and food prices. Weak or despotic leaders also spook the horses. Historical data shows a clear pattern. Sovereign defaults always surge following a spike in interest rates and a slowdown or reversal in capital flows – the conditions that we are seeing today.

Finally, despite America’s domestic problems and impressively high debt-to-GDP ratio, investors will continue to flee to the dollar during periods of uncertainty. The dollar then strengthens, which always makes life difficult for smaller or developing economies.

Two major international bodies exist to ensure that in theory defaults neither happen nor spread. The less important is the Paris Club, founded in 1956. With 22 permanent members from wealthy countries, plus international observers, it meets frequently to resolve problems in indebted countries. Recently it has linked up with a G20 initiative called the Common Framework with similar aims. It is highly politicised: its members’ prime concerns seem to be either to protect their domestic banks from losing their shirts from foolish lending, or areas of specific self-interest. Thus France will fight hard to rescue Tunisia, but not, say, Kenya, while Britain will do the opposite.

The decline of the IMF

The better-known body is the International Monetary Fund (IMF). Every United Nations country has to pay into this, on a proportionate basis to the size of their economies and guarantee further funding (though many – such as the US – are in arrears). Its theoretical firepower after recent new commitments is immense at a trillion dollars. Still, my hunch is that neither the IMF nor the Paris Club will be able to cope in coming years, even if the IMF’s funders actually pay in.

The IMF was an idealistic and admirable creation (see below), but has become fossilised and disingenuous. I have watched its brazenness with admiration. Under its constitution it can never write off a loan. However, it has special powers to suspend payments, in some cases seemingly forever. It also claims to have suffered very few losses, which is mischievously dishonest.

For example, Pakistan has borrowed 22 times. It has never repaid a cent, except either through new loans from the IMF or from the Gulf states, who also appear never to have been repaid. The IMF’s largest borrower is Argentina, which has defaulted five times since 1980. Like Pakistan, it goes through the pretence of repaying some debt, but takes more IMF money to do so.

The result is that the IMF has created dependent vassal states to which it is in turn in thrall. These countries can never be weaned off aid, but the IMF cannot be seen to write off the bad debts. The IMF list of outstanding loans and repayments shows $107bn on loan. Looking through this list, only a compulsive gambler would bet more than a quarter will ever be repaid. On top of this glaring problem of unrepayable debts, there is the damage the IMF often causes with its “cures” – although rarely enforced – and its willingness to deal with any despot or dictator. It’s a sorry decline.

In total, 147 governments have defaulted on debts since 1960. Only eight countries have not defaulted or utterly debased their currencies since 1900. I know a major debt-default storm is coming because it has started. Defaults are already on the rise and are going up faster than the increasingly opaque data. Many defaults are bilateral – such as African and Asian countries failing to repay loans to China or Russia – and never reported. Most probably it spreads later this year and next among smaller or less developed countries. Yet so large is the debt bubble that there have to be some major casualties further out as interest rates rise.

For all the considerable academic work on signals of likely default, the best guide has been a country’s previous form. Proven serial defaulters – such as Argentina, Greece, Mexico, Portugal, Spain and Turkey – must be in the cross-hairs. So too may those with alarming debt-to-GDP ratios and little hope of growing out of the problem, such as Italy or South Africa. However, the EU countries on the list will probably be part of the endgame, as every ruse will be tried to avoid such an event. Despite being a historic serial defaulter, China is low on my list because it has very little foreign debt. However, it ranks highly for the likelihood of a banking collapse, because of its domestic debt splurge.

Should investors run for the hills? From government bonds, yes – if only because the 40-year bull market has ended. From cash too, given rising inflation. But they should also be strolling towards equities. Companies with the right characteristics can and do survive defaults and worse. Just as it was once thought impossible that bond yields could be negative, so it has been forgotten that on extreme occasions some companies have been seen as a better credit risk than their national governments. So don’t be fooled by those many hands out at sea waving at you to join them. They are not in a happy place.

I wish I knew what Bretton Woods was, but I’m too embarrassed to ask

The Bretton Woods agreement was born out of the need to have a more open and better regulated financial world after the end of World War II, avoiding the economic rivalries and protectionism that resulted from, and worsened, the Great Depression. In July 1944, 730 delegates from 44 countries gathered in Bretton Woods, New Hampshire, to discuss how best to go about achieving their aims.

The key outcomes of the conference included: establishing a system of fixed exchange rates, under which all currencies were pegged to the dollar and the dollar was convertible into gold; setting up the International Monetary Fund (IMF); and setting up the International Bank for Reconstruction and Development (IBRD), which later became the World Bank.

The IMF was intended to be a forum for international economic cooperation that would promote sound economic policies among its members – effectively the keeper of the rules. It would also provide financial support to members with balance of payments problems, so that regular international trade could function.

The IBRD originally provided funding to help countries that had been devastated by the war. Later, its aims shifted to supporting economic development – including funding infrastructure – and then it focused on attempting to reduce poverty in developing countries.

The IBRD became operational in June 1946 and the IMF in March 1947. The exchange-rate system became operational in 1958 when exchange controls were eliminated for current-account transactions and member currencies became convertible. While the IMF and World Bank still exist today, the exchange-rate agreement ended in the early 1970s when US president Richard Nixon ended the gold standard in America so that dollars could no longer be converted to gold. The system of fixed exchange rates fell apart and most major currencies began to float freely.

With energy prices going through the roof everywhere, it is no secret that consumers are feeling the pinch and having to pay higher prices to fill up their cars at petrol pumps.

Consumers in the UK have been hit particularly hard, and are now paying an average of £1.85 per litre to fill up their cars, says motoring organisation the RAC. The cost of filling an average family car with petrol is now more than £100.

As Arij Van Berkel of Lux Research points out, historically the spread between crude oil price and fuel price has been constant. But Brent crude oil is currently trading at $120 barrel, lower than it did in 2008, while petrol prices are much higher than then. So what is going on?

A lack of refining capacity

Several experts tell MoneyWeek that a lack of crude oil refining capacity is driving higher petrol prices.

Competition among refining companies for market shares tends to keep fuel prices low. But this time, says Van Berkel, “there is no or very little appetite to invest in refining capacity and hence there’s not much appetite to increase market share”.

“Companies appear to just enjoy the ride and get high margins on fuels for as long as it lasts without wanting to fight for extra sales. This keeps the prices high and higher than one would expect based on past behaviour,” he adds.

The International Energy Agency predicts that oil demand could hit its peak as soon as 2025 due to the growth of electric vehicle sales, a factor which is curbing investment.

Craig Erlam, senior market analyst at OANDA, agrees that the lack of refining capacity is reflected through higher refining margins: “Margins are currently high due to a lack of capacity which is contributing to much higher prices at the pump.”

Ideally, refinery capacity would be higher and margins lower. “But sanctions on Russia and underinvestment everywhere else mean this isn’t the case,” says Erlam.

The sterling effect

Michael Hewson, chief market analyst at CMC Markets, notes petrol prices have not really changed in dollar terms – the strong dollar and weak sterling is another factor in pushing UK petrol prices higher.

The pound to dollar exchange rate was around $1.85 in 2008 – the pound is currently trading at just over $1.20. With oil priced in dollars, a weaker sterling means oil and petrol are more expensive in sterling terms.

Why was the price of oil higher in 2008 than now?

Oil prices have risen in recent months due to higher demand following months of Covid lockdowns and Russia’s invasion of Ukraine. But the oil price has still failed to breach its all-time high of $147.50 in July 2008.

Why?

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says oil prices are lower now because of the point we were at in the global business cycle and because “global oil production was stagnating”. In addition, stronger demand from the “Brics” countries – Brazil, Russia, India, China and South Africa – played a part in 2008.

But according to Streeter, even though oil prices are lower now than they were in 2008 this is likely to change because of the removal of Russian oil from the market. Russia is the world’s third largest supplier of crude oil after Saudi Arabia and the US. The EU imports more than 40% of its gas and 29% of its oil from Russia, but is to impose a ban on most Russian oil imports by the end of the year. The US has taken a more stringent approach and has banned Russian oil completely.

So even if oil cartel Opec were to “open its taps, it wouldn’t make up for Russia’s supply in the market,” says Streeter.

SEE ALSO:

The cost of petrol in the UK compared with the rest of the world

What makes up the price of a litre of petrol?

How to cut your car’s fuel bill as the price of petrol hits a record high

Most of the West has already started to wean itself off Russian oil, and may soon be able to switch off the gas pipelines as well. But although we may be able to do without Russia’s energy, food is a different matter. It is becoming increasingly clear that Vladimir Putin is weaponising food supplies as part of his war on the West. Very soon there may be widespread shortages.

Both Russia and Ukraine were the world’s breadbaskets. Between them, the two countries supply 28% of globally traded wheat, 29% of barley, 15% of maize, and 75% of sunflower oil. Add it all up and it comes to 12% of all the calories traded around the world. That is now at real risk.

Ukraine’s agricultural industry is being systematically destroyed by Russian forces and the Black Sea ports that were used to ship its grains to the rest of the world are either now in Russian hands or effectively blockaded. Russia’s exports are under the control of its government. Putin can hold the world to ransom. Indeed, he is already doing so. The price of wheat is up by more than 60% this year, and India has already banned all exports on fears that it will run out of grain to feed its own people. Very soon countries dependent on imported food could well be facing critical shortages, while prices soar elsewhere – and Russia can exploit that to its own advantage.

Making up the shortfalls

The truth, however, is that we could easily be making up that shortfall in production. Agriculture is the most heavily regulated, state controlled and politically managed industry in the world. For the last 30 years we have been doing everything we can to limit production. It is hardly surprising we have ended up so completely dependent on Russia and Ukraine. There are plenty of ways we could start to change that.

First, we should liberalise the rules on gene editing and genetically modified crops. The technology has been around for a couple of decades, but public opinion has been too squeamish to embrace it. Genetically edited wheats and barleys could have dramatically improved crop yields, would require less cultivated land and use less fertiliser. How much extra could we produce? No one knows for sure because right now the technology is so restricted there has been little incentive for anyone to invest in it. But it could easily be 20% to 30% more per acre – and that would make a huge difference.

Next, we should ease up the restrictions on fertilisers. The EU has spent the last five years steadily banning some of the most effective fertilisers and weed killers on flimsy environmental grounds, even though they are the most effective way of getting more crops out of every field. If we relaxed some of those restrictions, as well as making it easier for agro-chemical companies to come up with new types of fertilisers, we could dramatically increase yields.

Change the incentives

Finally, and perhaps most importantly, we should create a free market in agriculture. Within Europe, the Common Agricultural Policy has burnt its way through huge amounts of money, but has been aimed at supporting farming communities and protecting the environment, rather than trying to get more food out of the ground. Indeed, a lot of the time it pays farmers to grow less food instead of more (which is going to look like a very odd policy if there are serious grain shortages around the world). The UK might have left the EU, but so far we have shown very little interest in reforming agricultural policy to produce more. Meanwhile, countries such as the US and Argentina, both capable of producing vast amounts of grain, protect the industry with tariffs, leaving it unable to compete in the global market as effectively as it could, and reducing incentives to export more.

It is crazy that the world is dependent on Russian grain. We need to end that as soon as possible. There is plenty of land in the world to grow enough crops to feed everyone. With the right technology, and with free markets in agriculture, we could achieve that in just a few years – but it is not going to happen unless we start now.

SEE ALSO:

What war in Ukraine means for agricultural commodities

Russia, Ukraine and the coming global food crisis

Will the sanctions aimed at Putin have any effect?

Russia used to boast that “it had never interrupted [natural gas] supplies to a European customer, even in the tensest moments of the cold war”, says the Financial Times. By suspending supplies to Poland and Bulgaria last week, Moscow has torched what remained of its reputation as a reliable energy supplier. “More countries may be cut off within weeks if they, too, reject Russia’s new demand to pay in roubles.”

European natural gas spiked 24% following the news, says Avi Salzman in Barron’s. But prices then came back down to only slightly higher than before the cut-off. Warmer weather and weaker demand from Asia – courtesy of China’s lockdowns – partly explains the subdued reaction. Poland is particularly well-prepared, having invested in storage. Other supplies are also becoming available: the US plans to ship 60% more liquefied natural gas (LNG) to Europe in 2022 than last year.

Sudden stop

Roughly 40% of Europe’s natural gas comes from Russia, says Michael Race on BBC News. The bloc is aiming to cut Russian gas imports by two-thirds this year. That will be difficult enough, but the rouble payments dispute raises the risk of a more sudden stop to supply.

Further cut-offs may come later this month, although which countries will be affected depends on the details of contracts that are not public, says The Economist. Moscow has offered a compromise that would see buyers open multi-currency accounts at Gazprombank in Switzerland, but it is unclear whether the plan is compliant with sanctions. Regardless, Moscow’s decision to “go all in” by cutting off supplies to member states shows that “the game of energy poker” being played by Europe and Russia “is getting scarier”.

Out of gas

European wholesale gas prices are now trading around €100 per megawatt-hour (MWh). That is more than four times higher than this time last year, but less than half of the peak they hit in the immediate aftermath of Russia’s invasion of Ukraine. A complete shut-off in Russian pipeline flows could see the price spike to an average of €300/MWh, a 200% increase from current levels, says Silvia Ardagna of Barclays. That could prompt energy rationing, forcing some firms to limit their hours of operation and inflicting more economic damage.

Germany would be among the hardest hit. The Bundesbank calculates that an energy embargo could cause GDP to fall by just under 2%, says Philip Oltermann in The Guardian. Advocates of an embargo point out that the Bundesbank’s projections suggest a smaller economic hit than the pandemic (which reduced GDP by 4.6% in 2020). But there is a “heated German debate over the economic price the country should be prepared to pay to help cut off financial support for Putin’s war”.

There have been plenty of headlines recently about suring energy bills and the looming energy crisis in Europe.

Certainly, this crisis is coming. After weeks of running at 20% the Nord Stream 1 pipeline that delivers Russian gas to Europe will soon be shut down, at least temporarily. Russia has offered to pump more gas through the new Nord Stream 2 pipeline, but European leaders view accepting these terms as a humiliation after they attempted to impose sanctions following the Russian invasion of Ukraine in February.

Unless something changes soon, Europe will not have enough gas this winter.

The growing threat of energy rationing

The threat of energy shortages in Europe is ominous. The Germans are already discussing rationing. If such rationing does take place expect production in Europe to slow and inflation to get further out of control.

Hopefully the Europeans can sort this out before it is too late. But if they cannot, it is worth thinking about how shortages and high energy costs will affect us in the United Kingdom and what we can do to protect ourselves against the coming crisis.

Back in June, British Gas owner Centrica signed a deal with the Norwegian company Equinor. And the United Kingdom has never really relied on Russian gas. Nevertheless, the situation in Europe has become so bad that Britain may experience gas shortages in the coming months.

And even if we do not suffer actual shortages, prices have spiralled out of control. Auxilione, an energy consultant, has published projections of the energy-price cap in the United Kingdom, and they make for bleak reading. Last winter the price cap was set just above £1,000.

Over the summer this rose to close to £2,000. However, many of us have yet to notice this on our energy bills because no one has had the heating on during this sweltering summer. Cornwall Insight is projecting that the price cap will rise to more than £3,500 this winter and will then eclipse £7,200 in 2023.

Will people take to the streets over high energy bills?

This means that the energy bill for the average household will rise from around £80 a month in 2021 to about £290 a month this winter and then to approximately £600 a month in 2023. That is a very scary prospect for many of us. The average British household cannot afford a tripling of their winter energy bill.

For this reason many analysts and politicians think that there may be political instability. The German foreign minister, Annalena Baerbock, even alluded to “popular uprisings” in Europe last month. Shocking stuff. So what can we do this winter to try to insulate ourselves from these price hikes? Well, first and foremost, actual insulation is not a bad idea.

For most of us, refitting our entire house in the coming weeks is not possible.

But it could make sense to buy heavier curtains and a few draught stoppers to put at the bottom of the doors inside your home. Moving large pieces of furniture away from radiators to stop them absorbing heat allows hot air to circulate more efficiently in the room potentially lowering energy bills.

Gas will be very expensive this summer, but that does not mean that other energy sources will be. If you have a fireplace or a stove, this could give you an edge. You can currently buy a pallet of smokeless coal for under £500, which should be enough to last the winter.

A pallet of fire log briquettes goes for £400. If you do not live in a smoke-controlled area, you could take the Irish option and buy a half-tonne of peat briquettes on eBay for just shy of £570. If you are going to light a fire, it is worth considering shutting off the rest of the house as the evening wears on and the temperature drops.

Make the room with the fireplace the centre of your home this winter if it is not already. It might even be a good opportunity to spend some time with the whole family – make the children put down their phones and play a board game together.

Infrared heaters are an alternative

For those who live in the cities or in apartments and do not have fireplaces, the situation is more difficult.

Increasing insulation and occupying a single room in the evening still makes sense, but it is difficult to access an alternative energy source. It may be worth buying a high-quality electric heater, provided the electricity it uses costs less than the central heating.

Infrared heaters, like the ones that are common in pub gardens, are highly energy-efficient, although they work by projecting heat in a single direction rather than heating up the whole room.

In a worst-case scenario, you could consider stocking up on large candles of the sort you see in churches. Lighting a few of these in a medium-sized room can generate a surprising amount of heat. Note too that if we do see shortages and outages, these candles could come in doubly handy.

All of this is pretty gloomy and many of us would prefer not to think about it. But unless something changes with the situation in Europe very soon, we will be facing extremely high energy prices this winter. It is better to face this situation realistically and plan in advance rather than being hit by energy bills you cannot afford.

Doing so will also put less pressure on the grid and ease the burden on those who, for whatever reason, must consume gas this winter no matter what the price.

Cyberattacks can strike almost any company. Books and crafts retailer The Works had to close some stores temporarily this week after hackers got into its systems.

In February, deliveries of crisps and nuts were disrupted when KP Snacks was hit by a ransomware attack. Smaller businesses certainly aren’t immune. The government’s latest annual Cyber Security Breaches Survey reports that 48% of small businesses have identified a cyberattack over the 12 months. Worse still, 31% say they are now being attacked at least once a week.

The impact of these attacks can be considerable. While many breaches are repelled, hackers only need to get lucky once. The government’s data suggests that one in five attacks have direct negative consequences, ranging from financial costs to a loss of data. The average bill for each such attack was £3,080 for small businesses.

The pressure is on for small businesses to invest in cybersecurity, not least due to fears that Russian hackers could increase attacks on Western organisations. Equally, the response needs to be proportionate. Small businesses are less likely to find themselves on the end of an attack from state actors, and their resources are more limited anyway. Few small businesses are in a position to appoint in-house cybersecurity professionals.

Taking care of business

Many small businesses are already making good use of third-party products and services that provide a decent level of protection. There is also growing awareness of the potential value of cyber insurance policies, which can provide practical support as well as covering financial losses. However, small businesses need to address these issues coherently. The government’s data suggests only 37% of small businesses have a formal cybersecurity strategy in place, which suggests too many firms haven’t thought about how to protect themselves. In any case, it would be a mistake to depend entirely on third-party support. Every business, irrespective of size, is capable of making its own improvements through a focus on basic precautions.

How to get started

The government-backed Cyber Essentials scheme is a good starting point. It aims to equip businesses with the tools to protect against common cyberattacks, such as phishing threats, and to reduce their vulnerabilities through solutions such as patching software.

Taking part can also drive commercial benefits. Businesses certified as having met the scheme’s requirements will have a more reassuring story to tell customers. Some potential clients may even make certification a requirement for their suppliers: the government already insists on this for certain public sector contracts. Getting certified carries a cost of up to £500, depending on the size of your business. But there is lots of free help to get you through the process and improve your security. The government’s National Cyber Security Centre publishes a Cyber Essentials Readiness Tool to help you get started. A questionnaire will help you determine your current level of cybersecurity and provide you with information, as well as a custom plan for you to follow based on your answers.

The West’s decision to sanction Russia’s central bank raises deep questions about the future of the global monetary system, says Jon Sindreu in The Wall Street Journal.

The US and its allies have frozen Moscow’s access to more than half of its $630bn in foreign reserves in response to its invasion of Ukraine.

The implication – that reserves held by unfriendly governments can be turned into “worthless computer entries” – is likely to drive a shift out of dollar assets and into alternatives such as “gold and Chinese assets”. That could undermine the dollar’s role as the world’s leading currency.

Challenging the dollar’s hegemony

Dollar dominance rests on two pillars. First, it accounts for about 59% of the foreign exchange reserves held by the world’s central banks, far above the second-placed euro, on 20%. China’s renminbi accounts for less than 3%, a lower share than the British pound. Second, the dollar is the default currency used in international transactions. Oil, for example, is almost always priced in greenbacks. “In February only one transaction in every five registered by the Swift messaging system did not have a dollar leg,” says The Economist.

Yet the more the US “weaponises the dollar” against the likes of Russia and Iran, the more it “undercuts the attraction of the dollar as a reserve currency”, says Andrew Stuttaford in National Review. Saudi Arabia has moved to start pricing “some of its oil sales to China in yuan”. That’s “a noteworthy step as the Saudis have been selling oil exclusively in dollars since 1974”. India and China are setting up alternative payment systems to buy Russian energy.

The greenback’s hidden strengths

Still, the dollar’s rivals face steep hurdles. The renminbi is not fully convertible, meaning there are limits on how much it can be traded on foreign exchange markets. In a future crisis, “the Chinese government might not appreciate Russia dumping renminbi… to prop up the rouble”, says Eswar Prasad in Barron’s. Investors also expect a reserve currency to be backed by institutions such as “independent central banks… and the rule of law” that are much better established in the West.

That may help explain why, even as the dollar’s share of global reserves has slipped over the last two decades, the “chief beneficiaries” have been not China, but the small, open economies of “Canada, Australia, Sweden, South Korea and

These currencies are not so much rivals as “extended buttresses… providing options for diversification while continuing to benefit from the liquidity and sophistication provided by America’s financial markets”.

China and its allies may start to trade more in renminbi, but this is unlikely to account for a big slice of global trade, says Neil Shearing of Capital Economics. Few currencies can compete with the “deep and liquid” markets for dollar assets. Tellingly, “as China and Russia have tried to reduce their use of the dollar in bilateral trade”, they have turned to “the euro, rather than the rouble or renminbi”. A decade from now, “the most likely outcome is a more fragmented global financial system – but one that still has the US dollar at its core”

There's been a lot of excitement (if that's the right word) over the idea that Russia is no longer accepting dollars as payment for its energy.

Overall, it would prefer gold ("hard currency") or roubles, but it'll take most other national currencies as long as they're not greenbacks.

Is this the beginning of the end for US dollar hegemony?

The answer is "no".

Here's why...

The US dollar is not perfect...

Before we get into this I want to make one thing clear. I've written about the decline of the US dollar on several occasions in the past. I'm not a US dollar "maximalist" by any means.

It's clear that the US decided that the role of "World Police" was a burden and responsibility it could no longer be bothered to shoulder. The US dollar was also "weaponised" a long time ago. This weaponisation became overt as long ago as 2012, when Iran was sanctioned over its nuclear activities.

So anyone who feared that the US dollar might not be a financial operating system that was compatible with their own nation's values or ambitions had been given every reason to find alternatives well before the most recent sanctions were imposed on Russia.

Moreover, the US dollar has been declining as a share of central bank reserves for a long time. As economic professor and general currency commentator Barry Eichengreen pointed out in the FT the other day, the US dollar accounted for around 70% of foreign exchange reserves in 2001. Now it accounts for just 59%.

So dollar dominance as such, has been on the decline for some time. (Although "decline" in this case is probably the wrong word, because in fact what's happened is that most of this move out of the US dollar has been into smaller currencies – such as the Australian dollar, South Korean won, and Swedish krona – which have become increasingly viable as their markets have deepened, ie become more like American markets).

Anyway, all of this is to say that we are in complicated times, and that – as Eichengreen puts it – we are "already seeing movement towards a more multipolar international monetary system". I think it's also fair to say that the world has also been quietly hunting for an alternative to the post-1970s monetary order ever since the 2008 financial crisis.

But I don't feel that Russia's desire to trade energy in anything other than US dollars is particularly significant in terms of this hunt for a new monetary order.

... but what's the alternative?

Why not? You can argue that the US dollar is being debased by money printing. You can argue that the US is increasingly less reliable as a partner, given its willingness to cross the Rubicon when it comes to cutting countries off from the global reserve currency.

But you have to have an alternative. History shows that reserve currencies give way to one another when another comes along that is more attractive.

That's usually because the dominant power is on the way down, while the up and coming power is up and coming. That's how the pound gave way to the US dollar. But this is a simple symptom of the fact that capital flows to where it is treated best and where it finds the most opportunities.

The war has resulted in Russia losing capital of all kinds – financial, human, social. The country has had to impose capital controls in order to prevent capital from fleeing its borders. This is not the recipe for supplanting the global financial hegemon.

Think of it this way. Does Russia's demand to swap Russian energy for anything but US dollars make the world keen to find an alternative to US dollars? Or does it instead make most countries keener to find an alternative to Russian energy?

Neither Russia, nor China – the rising power today – have demonstrated any reason to trust them with your hard-earned capital. Russian property rights have always been built on a "gangster rules", "might is right" basis.

China loves foreign capital when it's made up of greedy overseas investors blindly recapitalising its banking system or foolish manufacturers handing over their intellectual property in hope of accessing a billion-odd Chinese consumers.

But when business people or shareholder capitalism start to kick off and threaten the grip of the Communist party or the social order, you see what happens. Mouthy entrepreneurs and A-listers vanish then come back three months later, much chagrined.

It's clear that China recognises that its recent approach has been toxic to foreign investment, and it is trying to wind that back. Hence the recent surge in Chinese tech stocks. This also explains its somewhat half-hearted support of Russia.

But I'd still be very wary of putting your money to work there.

The real threat to the US dollar is from the US abandoning its values

None of this is to say that the US dollar will be the global reserve currency forever. That’s just not how these things happen.

But the real risk to US dollar hegemony is internal. The real risk is that the US retreats from the things that make the dollar valuable as a reserve currency – rule of law; enforceable, well-respected property rights; and the protection of those rights for all, regardless of political perspective or socio-economic position.

That's why all this "culture war" stuff actually does matter. Creeping authoritarianism from within is a much greater threat to US dollar hegemony than the overt authoritarianism from hostile nations.

In short, the real risk stemming from weaponisation comes if and when a currency is weaponised against its own people.

Otherwise, the US only needs to worry if and when China decides to open up and embrace democracy and entirely free markets. Capital would flood in. But I suspect most of us would be rather happy about that because that's a pretty benign regime shift.

After all, for all the masochistic joy that some British people get in revelling in tales of decline, it's not as though Britain disappeared after the pound was no longer the world's reserve currency. Sterling remains significant and London is still by far and away one of the world's most important financial centres, underpinned largely by clear respect for property rights. Values matter.

So what could replace the US dollar?

So what about that long run? Well, if you agree with my basic thesis – that this is built on values and property rights – then I suspect that the biggest threat to US dollar hegemony is more likely to be bitcoin, or something like it.

There's a lot of utopian blather around cryptocurrencies, but the fundamental promise is an attractive one. Indeed, it's a currency rooted in precisely the values that underpin the US dollar and US democracy: secure property rights, freedom of individual action, and transparency without sacrificing privacy, to name but a few.

(Indeed, the ideal of bitcoin is so appealing that I've always thought that if you were a bad actor, and you wanted to find a way to undermine the status of the US dollar, you'd be hard pushed to find a better way to do it than to create something like bitcoin and then launch it during a world-shaking global financial crisis. But that's a conspiracy theory for another day.)

Anyway. Debasement – whether that be of the actual value of the currency or the philosophical values that underpin the currency – is a genuine threat to the reserve currency at all times. There's plenty of risk of that.

And you should certainly own some gold. It's a solid disaster hedge, it tends to do well when inflation surprises on the upside, and it will certainly stay in demand if authoritarian nations' central banks are looking for ways to diversify.

But Russia demanding payment for its oil in something other than US dollars? I just don't think that in and of itself, it's a big deal.

Feel free to disagree or point out where my reasoning has gone awry at editor@moneyweek.com.

Investing in any bank’s shares may seem a contrarian proposition at the moment. Investing in a bank in a country that has been invaded by Russia might then seem on the hazardous side of contrarian.

Yet the Russian invasion of Georgia happened in 2008 and that means further military conflict is unlikely. Therein lies the opportunity.

Vladimir Putin’s invasion in 2008 in support of South Ossetia (a Russia-friendly breakaway province) was a brief and one-sided escapade. Sadly it may even have encouraged the Russian tyrant to think that an invasion of Ukraine would be similar.

A solid economy

Following the invasion, Georgia is now less reliant on Russia both as an export market (14% of exports) and as a source of remittance flows from Georgians working abroad who send money back home (now 12%, down from half ten years ago). The rich volcanic Georgian soil means that the country is less exposed to rising wheat prices or a shortage in fertiliser than many. Georgia is also less vulnerable to higher energy costs than in the past, after a decade of investment in hydro power dams.

These made up 70% of energy production last year. In short, the difficult recent history since the fall of the Soviet Union has been a catalyst for the country to become more resilient.

The economy has been strong, with real GDP growth of 5% per year for the three years preceding the pandemic. Growth is forecast to be 3% in 2022, assuming the conflict in Ukraine is resolved in a few months’ time, according to Galt & Taggart (G&T), Bank of Georgia’s brokerage business (named after the characters in Ayn Rand’s Atlas Shrugged).

Even in the worst-case scenario of a prolonged conflict in Ukraine and sanctions applied to Russia’s oil and gas exports, G&T predict a 1% contraction in the economy.

This may be too pessimistic, since Georgia is a relatively stable destination in the region. I’ve heard stories of flights to Tbilisi from Moscow and St. Petersburg being booked out as skilled Russians flee Putin’s regime.

Managing the risks well

London-listed Bank of Georgia (LSE: BGEO) is one of two leading local banks. It’s cheap and in fine shape (see below), although obviously not risk-free. Around 60% of the bank’s balance sheet (both loans and deposits) is in US dollars or other foreign currencies. This would be an issue if the currency devalues steeply: borrowers who earn in local currency could struggle to service their dollar debts.

Some of this risk is reduced by the 1.3 million Georgians who earn overseas in foreign currencies and send money home. In 2021, remittances were up by 25% year-on-year, and by 36%from 2019.

The central bank, which has been increasing its $4bn in foreign-currency reserves, is aware of the devaluation risk and requires banks to have higher capital weightings for foreign-currency loans. It has also set the maximum term of a foreign-currency mortgage to ten years, as a further incentive to encourage borrowing in lari, the local currency. Thus lower interest costs on foreign-currency mortgages are offset by higher principal repayments.

Sulkhan Gvalia, finance director of the Bank of Georgia, who used to be head of risk management, has just bought £200,000-worth of shares at around £12. I met him when I listed the bank on the London Stock Exchange a decade ago, and he struck me as a shrewd character with a common-sense approach to risk management that larger, supposedly more sophisticated, banks in the US and Europe could have benefited from.

While the share price fell steeply during the financial crisis and Russian invasion, the bank didn’t need a large rescue rights issue or rely on a government bailout. I own the shares and think that there is plenty of upside to compensate for the perceived risks.

The sanctioning of Roman Abramovich, the Russian oligarch who has controlled Chelsea football club for nearly 20 years, and who started the flood of foreign money into the game, resulted in the club going up for sale. By the time you read this we might know who has bought it.

Potential bidders for an asset that was expected to command well over £3bn included a consortium led by the owners of the LA Dodgers; another led by the Ricketts family who own the Chicago Cubs; a team led by the property developer Nick Candy; and one or perhaps two others who may yet make the final round. An offer from Amazon, Netflix, Disney, or Sky’s owner, Comcast, would really shake things up – there could well be a surprise before the deal is finalised.

But whoever ends up buying it, there was a missed opportunity here – this could have been the moment to reinvent the way one of the UK’s most successful industries is run.

Britain’s Hollywood

The UK government is, quite rightly, vetting all the bids. It has said that all the money from the sale will go to charity, with much of it ultimately dedicated to helping the refugees flooding out of Ukraine.

But why are we selling it to another foreign multinational sports franchise? The Premier League is a great UK commercial success. It is the most popular sporting contest in the world; in many ways it is an asset as valuable to the UK as Hollywood is to the US.

But its ownership is a mess, dominated by an odd mixture of Gulf States, absentee American sports conglomerates, or Asian or Russian billionaires. Only a handful of clubs still have British owners.

None of them have any links to the towns where the teams are based and many owners are using the clubs simply to improve their reputations.

They have no interest in the towns where they are located, or even the long-term success of the sport. The sale of Chelsea in such strange circumstances is a chance to try something new. Here are four options we should be thinking about.

First, give it away. The club could simply be placed in the hands of a supporters’ trust, with anyone who had held a season ticket for five consecutive years given a share. After that, it would be up to the fans to decide what to do with it. They could run it as effectively as they pleased. They could list it on the stockmarket, or if they really wanted to they could sell it to someone else. Sure, it would not have as much cash to spend on transfers as it might with another mega-rich owner. But there is plenty of money in football these days. Free of debt, there is no reason why Chelsea should not be self-sufficient financially and still do well.

Second, donate it to Chelsea. One share could be given to every resident in the Royal Borough of Kensington and Chelsea. With 156,000 of them, and a £3bn price tag for the club, that would come to almost £20,000 per person. Alternatively, why not give a share to everyone in London? Either way, the club would be owned by its local community.

Experimenting with ownership

Third, turn it into a national asset. The club could be put into a new company owned by the government and then floated. The money raised would be enough for at least a small temporary tax cut, which might help with the cost of living crisis. Finally, it could be placed in the hands of a broadcaster. Folded into the BBC, ITV or Channel 4, it could be the basis for a new sports streaming service, and at virtually zero cost. If streaming is the future, as many experts believe, that could create a powerful new UK company.

There may be other options, but the point is this: there is nothing necessarily wrong with foreign owners and global sports franchises. Over the last two decades they have brought a lot of money into the game and turned it from a domestic into a global contest. But the Premier League could use some different forms of ownership. The sale is a chance to try something new, creating models that might work better. We should take some time to debate that – not just flog it off as fast as possible.

What’s happened?

A growing number of big investors, including bosses at BlackRock, Oaktree Capital Management and Allianz Global Investors, have gone public with predictions that the war in Ukraine will prove an inflection point in the global economy. “The Russian invasion of Ukraine has put an end to the globalisation we have experienced over the last three decades,” wrote Larry Fink, chief executive of the world’s largest asset manager, BlackRock, in his annual letter to shareholders last week. The isolation of Russia from capital markets will promote a trend everywhere towards national independence and hasten the development of rival economic blocs led by the US and China. A world in which cheap offshore manufacturing and smooth global supply chains hold costs down will be replaced by “a large-scale reorientation of supply chains”, and that will be inflationary, says Fink. That implies lower growth and lower returns for investors.

Is Larry Fink right?

One metric that offers a reasonable proxy for “globalisation” is international trade as a share of global GDP. That share surged from 25% in 1970 (World Bank figures) to 50.7% in 2000 and peaked at 61% in 2008. This was an era when Western policymakers believed that trade and investment would bring the world closer together politically. From 1992 to 2008, Russian gas exports grew tenfold. Between 1985 and 2015 Chinese goods exports to the US rose by a factor of 125. And in the 1990s annual global flows of foreign direct investment rose by a factor of six.

So what went wrong?

In the wake of the financial crisis, global trade fell sharply before bouncing back a bit. But it has never again hit that 61% – instead trending lower and falling to 51.6% by 2020. Meanwhile, global flows of long-term investment fell by half between 2016 and 2019. The Ukraine war follows hard on the supply-chain shocks of the US-China trade war, the Covid-19 pandemic, and the semiconductor shortages – all of which have focused attention on supply-chain sovereignty and domestic production. In other words, globalisation has been in retreat for some time, as John Micklethwait and Adrian Wooldridge point out on Bloomberg “But Russia’s invasion of Ukraine marks a bigger and more definitive assault than the previous ones.”

Why is this retreat happening?

Two main reasons, say Micklethwait and Wooldridge. First, because “geopolitics is definitively moving against globalisation” and towards a world dominated by two or three great trading blocs (an Asian one led by China, perhaps with Russia as its energy supplier; a US-led bloc; and perhaps a third centred on the EU). But just as important is a change in mindset. CEOs now understand they are in a world where political matters trump economic logic. They are recalculating accordingly, shifting from a “just-in-time” mentality to “just-in-case” – by preparing to bring production closer to home in case their foreign plants are cut off, for example. Historians may well decide that “the definitive moment globalisation died was when China, India and South Africa all abstained on the United Nations vote condemning Putin’s invasion”, says Robert Peston in The Spectator.

What will that look like in practice?

Already, French president Emmanuel Macron has committed his country to self-sufficiency in pharmaceuticals. The EU has vowed to wean itself of Russian gas, oil and coal by 2027. Joe Biden has promised to “make sure everything from the deck of an aircraft carrier to the steel on highway guardrails is made in America from beginning to end”. But this “fetishising of domestic manufacturing over advancing crossborder trade in services and networks” is ironic, argues Adam Posen in Foreign Affairs. In fact, it is the latter sectors that have truly advantaged the West over Russia in implementing effective sanctions, and that have deterred Chinese businesses from bailing Russia out. Sadly, the retreat from globalisation will diminish both innovation and the return on capital in the world economy, and “it will do so on every side of the economic divide”, says Posen.

Growth will suffer then?

Yes. It will lead to higher prices for inputs, already seen most dramatically in the oil and gas price surges, but also in soft commodities and metals, as Emma Duncan points out in The Times. Higher input prices push up consumer prices and reduce output, thus hitting employment and wages. The other “source of economic pain will be lower demand, as markets are closed off to each other”. World trade will fall – hurting the global economy, and Britain (an open, trading, service-based economy) more than most. “About 63% of our GDP is traded, compared with 26%, 36% and 49% of America’s, China’s and Russia’s respectively.” Globalisation is in retreat, and we are “going to miss it when it’s gone”.

What can be done?

For policymakers, deglobalisation adds to the fiscal pressure of a low-growth world. Rishi Sunak’s spring statement fiddled with tax rates. But arguably far more important, says James Heywood on CapX, was his promise of a major review of how the tax system creates incentives for investment. That could prove crucial to reinvigorating growth and productivity. Meanwhile, we’ll have to learn to invest in an inflationary environment that compresses multiples and shrinks profits, says asset manager Thomas Friedberger. Investors will have to position themselves to “take advantage of these mega trends: energy transition, cyber security and digitalisation”, he told the FT. Monica Defend, head of the Amundi Institute, suggests a focus on sectors such as energy and defence that will benefit from “strategic autonomy”. Virginie Maisonneuve, of AllianzGI, believes the shift could “drive innovation” by linking renewable energy with artificial intelligence to enhance efficiency, for example.

SEE ALSO:

The end of the era of optimisation

The price of oil “whipsawed from a peak of $128 to as low as $98” in a fortnight as the market gyrated between Western sanctions on Russia, China’s Covid-19 surge and uncertainty about new supply from US shale drillers and Opec, says The Economist. Brent crude traded at around $119 a barrel on Wednesday, up by more than 50% this year.

The pullback from recent highs suggests some “speculative froth has blown off” the market, says Liam Halligan in The Daily Telegraph. But note also that “Western energy sanctions, while extremely serious, are not quite as tight as suggested by the belligerent political rhetoric”. It may be “the end of the year at the earliest” before Russian crude stops flowing to the UK and the EU.

Sanctions have caused shipping delays and disruption to global oil markets, says BCA Research. But by May ships will have been rerouted and China and India, keen to snap up Russian energy at a discount, will have put sanctions work-arounds in place. Western policymakers are putting pressure on Saudi Arabia and the United Arab Emirates to boost supply, but this is complicated by the fact that Saudi Arabia and Russia are “strategic partners”, says Daniel Yergin of IHS Markit. “Ever since the price collapse of 2014” Riyadh’s “goal had always been to bring Russia into a [supply] agreement” rather than have it “stand outside as a competitor”.

US shale producers may raise output, but Western oil producers are reluctant to invest. “The US has been looking for other sources of supply, including possible barrels from Venezuela, which has been under sanctions,” says Patti Domm for CNBC. A nuclear deal with Iran could bring one million barrels per day back onto markets, “but those talks have bogged down in recent weeks”.

Wheat and other grain prices have surged since the Russian invasion of Ukraine due to fears of a supply crunch that threatens to send global food prices soaring and fuel food insecurity around the world. The issue is that Russia and Ukraine are both major producers and exporters of wheat (and other cereals), and still have crops from last year to ship. That’s currently impossible due to Ukraine’s wartime ban on grain exports and the closure of Ukraine’s Black Sea ports.

Meanwhile, paying for Russian exports that do make it out via other routes has been complicated by Western sanctions. While Ukraine is “unreachable”, Russia is “untouchable”, says Michael Magdovitz of Rabobank. And a prolonged war would mean lasting disruption to this year’s crops too.

As a result of all this, countries including Hungary, Turkey, Algeria, Argentina and Indonesia have already slapped total or partial bans on grain or other food exports – the first signs, analysts predict, of a turn towards greater food nationalism. Some think the wheat supply shock is set to fuel price spikes, shortages and even social unrest in countries that depend heavily on imports from Ukraine and Russia – especially in the Middle East and north Africa.

How important are the two countries?

Russia and Ukraine are two of the most important producers and exporters of agricultural commodities in the world – especially of cereal crops, including barley, wheat and maize. Overall, the two countries export 12% of the food calories traded worldwide. In the five years to 2020-2021, the two countries accounted for 19% of global production of barley, with Ukraine and Russia being the world’s number two and three exporters respectively. When it comes to wheat (and meslin), their importance is even greater (meslin is a mixture of wheat and rye sown and harvested together; for the purposes of trade statistics it is usually classified with wheat.)

In a market where the top seven exporters combined accounted for 79% of international trade in 2021, Russia was the biggest of all, accounting for 18% of global wheat shipments (32.9 million tonnes). Ukraine was the fifth biggest exporter, with a 10% global market share (20 million tonnes). Ukraine is also the world’s biggest exporter of sunflower oil, followed by Russia, with the two accounting for a combined dominant share of 64%.

So prices will rise?

Yes, and from an already high point in the cycle with prices soaring for both grains and vegetable oils. Having fallen over the first half of the 2010s, they’ve been rising steadily since about 2016 – but since 2020 they have spiked due to all the familiar supply problems associated with the pandemic.

To compound the fresh supply shock of the Ukraine war, both Russia and Ukraine are key suppliers to many countries that are highly dependent on imported foodstuffs and also fertilisers. For example, Eritrea – a country already wracked by political chaos and hunger – gets virtually 100% of its wheat from Russia and Ukraine, as do many central Asian countries. Somalia gets more than 90%, and the DR Congo get more than 80%. So too does Turkey. Countries getting more than 60% of wheat from Russia and Ukraine – still highly vulnerable to the supply shock – include Pakistan, Libya, Egypt and Lebanon.

In a report published last Friday, the UN’s Food and Agriculture Organisation (FAO) warned that, in the event of a prolonged war and accompanying reduction in food exports by Ukraine and Russia, the upward pressure on food commodity prices would lead to an extra eight to 13 million people going short of food. The regions worst affected, the FAO predicts, will be Asia-Pacific, sub-Saharan Africa, the Middle East and north Africa

Why does fertiliser matter?

Because along with fuel it is one of the largest single variable costs involved in producing any food crop – whether for human consumption, or for use as animal feed – and because Russia and its close ally Belarus are both major producers of fertilisers, and big suppliers of critical fertiliser components, including natural gas and potash.

The price of fertiliser has already more than doubled over the past year, due to both surging fuel costs (making fertiliser is highly energy intensive) and to the 2021 sanctions imposed on Belarus, which produces 18% of the world’s potash (compared with 20% for Russia).

Some analysts think the disruption to fertiliser production and supply – and the disruption to the international trade in potash – has the potential to prove an even more significant shock to global agriculture than the wheat shortage. In other words, the Ukraine war won’t just push up the price of bread in the Middle East and north Africa, it will also push up food prices globally.

What can be done?

“This crisis is beyond the normal ability to shuffle supplies around,” says agricultural economist Scott Irwin of the University of Illinois. “We’ve exploded that system, and the cost is going to be extreme pain.” The truth is “there is no easy fix”, says The Economist. Some of the 160 million tonnes of wheat fed to animals each year could be diverted for human consumption, but “substitution may export inflation to other staples”.

Ramping up wheat production in the US and Europe, and drawing on India’s vast stockpile, could yield ten to 15 million tonnes – a “substantial quantity, but less than a third of Ukraine and Russia’s combined exports”. When it comes to maize, governments could divert some of the 148 million tonnes used as bioethanol feed to help plug the likely shortfall this year of 35 million tonnes.

But fertiliser shortages are “even harder to cover”, with new potash mines taking five to ten years to build. “The war in Ukraine is already a tragedy.” As it “ravages the world’s breadbasket”, an even greater calamity looms.

Russia appears to have escaped what could have been its first default on foreign currency since 1918.

It ordered payment of $117m in interest payments on two dollar denominated bonds on Wednesday, despite widespread speculation that it wouldn’t be able to do so. Earlier this week, Russia maintained that it would pay back debts in roubles, rather than dollars – something that would have almost certainly been classified as a default.

Russia has come under a barrage of sanctions in recent weeks, cutting it off from roughly $640bn of foreign reserves, which would make it much harder for it to repay its debt.

So is Russia out of the woods?

Russia’s finance ministry said it made the payments to Citigroup in London, but it remains uncertain whether investors will receive the money, says the Financial Times. Under US sanctions, investors can still receive interest payments from Russia until 25 May.

The ministry said it was waiting to find out whether the payment had been accepted by Citi or not. If Wednesday’s payment is not accepted, then Russia has a 30-day grace period before it officially defaults on its foreign currency debt.

And the Wall Street Journal points out that Russia still has another $615m in payments to make by the end of March, and a further $2.1bn is due in April, so Russia is still not out of the woods.

And Fitch said earlier this week that failure by Russia to pay debt on OFZ bonds, due on 2 March would result in default if it was not “cured” within 30 days.

OFZ bonds, which are local currency bonds, are federal loan bonds issued by Russia’s government. The country’s Ministry of Finance auctions them to fund the federal budget or to bail out troubled banks. So, OFZ plays a crucial role in Russia’s financial system.

How much foreign debt does Russia have?

At just under $60bn, Russia’s foreign currency debts are considered minuscule compared to some other countries. This is partly because Russia has been under some form of sanctions since it invaded Crimea back in 2014.

As the Wall Street Journal puts it, “Russia has been fairly restrained in raising money in recent years, partly out of prudence and partly because of previous rounds of sanctions.”

Because of this, the last time Russia issued dollar-denominated bonds was back in 2019.

Last week, credit ratings agency Fitch downgraded Russia’s once investment grade credit rating to junk. Russian bonds are trading at around 20% of their face value.

What would it mean for the economy?

Russia’s payment on Wednesday means the likelihood of a default has fallen. But, if it does still happen, while certainly an unpleasant market event, it is unlikely to reverberate too harshly across the world.

Many foreign investors had already trimmed their exposure to Russia.

Before the invasion, Russian sovereign debt represented around 6% of JPMorgan’s emerging market bond index. But on 7 March, JPMorgan said it would remove Russian sovereign and corporate debt from its indices.

Blackrock – the world’s biggest asset manager – is estimated to have had the most exposure to Russian dollar debt, with approximately worth $1.5bn of holdings.

A default makes restructuring agreements between debtors and creditors extremely difficult given the sanctions that are currently in place.

So a Russian default risks investors having to weather the losses until a deal can be brokered with the Kremlin. But that is a while away.

Another point of reassurance according to the Wall Street Journal is that not all Russian companies are struggling with payments. “Despite the rhetoric, some Russian companies, such as Gazprom, have made on-time payments on their foreign debt in US dollars, so it’s not clear what the Russian government will decide to do.”

Has Russia defaulted before?

Russia’s last debt crisis of 1998, when it defaulted on local currency bonds, shook Wall Street.

Long Term Capital Management (LTCM), a hedge fund, held a significant position in Russian government bonds and had to be bailed out to the tune of $3.6bn by a number of Wall Street banks organised by the Fed. LTCM entered into liquidation two years later.

Western nations are scrambling to cut exposure to Russian energy, and a rapid shift to green energy is looking ever more like a national security issue.

Russia’s war on Ukraine “should motivate us to accelerate our transition to a clean energy future”, tweeted US president Joe Biden on Wednesday. “To protect our economy over the long term, we need to become energy independent” – and clean energy “means tyrants like Putin won’t be able to use fossil fuels as a weapon”. Optimistic climate campaigners foresee a win-win: what could be better than starving the Putin war machine of funds while also saving the planet?

In future, clean energy will be seen as the “energy of freedom”, reckons Christian Lindner, Germany’s new finance minister. But others are sceptical. Renewables’ capacity will be slow to ramp up, and weaning Europe off Russian gas will be a slow process. Meanwhile, energy prices are spiralling, emissions are rising, and some analysts expect fossil fuels to remain vital in the short-term as a bridge to net zero.

What will the effect of sanctions be?

As part of the wide-ranging sanctions on Russia, Biden signed an executive order blocking US imports of Russian coal and gas, with the aim of sending a “powerful blow to Putin’s war machine”. The US can afford to act swiftly; it gets only 7% of its imported oil from Russia.

By contrast, the EU gets 40% of its gas and just over 25% of its oil from Russia. It announced cuts to imports of Russian gas by two-thirds within a year – though this target would obviously become moot if Putin follows through on threats to cut off the gas in response to Western sanctions.

In the UK, the Boris Johnson government is briefing media that it is looking at “alternative sources of energy that are cheaper and more reliable and less vulnerable to the whims of a dictator”. Kwasi Kwarteng, the business and energy secretary, said Britain would “phase out” imports of Russian oil by the end of 2022 and was “exploring options” to end Russian gas imports.

What is Johnson’s plan?

The government’s new “energy supply strategy”, which it has signalled it will unveil within days or weeks, is likely to include an increase in North Sea oil and gas production, and more investment in nuclear and renewables, including offshore wind. It could also include looking again at fracking for shale gas, which has been under a moratorium for the past two years, although Kwarteng is reportedly not a fan. A policy paper is due within the next couple of weeks.

The UK’s approach broadly reflects the fact that, in the short term, the Ukraine war means that Europe may be burning more coal, but in the long term it could drive a speeded-up green transition. Meanwhile, the whole question of the UK’s net-zero ambitions is becoming more central to politics. Pressure is growing on the right of the Conservative party for a watering down of net-zero targets.

What about consumers?

Unlike many countries in mainland Europe, the UK gets very little gas from Russia: the proportion varies between 2% and 4% . However, gas is a global market, and constrained Russian supply dramatically affects the price we pay. On Monday, UK wholesale gas prices spiked wildly to a fresh record of 800p per therm, before falling back to 501p – up 8% on the day and more than 12 times the level of a year ago, when prices were around 40p per therm.

Brent crude oil soared to $139 a barrel, and fuel prices have surged over the past fortnight. When it costs £100 to fill up a car, the benefits of going electric might start to outweigh the doubts. Alternatively, high fuel prices could help motivate a backlash against net zero. It seems increasingly clear that this tension will be at the centre of UK politics for the next decade or more.

What about China?

China has been sending mixed messages on Ukraine. While it may be in Beijing’s interests for a weakened Russia to be drawn further into its orbit, it is not in China’s interests for the international system to collapse, fuelling a global recession and regional conflicts.

Like the UK, China directly gets relatively little gas from Russia (5% of gas imports, 10% of oil). But overall it is a net importer of energy, and a big emitter of carbon, and will be heavily affected by the rocketing prices for oil and gas.

“Typically, when China experiences energy shock, its response is to burn more coal,” says Leslie Hook in the Financial Times. “So as oil and gas prices rise, we are likely to see China turn back to coal, which it can produce domestically, to keep power stations going.” China is still building new coal plants, and emissions there rose 4% last year, accounting for a quarter of the global rise in emissions.

So the war could derail progress?

The transition was already in trouble before the Ukraine crisis. Last year the surging post-pandemic recovery boosted global demand for power, and coal power output in Europe rose 18%, its first jump in nearly a decade. Coal use globally surged to record levels over the northern hemisphere winter, and 80% of the world’s energy is still from fossil fuels.

Most analysts, including within the industry, think the jump in coal will be short-lived. Yet there’s a risk that the economic instability created by Russia’s war of aggression will prove a long-term setback for the green transition, rather than an incentive, says energy economist Dieter Helm. What has happened this year is the first “net-zero price crisis”, he says. It is a bitter reminder of just how costly the green transition will be – and also how necessary.

Russia’s invasion of Ukraine has sent the price of many commodities, including energy and metals, soaring.

But we also risk seeing severe disruption to the global food supply if the war continues.

Ukraine’s soil, known as Chernozem, is incredibly fertile, so much so that the country is often described as the “breadbasket of Europe”. “It has the ability to provide food for half a billion people. Around 32 million hectares of land is cultivated every year and crops form the bulk of Ukraine’s national exports” as Spanish online newspaper AS reports.

So what does the invasion mean for food production?

What agricultural commodities are Russia and Ukraine known for?

When Russia invaded Ukraine on February 24th, the price of wheat rose to its highest level since the start of the year, and since then it’s continued to rise.

Ukraine and Russia are, respectively, the third and eighth-largest wheat producers in the world, says the United Nations Food and Agriculture Organisation. Together, they account for almost a third of the world’s wheat and barley exports.

Russia and Ukraine are also significant exporters of sunflower seed oil. In 2020, Ukraine produced 18% of the world’s sunflower seed, safflower, and cottonseed oil; 8% of its wheat and meslin (a mixture of wheat and rye); 12% of its barley; and 13% of the world’s corn, according to the International Trade Centre.

Russia is an even bigger food producer, with its sunflower seed, safflower or cottonseed production accounting for almost 40% of total global exports in 2020; and 18% of the world’s exports of wheat and meslin.

How will the war affect Ukrainian supplies?

So what happens given that so much of this supply is being cut off or disrupted? Clearly, we are looking at serious consequences for agriculture and food production, including “the disruption of business operations and trade flows, higher commodity and energy prices and a deteriorating economic outlook,” says Dutch bank ING. Already “the impact is trickling down to many food & agriculture companies in Europe and elsewhere”.

With men being called up to fight, harvests and transportation are already being drastically affected. Meanwhile, Oleg Ustenko, economic adviser to Ukrainian president Volodymyr Zelenskyy, points out that it may be impossible for Ukrainians to sow seed this year as “those parts of Ukraine which are most productive in terms of agricultural production are now consistently under aerial attack and artillery bombardment”.

Time is running out for Ukraine’s “spring sowing campaign”, the regular window for which runs in the first ten days of March. Planting needs to be fully completed in the last week of April.

“Working the fields in regions such as Chernihiv, Poltava, Kharkiv, Sumy, and Zhitomir has become practically impossible”, says Ustenko. There is “no way that Ukrainians will be able to sow this year based on a normal schedule”.

What effect will it have on Russia?

Although Russian agriculture has escaped sanctions (similarly to energy), “importers and exporters can still experience difficulties with settling payments in case their trade partners work with sanctioned Russian banks,” says ING.

Many international food companies have temporarily closed operations in or suspended exports to Russia. While local companies may choose to reopen if the security situation allows it, Western companies that have exited are unlikely to see any incentive to return quickly.

And even if seeds are grown and harvested, logistical issues due to the closure of Ukrainian ports and the security situation at the Black Sea mean exports could well be curtailed.

Which other countries are most vulnerable?

Russia’s invasion leaves many countries in Africa, Asia and the Middle East vulnerable to prolonged food shortages – Russia and Ukraine represent 70% of Egypt and Turkey’s wheat supply, for example. Ukraine is also a key exporter to Asia, while Russia meets most of Africa’s wheat demands.

A prolonged war means countries reliant on Ukrainian wheat could face shortages as early as July, Arnaud Petit, international grains council director, told The Associated Press.

"Up to 90% of Lebanon’s wheat and cooking oil imports come from Ukraine and Russia, as well as a large proportion of grain imports. The fighting in Ukraine has engulfed the country’s southern ports, putting a stop to shipments, and imports from Russia have been hampered as a result of financial sanctions imposed on Moscow”, says Al Jazeera.

African countries imported $4bn worth of agricultural products from Russia in 2020. Nigeria has already taken measures to lower its dependence on Russia for grains, but the disruption in food supplies has also reverberated further east, with the effects being felt in Asian countries such as Indonesia. Ukraine was the country’s second largest source of wheat in 2021.

In the Western world, the ongoing conflict will translate into higher costs for livestock feed, driving up the price of dairy and meat and driving up the price of US wheat exports.

How inflationary will this be?

How long the conflict will last could determine how far food prices will rise. But we should expect a significant jump, as food prices were rising around the world even before the invasion. Food prices in the UK rose by 2.7% in January for example, and the price of staple products such as peas, bread and eggs has risen by more than 10%.

The spectre of higher prices due to the conflict comes at a time when a drought in South America has already reduced soy supplies, and labour shortages in Malaysia are limiting the production of palm oil.

How does this affect fertiliser production?

The problems go beyond crops alone. The price of fertiliser, the key input in crop production, is also soaring in price.

Russia is the world’s largest producer of fertiliser, ahead of China, Canada, Morocco and the US. Russia is a major producer of ammonium nitrate and urea, and a big exporter of potash, an important nutrient for major commodity crops such as corn and soybeans. The fertiliser market was already being affected by soaring gas prices – natural gas is key to producing fertiliser from nitrogen.

“A prolonged disruption to the global supply of nitrogen and potash nutrients could cut into crop production in many parts of the world, for both the 2021/22 marketing year as well as 2022/23, at a time when food prices are already at record highs,” says consultancy Gro Intelligence.

Potash exports from Belarus have also been disrupted and the effects of Western sanctions may make this worse. Potash is a key ingredient in the production of major commodity crops such as soybean and corn.

Are there any investment opportunities?

Just as oil companies have benefited from the rise in oil prices, so fertiliser producers are profiting from global supply concerns.

German fertiliser company K+S (Frankfurt: SDF) may be worth investing in for the long term, says Brad Thomas in Seeking Alpha as “the company's strong focus on potash with its long-term superb strategy makes for an appealing investment, even if spot pricing for potash is historically volatile”. He thinks the stock price could rise by as much as 20% and expects a long-term price target of €26. Prices are currently trading at around €21.89.

Nasdaq recommends looking at Canadian fertiliser company Nutrien (NYSE: NTR). The company is also the world’s largest potash producer, with its six potash mines in Saskatchewan boasting more than 20 million tonnes of capacity. Nutrien is looking at selling 14.3 million tonnes of potash this year.

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.

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.

Russia’s invasion of Ukraine is having a far greater impact on markets than the average geopolitical incident from recent decades. There are good reasons for that.

Markets were already unsettled by the changing macroeconomic backdrop, while sanctions on this scale have never before been deployed against a major economy and huge commodity producer like Russia. But the most worrying factor is that Russia has nuclear weapons, which raises a risk that most of us haven’t seriously considered since the fall of the Berlin Wall.

In a report issued at the start of this month, analyst Peter Berezin at BCA Research estimated that there is “an uncomfortably high 10% chance of a civilisation-ending global nuclear war over the next 12 months”. The obvious question being: what does that mean for markets?

Buy on a spike in fear

Berezin’s report has grabbed a few headlines along the lines of “nuclear war is bullish for shares”. Clearly, this isn’t his point. A story that US trader Art Cashin tells about the 1962 Cuban missile crisis is more illustrative. Cashin wanted to sell stocks, but his mentor, an experienced old hand, told him: “Look kid, if you hear the missiles are flying, you buy [stocks]. You don’t sell them... Cause if you’re wrong, the trade will never clear. We’ll all be dead.”

In other words, invest as if nuclear war won’t happen, because if it does, you won’t care about your portfolio. This makes sense. Even if you want to plan for the scenario of a devastating but survivable nuclear exchange (perhaps you have a holiday home in New Zealand), you’re still looking at a world where physical gold is about the only asset of potential use, and we’ve always suggested that MoneyWeek readers own a bit of that, so no change there.

So what’s the opportunity? Berezin argues that a spike in Google searches for “nuclear war” plus a run on potassium iodide (an anti-radiation treatment) implies that “a freak-out moment is coming, which will present a good buying opportunity for investors”. But it’s a bit more nuanced than “buy the dip”. What’s arguably more useful about Berezin’s report are his points on what a new cold war (which unlike nuclear war, seems inevitable) means for the economy.

Higher government spending on defence and alternative energy; a faster retreat from globalisation; and maybe even a tendency for households to save less, given “the ever-present danger of war”. All of these imply both higher inflation and higher interest rates. So if markets do “freak out”, be selective about the “bargains” you buy – because all of the factors that have been scaring markets for the past six months or so are only going to get worse.

Many developing economies entered 2022 contending with high inflation, slowing growth and stretched public finances because of the pandemic, says The Economist. Then Russia invaded Ukraine. Now they can add soaring commodity prices into the mix: “Large importers of wheat and sunflower oil across north Africa and the Middle East, most notably Egypt” could be heading for hunger and civil unrest.

The war may also prompt companies and investors to take a more cautious approach to overseas investing in future for fear of further geopolitical upsets. That would mean less investment in emerging markets (EMs) – which are perceived as riskier – and steeper capital costs for local businesses.

High risk, low growth

“The start of the war sparked a sell-off across many EM financial markets,” says William Jackson of Capital Economics. This reflects “financial contagion” as investors turn towards safe haven assets. But EMs had been struggling before the invasion, with the MSCI Emerging Markets index falling more than 10% in the year to the end of February, even as the developed market equivalent gained more than 10%. That’s partly due to a regulatory crackdown in China, which accounts for almost one-third of the index.

Tighter US monetary policy is another headwind, says Jonathan Wheatley in the Financial Times. Higher interest rates on dollar assets tend to cause investors to pull cash from emerging market stocks and bonds. It also usually boosts the dollar, and a stronger greenback makes it more expensive for companies in emerging economies to raise and service dollar-denominated debt.

Emerging economies have less reliable legal and economic institutions than developed ones. Investors accept that when growth prospects are strong, but “the difference between the pace of growth in developing and advanced economies is set to narrow to its lowest level this century”. As David Lubin of Citi bank puts it, “without growth, it’s just [all] risk”.

Nevertheless, emerging markets look well-positioned, says Reshma Kapadia in Barron’s. Most have lower reliance on foreign borrowing and higher foreign exchange reserves than during previous periods of US monetary tightening. India’s foreign exchange reserves have more than doubled over the past decade. MSCI EM company profits “are expected to grow by 10.2% in 2022”, faster than the 8.9% predicted for US stocks.

That growth comes much cheaper too, with the index trading on 12 times 12-month forward earnings, compared with 19 in the US, “the widest valuation gap in nearly 20 years”. Brazil and Indonesia, which both stand to gain from the commodities boom, look intriguing bets.

John and I thought it would be useful this week to round up what has happened to commodities since Russia invaded Ukraine.

What commodities does Russia produce? How have markets been affected? What are the investment implications?

It’s worth remembering that after a decade of underperformance, commodities in general were already in a bull market before the invasion.

If you had to put a date on when the low came, it would be somewhere in early March 2020, at the height of the coronavirus panic, when the oil price went negative.

What a buy that was.

It’s also worth noting that, while the sanctions imposed on Russia have had a devastating effect on its economy, they have also inflicted – or are about to inflict – a certain amount of pain on ordinary Westerners in the form of food and energy price inflation. Never mind oil going over $100 a barrel, the wheat price has almost doubled.

There is a cycle to commodities. Years of investment leads to a shortage of supply; prices go up, which attracts speculators and investors. Producers, as a result of higher prices and increased investment, produce more; prices come back down again.

The problem is, human beings being what they are and markets being what they are, rises and declines always seem to go too far. As a result, you get these speculative blow-off tops and vicious bears, both of which quickly get forgotten when the other is rampant.

Here’s what’s happening in the energy market

Let’s start with natural gas. Russia is the world’s second-largest producer. The US is actually top dog when it comes to natural gas, but it is the fact that Russia supplies about 40% of Europe’s natural gas that is causing such upheaval. Italy and Austria are almost entirely dependent on Russian gas; about a third of Germany’s gas comes from Russia, while here in the UK, about 5% of our gas is Russian. (Our biggest foreign supplier is Norway – I guess we have to hope Norway doesn’t decide to invade Sweden – or indeed Britain.)

The Financial Times reports that European wholesale gas prices hit €335 a megawatt hour, up from about €16 a year ago; the UK has also seen over 1,000% inflation in gas prices. This was already happening – the invasion has made it worse.

Moving onto crude oil, Russia is responsible for about 10% of global oil supply, and around 30% of EU supply. Germany, for example, sources 34% of its oil from Russia.

Oil is in a runaway bull market that has gone parabolic (I’ve been saying be long oil for a long time, as regular readers will vouch): Brent is at around $130/barrel and a re-test of the 2008 highs of $150 looks a given.

It’s a minority view, but there are many who argue that it was $150/barrel oil that triggered the global financial crisis, by the way – the last thing we need right now is another one of those.

With bans on imports pending, the oil shock of the early 1970s could end up looking like a doddle.

And then there is the underreported but perhaps equally important energy supply that is coal. Russia is the world’s third-largest coal (thermal and coking) producer, with over 50% of hard coal received by German power generators and steelmakers coming from Russia in 2021.

Whether coal, gas or lack of wind, this all translates into runaway electricity prices across Europe.

How Russia’s invasion of Ukraine is affecting metals and grain prices

We come to metals next. Russia is the world’s largest producer of palladium and nickel. Nickel is vital to the steel and battery industries; palladium to the automotive sector and anywhere that requires its properties as a catalyst. The prices of both have gone bananas.

Palladium now sits at all-time highs of $3,200/oz, having been at just $500 a few years back.

Nickel – wow. It went from $25,000/tonne to over $100,000 in just a few days. The London Metal Exchange has had to suspend trading. A Chinese nickel company got on the wrong side of the trade and reportedly got a margin call rumoured to be more than $10bn, which its bankers are currently trying to sort out. Goodness knows how that is going to pan out, and I pity small traders with open positions.

Russia is also the world’s third-largest steel exporter, the fourth-largest aluminium exporter, the fifth-largest iron exporter and the eight-largest copper producer.

As for precious metals, it is the world’s largest silver producer, and second-largest producer of gold and platinum. It’s no wonder you’ll struggle to find me a metal that has not gone up in price.

And so we come to stuff it grows. Russia is the world’s fifth-largest producer of wood, and the number one exporter of both grains and fertiliser.

On this front, Russia didn’t need Western sanctions – it has ceased its own fertiliser exports in an effort to tackle domestic inflation. About 20% of global fertiliser supply is Russian and fertiliser cost inflation is causing big problems for farmers worldwide.

As for grains, Russia is the world’s largest wheat producer, responsible for about 17% of global supply. As a result, the wheat price going “limit up” (hitting the maximum daily gain allowed by the exchange) has become an almost daily occurrence. The price has gone from around $5 a bushel last year to nearly $13 today, breaching its 2008 all-time highs.

Prior to this crisis Russia was the 11th-largest economy of the world and it supplied roughly 17% of global commodities. To suddenly exclude a country of this size and strategic importance from the global economy is without precedent.

No wonder commodities prices are rocketing.

Dominic’s film, Adam Smith: Father of the Fringe, about the unlikely influence of the father of economics on the greatest arts festival in the world is now available to watch on YouTube.

What sanctions have been imposed?

Over the course of last weekend, the G7 bloc ex-Japan (France, Germany, Italy, Britain, Canada, the US and the European Union) imposed tough sanctions in four areas that they had previously held back from – a sign that Russia’s invasion of Ukraine has already changed the West’s strategic calculus.

First, they removed selected Russian banks from Swift, the global banking system that facilitates financial flows and trade.

Second, they announced a freeze on foreign assets of Vladimir Putin, his inner circle and their families. Those targeted included the veteran foreign minister Sergei Lavrov, the rest of the Russian security council, and 11 more named officials. Putin’s wealth is famously obscure, and the move may have limited effect in practice. Targeting a head of state in this way is highly unusual and has symbolic value: Putin joins a select club of murderous kleptocrats alongside Kim Jong-un, Alexander Lukashenko of Belarus and Bashar al-Assad of Syria.

Third, they announced limited sanctions against a number of oligarchs, such as limiting the sale of so-called golden passports to wealthy Russians. Fourth, and most important, were the unexpected and game-changing sanctions on Russia’s central bank.

Why’s that so significant?

Because the sanctions are aimed at blocking Russia’s access to its own $630bn (£473bn) reserves of foreign currency. Until that move, many commentators were predicting that those carefully built-up strategic reserves would cushion the impact of economic sanctions and let it ride out the crisis. Now they are not so sure, since almost half those reserves are in the form of “electronic debt” held by Western central banks.

“The most recent measures targeting the Central Bank of Russia have completely changed the picture,” reckon JPMorgan analysts. “Russia’s large current-account surplus could have accommodated large capital outflows, but with accompanying CBR and Swift sanctions, on top of the existing restrictions, it is likely that Russia’s export earnings will be disrupted, and capital outflows will likely be immediate.”

The upshot is that some economists are now predicting a double-digit contraction in GDP – and the lesson is clear, says David Frum in The Atlantic: “Do not fight with countries whose currencies you use as a reserve currency to maintain your own.”

Will the sanctions work?

There are no guarantees that the pain inflicted on Russia by sanctions aimed at isolating and hurting it economically will change its policies or government. Yet there’s no doubt that serious economic pain will be inflicted – slowing growth, limiting Russia’s ability to develop and produce advanced military equipment, and potentially causing Putin to alter his domestic calculus – or foreign policies – if discontent rises and the Ukraine war proves unsustainable.

The Kremlin has prepared for this moment, but could do so only up to point. Since 2016, the Russian central bank has diversified its foreign reserves, cutting exposure to western Europe and the US, and increasing holdings in Japan, China, and monetary gold. Ten years ago, 90% of Russia’s foreign exchange and gold reserves involved Western counterparties or issuers, according to Sven Behrendt, of GeoEconomica, a German political risk consultancy.

Now, he reckons that’s true of less than 45% of an estimated $622bn reserves. That’s a big shift, but it hasn’t been enough to insulate the Russian state from the financial fallout this week – which included a 30% collapse in the rouble, and such a global exodus from Russian assets that Moscow ordered the suspension of all trading in stocks and derivatives.

How else has Russia responded?

It more than doubled its key interest rate to 20% on Monday and introduced capital controls, while the central bank’s governor said sanctions had stopped it selling foreign currency to prop up the rouble. It also closed down the stock exchange and derivatives trading, rather than accept what could be a historic rout (Barings analysts this week wrote down the value of Russian shares to zero).

The state also ordered exporting companies, including state-backed energy giants Gazprom and Rosneft, to sell 80% of their foreign-exchange revenues on the market to help prop up the rouble. And this points up the glaring omission in the sanctions to date: the oil and gas sector. Germany might have “de-certified” the Nord Stream 2 pipeline – for now – but not the pipelines through which gas is continuing to flow to Europe.

How will this affect the economy?

Overall, Russia’s economy is relatively small and globally unimportant. Italy’s is twice as big with half the population. Poland exports more goods to the EU than Russia does. But Russia’s energy sector is vast, accounting for more than half of Russian exports and dominating government revenues.

That makes the country ultimately vulnerable, but right now it gives Moscow leverage. Europe relies on Russia for about a quarter of its oil and more than a third of its gas, so an outright embargo would incur massive costs, including spiralling inflation and a potentially deep recession. Ultimately, the EU is willing “to freeze Russian banks – but not German homes”, says Lex in the Financial Times.

The West has announced some new restrictions on high-tech exports to Russia, including equipment connected to extracting oil and gas. Firms such as BP and Shell have rushed to dump stakes in Russian energy firms. And Germany announced a long-term pivot away from reliance on Russia. But for as long as Europe still relies on Moscow for a big slice of its energy, the Kremlin has cards to play. In fact, the main macroeconomic consequence of the war, says Rana Foroohar in the FT, may well be to accelerate Russia’s financial decoupling from the West, make Moscow much more dependent on China, and hasten the shift to a bipolar global financial system based on the dollar and renminbi.

A week is long in the cryptocurrency world, and the past week is a perfect example of this.

The cryptocurrency market tanked last week, moving in tandem with risk-on assets such as equities when news broke of russia’s invasion of Ukraine. This led crypto-sceptics to claim that digital currencies clearly aren’t the gold 2.0 that many crypto-bulls believe.

But the opposite happened this week, with cryptocurrencies soaring on Wednesday even as stocks struggled.

So why is crypto up and what have tensions between Russia and Ukraine taught us about the crypto market’s various uses?

Ukranians are flocking to cryptocurrencies

Ukraine has seen a surge in demand for cryptocurrencies. As the Wall Journal Points out, bitcoin has been trading at a “premium” this week against the Ukrainian currency, the hryvnia.

“On Binance, the largest exchange in the world, bitcoin was trading for the equivalent of $45,894 in hryvnia terms. On Kuna, the largest exchange in Ukraine, it was at $46,847, and had traded as high as $51,240,” the Journal said.

Ukraine has raised more than $35m in donations from digital currencies, as it pleads for more financial support from the world to help it survive Russia’s invasion, says blockchain analysis firm Elliptic.

“Some Ukrainians are also turning to crypto as an alternative to Ukrainian financial institutions, which are limiting people’s access to bank accounts and foreign currency,” says Recode.

​”In a scenario where governments are in chaos, it’s difficult to rely on traditional banks, and there’s fear of surveillance. So a relatively anonymous system where no government is involved is appealing,” adds Recode.

Cryptocurrencies were gaining traction in Ukraine even before the war took place after it passed a law in February legalising cryptocurrencies. Now Ukraine now ranks fourth in the world in terms of cryptocurrency adoption, according to blockchain analytics firm Chainalysis. Russia was much further down, in 18th place.

Russians may use crypto to avoid sanctions

Another school of thought is that Russia, which has been slapped with a host of sanctions in the last week, including being banned from SWIFT and being restricted from selling foreign reserves, could use cryptocurrencies to reduce the impact of being financially cut off from the world.

Crypto could be a way for the Kremlin to transact with the world even after being financially isolated. That is the view of OANDA’s market analyst Edward Moya who thinks Western sanctions against Russia are “bolstering the argument for blockchain products that will compete with the SWIFT network”.

This isn’t the first time the world fears that a country may use cryptocurrencies to avert sanctions. The US and many other nations have long accused Iran of using bitcoin to avoid the sanctions it faced because of its nuclear activities. Indeed, earlier this year, Iran was said to be building a cryptocurrency called Ramzarz to help businesses make international transactions

Russia has been developing the digital rouble as a central bank digital currency (CBDC) since October 2020, and is committed to piloting it in 2022, according to CoinDesk.

“Similar to how Covid accelerated a lot of digital economy and stay-at-work adoption, this aggression by Russia and the West’s response in terms of sanctions and freezing of reserves, might accelerate the adoption of alternative payment channels and self-custodial stores of value,” says Lyn Alden, founder of investment firm, Lyn Alden Investment Strategies.

But using cryptocurrencies in wartime isn’t easy

While cryptocurrencies may seem like a blessing in times of war, in reality using it is far from simple. Given the volatile nature of the market, donation amounts cannot be guaranteed, as Ukraine may receive less than was initially donated if the value of the cryptocurrency suddenly falls.

Also, using cryptocurrencies is likely to require an internet connection, something which cannot be guaranteed as Russia intensifies its shelling of various cities. And not everyone is familiar with the nuances of the crypto market, so starting to learn that during war may not be the best time.

Another risk is the uncertainty behind making a withdrawal. Imagine taking money out of a cash machine, only to realise your funds have lost half their value just minutes later. But for somebody living in a city under fire, having an alternative to cash may be useful.

Cryptocurrency exchanges have so far refused to ban Russia

Ukraine’s vice-prime minister, Mykhailo Fedorov, along with the EU and US, has called for cryptocurrency exchanges to block the addresses of Russian users.

"It's crucial to freeze not only the addresses linked to Russian and Belarusian politicians but also to sabotage ordinary users," tweeted Fedorov.

So far most cryptocurrency exchanges have fallen short of committing to an outright ban on Russian transactions with exchanges such as CoinBase, KuCoin and Kraken saying they would only do so if they were legally required to do so.

Binance said it won’t implement an absolute ban, but it will take action against Russian individuals subject to sanctions.

Cryptocurrencies may not be the gold 2.0 inflation hedge many claim, but the fighting between Russia and Ukraine has demonstrated that it can be used as a short-term solution in times of great uncertainty and, love it or loathe it, it is here to remain in one form or another.

“The global oil market is suffering what’s starting to look like the biggest disruption since the 1990-1991 Gulf War,” says Javier Blas on Bloomberg. Brent crude oil prices hit $110 a barrel early this week, their highest level since 2014, and other signs of strain are appearing. Russian oil usually trades at a few dollars discount to the Brent benchmark, but that has since widened to more than $18. Oil refineries are thought to be “self-sanctioning” – refusing to deal in Russian oil for fear of legal complications even if they are technically allowed to do so. That could see as much as two million barrels per day of Russian oil drop off world markets, worsening the existing shortage.

Meanwhile, Russian gas continues to flow to Europe through Ukrainian pipelines, says Adrien Pécout in Le Monde. At the outbreak of hostilities “the market anticipated that everything would suddenly cut off, then it calmed down, because the fundamentals of supply and demand are still there”, says Nicolas Leclerc of broker Omnegy. However, prices remain “very volatile”. European wholesale gas prices spiked towards €135 per megawatt hour last week but have since fallen to around €117, still short of December’s €188 record high.

Russia is also a “big supplier of aluminium and nickel, and produces about 40% of the world’s palladium”, says Jon Yeomans in The Sunday Times. That explains why aluminium hit a record high of $3,525 a tonne this week. Some other disruptions are more surprising: Ukraine, is a major supplier of “neon gas, used in microchips”. Russia is the world’s biggest wheat exporter, with Ukraine in fourth place. Wheat prices traded in Chicago are up 30% this year. Higher food prices are “certain to make day-to-day life harder for ordinary people across the world”.

If Russian president Vladimir Putin had any doubt that the West was serious about imposing strict sanctions against its invasion of Ukraine, he met with a nasty surprise this weekend.

The UK, US, EU and Canada banned some Russian banks’ access to SWIFT this weekend, a move which caused the Russian rouble to plunge by almost 30% against the US dollar on Monday and prompted Russia’s central bank to more than double its interest rate to 20%.

A statement from the EU, US and UK said the ban will "ensure that these banks are disconnected from the international financial system and harm their ability to operate globally".

According to Ursula von der Leyen, president of the European Commision, the SWIFT ban will effectively bar Russia’s exports and imports.

What is SWIFT?

SWIFT was founded in 1973 and stands for Society for Worldwide Interbank Financial Telecommunication. It is a network used by financial institutions to send secure messages relating to transactions and the transfer of money.

It connects banks when a transaction is made; if the two organisations making the transaction are not already partners, then SWIFT can connect them through an intermediary.

More than 11,000 financial institutions around the world use the system to send more than five billion messages a year, making it an integral part of the global system of financial transfers.

It is overseen by the central banks of the G10 countries (actually 11: Belgium, France, Canada, Germany, Italy, Japan, the UK, the US, Switzerland, Sweden and the Netherlands) with the National Bank of Belgium acting as the lead overseer.

It is owned by its shareholders (financial institutions) and represents roughly 3,500 firms across the globe.

How badly will the SWIFT ban affect Russia?

It remains unclear how badly the move will affect Russia as it is not yet known which banks will be excluded from SWIFT. But around 70% of the country’s banking market will be affected, says Reuters.

If Russia’s largest banks, including the likes of Sberbank and Gazprombank, are targeted, then it could be a huge blow to the economy.

SWIFT is significant to Russia because, of the 40 million messages sent a day via SWIFT, 1% are estimated to involve Russian payments, says the BBC.

Zoltan Pozsar, a strategist at Credit Suisse, believes “exclusions from SWIFT will lead to missed payments and giant overdrafts similar to the missed payments and giant overdrafts that we saw in March 2020.”

“Banks’ inability to make payments due to their exclusion from SWIFT is the same as Lehman’s inability to make payments due to its clearing bank’s unwillingness to send payments on its behalf. History doesn't repeat itself, but it rhymes,” he added.

The collapse of Lehman Brothers is widely seen as the start of the Great Financial Crisis of 2008.

According to estimates by Alexei Kudrin, Russia’s former finance minister, Russia’s exclusion from SWIFT could cut Russia’s GDP by 5%.

This is not the first time Russia has faced the threat of expulsion from SWIFT. Russia was threatened with a similar move in 2014 when it annexed Crimea. That expulsion did not happen, and Russia set up an alternative, albeit smaller system, called System for Transfer of Financial Messages (STFM).

While it is hard to see STFM as a serious contender to SWIFT today, it could still help Russia cushion some of the economic shock. And there is also the possibility that Russian banks “might route payments via countries that have not imposed sanctions, such as China, which has its own payments system,” says the BBC.

What other sanctions have been imposed?

Apart from banning Russia from SWIFT, Russia’s central bank has also been blocked from using its $630bn in foreign reserves, making it harder for the country to shore up its economy against the wave of sanctions, reports the Financial Times.

“With assets of CBR [the Central Bank of the Russian Federation] set to be frozen around the world, it will severely limit Moscow’s ability to access its foreign currency reserves, part of the war chest it had built up, to try and insulate the country from the worst of the economic punishments,” says Susannah Streeter, investment and markets analyst at Hargreaves Lansdown.

The EU also froze foreign assets held by both Putin and Russia’s foreign minister, Sergey Lavrov.

Switzerland, a nation known for its neutrality, broke from tradition and said it will also sanction Russia. "In view of Russia’s continuing military intervention in Ukraine, the Federal Council took the decision on February 28 to adopt the packages of sanctions imposed by the EU on February 23 and 25“, the country’s government said in a statement on Monday.

Russian-registered planes and airlines have also been banned from most of Europe’s airspace.

How has the rouble reacted?

As my colleague John pointed out, it would be an understatement to say that the Russian rouble was in freefall. As recently as a fortnight ago, one pound would fetch you just shy of 104 rubles, but as of this morning it’ll get you 140, a jump of more than 30%.

Russians were scrambling to withdraw foreign cash such as dollars from cash machines on Monday according to multiple reports.

How does the SWIFT ban affect Russia’s energy sector?

The move also has ramifications for the energy sector, through higher inflation, given Russia is the world’s second largest exporter of both oil and natural gas and supplies Europe with 40% of natural gas.

There may also be further turmoil caused by missed payments for Russia’s agricultural and energy sectors.

According to Rick Joswick, head of global oil analytics at S&P Global Platts, the SWIFT ban will make Russian oil less attractive: "It will likely make many buyers more hesitant to purchase Russian oil. That will tend to drive down the price of Russian crude oil even more until it ultimately clears outside of its traditional markets in Europe".

However, the oil price is likely to continue to rise as sanctions threaten further disruptions to supply. On Monday, Brent crude oil was trading above $100 a barrel, a level which was passed last week for the first time since 2014.

By the close of play on Friday, markets appeared to have reverted to their “glass half-full” mentality.

Analysts were falling over themselves to say that sanctions would be mild; that there might be peace talks in the making. And markets rebounded somewhat.

Let’s just say, that’s not what happened. In fact, over the weekend, things escalated dramatically.

It’s not an exaggeration to say that we are now in a full-blown economic war.

So it’s little wonder markets have had a rough start to the day.

Russia is being unplugged from the financial system

This morning, as I’m writing this, the oil price is back over $100 a barrel, stockmarkets around the world have fallen – though not dramatically – and the Russian rouble has tanked. For perspective, a fortnight ago, one pound would have bought you just under 104 rubles. As of this morning, it’ll get you 140. Not that you’d want to buy any, because chances are you’ll struggle to spend them on anything.

That’s because the US, UK, EU etc have done quite a bit over the weekend to unplug Russia from the global financial system. They have placed sanctions on the Russian central bank and are also excluding some (though not all) Russian banks from the Swift international payments system.

What does that mean? Rather than delve into the weeds on the technical bits, the important point is that it will make it hard for the central bank to defend its currency, and it’ll also make it very difficult for Russia to do business with any mainstream entity.

About the one area where there’s still some leeway is the energy sector. But as others have pointed out, how many banks are going to want to enable Russian business now that it’s a pariah (because they won’t want to risk breaking present or future sanctions)?

There have also been some other big moves. Germany has changed its foreign policy radically over the weekend. The country now plans to meet the Nato goal of spending 2% of GDP on defence from about 1.5% now, something the US has long been nagging Europe generally to do.

(US spending is at over 3.5% while the UK has consistently surpassed the 2% target. Latest data for 2020-2021 suggests France is now meeting it too, along with Greece, Croatia, Estonia, Latvia, Poland, Lithuania and Romania.)

European airspace is also being closed to Russian aircraft – that’s more bad news for airlines, though in the context of Covid, it’s probably relatively minor.

What does this all mean?

The risks to the financial plumbing

The rouble, most obviously, has collapsed. The Russian central bank has raised interest rates from 9.5% to 20%. Meanwhile, Russian firms will reportedly be forced to sell 80% of their foreign currency earnings – in other words, swap any dollars or pounds or euros they get for roubles, to help prop up the currency.

Those moves don’t so far appear to be helping the rouble a great deal. In effect, it has become a great deal harder to put a price on Russian assets. Helen Thomas of Blonde Money draws a comparison with the Lehman Brothers collapse in September in 2008, in that suddenly no one knew what a large swathe of assets dotted about the financial system was worth.

The difference here is that exposure to Russia in general has been declining as its bad behaviour has increased over the past decade, so it’s unlikely that it’s a 2008 moment for the financial system generally.

But to paraphrase Zoltan Posner of Credit Suisse, an analyst who has become the man to read for a rundown on the plumbing that underpins the financial system (even if anyone speaking honestly only understands about half of what he writes) – you can’t yank a country out of the global payments network without some payments getting missed and things getting messy as a result.

That’s the sort of thing that you’d think central banks are likely to be prepared for. They’re old hands at papering over the cracks, so I’d expect the worst of this morning’s volatility to die down pretty rapidly.

But for Russia? Quite possibly the 2008 comparison may not cover it. Severe inflation is almost certain at these levels and hyperinflation is a genuine risk.

What about the wider market reaction, beyond the initial rush to “safety” by investors desperately trying to raise cash and lose leverage?

In terms of fleeing from Russian assets, probably the most notable reaction from a UK-based, Russia-exposed company has been that of BP, which has decided to get rid of its near-20% stake in Rosneft, the Russian state-owned oil company. Javier Blas at Bloomberg estimates that this could cost BP up to $25bn to exit.

Small wonder the BP share price has taken quite the knock today, despite the surging price of oil.

Sometimes the best decision is to do nothing

This all goes back to the point I made on Thursday, that the big risk with Russian assets now was that they’d become unsellable due to sanctions or capital controls. That’s where we are now.

In the longer run, does it accelerate a possible move away from the US dollar as global reserve currency? Some say “yes”, but I’m actually not entirely sure that’s the logical conclusion.

It’s not that I disagree that this is the overall aim for some nations; China and Russia specifically have wanted to create an alternative system to US dollar hegemony for a long time. But it’s hard to set up a workable alternative to the current global financial operating system if everyone signing up for it is a pariah state. It’s not great marketing.

I’m not saying for a minute that the US dollar will always be the global reserve currency. I’m just saying that, to my mind, the jury’s out as to whether this might in fact slow rather than hasten any move away from the dollar (and not just in the short term – the dollar index inevitably jumped this morning as it always does when there are market jitters).

What can you do? My first point, as always, is to keep your head. Don’t be panicked into selling, or into buying. My second point is a reiteration of one I made on Thursday – this escalation is inflationary (and probably stagflationary). None of this makes it easier for the stuff we need to get from A to B, which drives up the cost of said stuff. So the points I made about making sure your portfolio is inflation-resilient still stand.

But mostly, I’d go back to my first point: making investment decisions at times like these is particularly fraught. If you intend to do it anyway, stick to your process and make sure you write everything down first. But be careful. There is a lot of scope for nasty surprises right now, even more so than usual.

“There is a whiff of 1914 to the crisis in Ukraine,” says Jeremy Warner in The Telegraph. Russian president Vladimir Putin’s decision to send troops into two separatist-held regions in eastern Ukraine has heightened the risk of “the most serious outbreak of hostilities in Europe since the Second World War”. Yet major stockmarkets are surprisingly “insouciant”. Investors may think a major war would be irrational for all sides and therefore won’t happen, but “the irrational has always played a major role in history”.

The Ukraine crisis has so far been felt most acutely in energy markets. Brent crude oil prices rose above $99 a barrel on Tuesday, their highest level since 2014. Russia provides about one-tenth of the global oil supply, but those exports may be curbed by future sanctions. European wholesale gas prices have fallen back sharply this year, from a December record high of €188 per megawatt hour to around €79 at present, but Germany’s decision to suspend certification of the Nord Stream 2 gas pipeline in response to Russian actions raises the risk of a renewed spike. Europe’s biggest economy gets two-thirds of its natural gas from Russia.

Russian markets wobble

Russian assets have been hit hard. The benchmark MOEX stock index has plunged 27% since last October and lost 10.5% on Monday alone. The rouble fell close to a two-year low against the dollar before rebounding. London-listed Russian stocks have also plunged, with gold miner Petropavlovsk down 20% during the first two trading days of the week.

Sanctions mean it could soon be all but impossible for Western investors to hold or trade Russian government bonds. That has sent yields (which move inversely to prices) on ten-year rouble bonds up to 10.9% on Tuesday, a 1.3 percentage-point increase in just four days.

Western sanctions following the annexation of Crimea in 2014 shaved 2.5% off Russian GDP and triggered a local financial crisis, says Neil Shearing of Capital Economics. This time Moscow looks better prepared, with less external debt and fewer “financial linkages” with the West than in 2014. Sanctions this time might knock around 1% off Russia’s GDP. “This could rise to 5% if more stringent sanctions (such as blocking Russia from the Swift payments system) are imposed.”

Mostly about commodities

Oil, gas and other commodities aside, “Russia is incredibly unimportant in the global economy”, says Jason Furman, a former economic adviser to Barack Obama, tells the New York Times. With an economy smaller than Italy’s, “it’s basically a big gas station”. Still, that’s enough to risk “dizzying spikes in energy and food prices, fuel inflation fears and spook investors”, note Patricia Cohen and Jack Ewing in the same paper. “These are nail-biting times,” says Niall Ferguson on Bloomberg. Putin has reminded us that even bottom-up value investors – who say they don’t care about either geopolitics or macroeconomics – can’t afford to ignore political risks entirely. “As an investor, you may not be interested in war, but war is interested in you.”

Russia’s invasion of Ukraine in the early hours of Thursday reverberated across energy markets, drove oil past $105 a barrel to a-seven year high and sent global stockmarkets crashing. But that is not all.

The price of wheat climbed to a nine-year high, with experts warning food prices are likely to be the next casualty.

Russian troops launched attacks on Ukraine from three sides – from its northern border with Belarus, its eastern border with Russia, and in the south from Crimea, reports the Financial Times.

What has Russia’s invasion got to do with food prices?

Food prices have been rising sharply already

Food prices have been on the rise for some time as inflation soars, and agricultural commodities are no exception.

UK consumer price inflation hit an annual rate of 5.5% in January. Food prices rose by 2.7%, but the price of some staple products such as bread, eggs and peas rose by more than 10%, exacerbating a cost of living crisis.

John Allan, chairman of Tesco – the UK’s biggest supermarket chain – warned earlier this month that the “worst is yet to come” and he expects food price inflation to hit 5%.

On Thursday, the National Federation of Fish Friers, an official body that represents the UK’s fish and chip shops warned that a fish supper may soon cost £10 (on a side note, we know how much Britons love their fish and chips), as cod is are now 75% more expensive than it was in October.

Why does Russia’s invasion affect food prices?

So why would Russia’s invasion further exert pressure on food prices?

Ukraine and Russia are, respectively, the third and eighth largest wheat producers in the world, says the United Nations Food and Agriculture Organisation.

“If the situation escalates, it could impact the export of food from Russia. Russia and Ukraine make up 29% of wheat exports, 19% of exported corn and 80% of sunflower oil exports, says Sarah Coles, senior personal finance analyst at platform Hargreaves Lansdown.

The tensions between the two countries pushed wheat prices at the Chicago Board of Trade to levels not seen since 2012 on Thursday – $9.35 a bushel. The price of corn, soybeans and palm oil also surged in value.

There are concerns that Russia’s invasion may worsen existing food shortages. A drought in South America has already reduced soy supplies, while labour shortages in Malaysia are already limiting the production of palm oil. Palm oil is a key ingredient in the production of several consumer goods including chocolate, shampoo and biscuits.

Rising costs of fertilisers will also hit food supply and drive inflation higher, says Bloomberg. “The market is already feeling the pinch due to reduced potash supplies from Belarus after US sanctions, and any reduction of crop-nutrient exports from Russia will fuel the squeeze.”

Food prices may also rise due to disruption at ships in the Black Sea, says the Daily Mail: “A war could lead to significant disruption to ship movements around the Black Sea, which would fuel higher food inflation given that Ukraine, Russia, Kazakhstan and Romania all ship grain from ports in the area.”

While the UK isn’t among the main markets for these exports, food prices will rise here too: lower exports will drive global food prices higher.

The UK also imports Russian chemicals for fertilisers “which could hit UK harvest,” says Coles, “and the rising cost of energy is going to make every step in food processing and transportation more expensive”.

Brent crude oil hit an eight year high of $111 on Wednesday as Russia’s invasion of Ukraine showed little signs of abating. The price of gas has also shot up.

Russia, which plays a prominent role in both the oil and gas markets, has been hit with a host of sanctions by the West.

“Energy markets have largely been spared from sanctions deployed by the US, EU and UK on Russia’s financial sector, but typical buyers are effectively self-sanctioning, setting off a race to secure alternative supplies in an already tight market,” says the Financial Times.

So what does Putin want and what does the situation mean for fuel and energy prices?

Why has Russia invaded Ukraine?

The Kremlin ostensibly wants Nato to guarantee that Ukraine will not join the defensive alliance. He also wants Nato to stop all military activity in eastern Europe and pull out troops from countries that joined after 2017.

More fundamentally, he wants to reclaim what he sees as historic Russian territory. Putin has long pushed the idea that Ukraine is not a real country and is merely a region of Russia. Last year, he published an essay in which he appeared to be “rewriting Ukraine’s history”, notes the FT. He repeated these views last week in a scathing televised speech.

In 2014 Russia invaded and then annexed the Ukrainian peninsula of Crimea, which it regards as an integral part of Russia that was erroneously given to Ukraine after the breakup of the Soviet Union. In the same year, encouraged and armed by Russia, “separatists” in the cities of Donetsk and Luhansk in Ukraine’s eastern Donbas province broke off from Ukraine.

Now, a week after invading Ukraine and having made little progress, Russia has stepped up its attacks, pounding the city of Kharkiv and inching closer to Kyiv, the capital.

How has the oil market reacted?

The price of Brent crude oil continues to rise despite 31 member countries of the International Energy Agency agreeing to release 60 million barrels of oil on Tuesday in an attempt to control prices

Vishnu Varathan, head of economics and strategy at Japan’s Mizuho Bank, said last week “the scale of disruption and corresponding difficulty in substituting for lost Russian supply mean that price sensitivity to Russian oil disruptions are high.”

He expects oil prices to rise by at least another 15% if around a third of Russian oil exports are affected. So there is further pain ahead for the oil market, with prices “as high as $115-$130 (a barrel) is not unimaginable amid elevated risks of a head-on conflict between Russia and the West,” he said.

Russia’s influence on the oil market cannot be understated. It is the world’s second-largest oil exporter after Saudi Arabia, and is the world’s largest producer of natural gas.

What about gas prices?

EU natural gas prices briefly hit a record high of €194.72 per megawatt hour on Wednesday before slipping back to €160. UK natural gas prices followed suit. The last time European gas prices traded near these levels was December 2021.

Several gas companies have said they are exiting contracts with Russian firms, including state-owned giant Gazprom. It comes as oil giants including Shell and BP have exited all Russian operations, with the latter abandoning its stake in Rosneft, something which could cost the company well over $25bn.

Russia has faced a barrage of sanctions in recent days, including against the country’s central bank and cutting access to SWIFT, the international payments system, for seven of the country’s banks.

There are fears that gas prices may rise if Russia, which supplies around 4% of the UK’s and 40% of Europe’s gas may, along with Belarus, reduce flows as a response to sanctions. For now, however, Russia has said it will continue to export gas. But Alexander Lukashenko, the Belarussian president, hasn’t ruled out halting flows through his country.

Germany has refused to certify Nord Stream 2, an $11bn gas pipeline from western Siberia to Germany owned by Gazprom. It was intended to double the capacity of the Nord Stream 1 pipeline which is already operational.

A sardonic Tweet by Dimitry Medvedev, Russia’s former prime minister and now deputy chair of Russia’s Security Council, underscores how much higher European gas prices may rise. Medvedev, who tweeted in response to the project being cancelled last week, said: “Welcome to the brave new world where Europeans will soon be paying €2,000 per 1,000 cubic meters of gas!”

For comparison, European gas prices were trading at around €830 per 1,000 cubic meters of gas before the invasion took place.

How will this affect UK energy bills?

While the UK is less reliant than its European peers on Russian energy, wholesale prices rising in Europe means prices will jump in the UK as well.

Jonathan Brearly – chief executive of Ofgem, the UK’s energy regulator – warned earlier this month that a Russian invasion of Ukraine could send prices higher in the UK and ultimately result in an even higher energy price cap.

The energy price cap, which is the maximum price per kilowatt hour (kWH) that energy providers can charge consumers for gas and electricity, increased by £693 (for the average household’s usage) at the start of the month and Russia’s conflict with Ukraine is just one of many factors that are likely to see the price cap rise even further in October.

How will it affect petrol prices?

The crisis in Ukraine is driving the price of petrol to record highs, too.A litre of petrol on UK forecourts hit £1.52 on Tuesday, with the average cost of a litre of diesel at £1.55, according to Experian Catalist, a data firm.

As oil prices are still climbing further, petrol is expected to hit new highs in the coming days.

Simon Williams, a spokesperson for the RAC, warned of further pain ahead for petrol prices. “The sudden $10 (£7.50) jump in the oil price on Tuesday to $113 (£85) a barrel is likely to take the average price of petrol towards 155p a litre and diesel to 160p...”

For perspective, in 2000, when protests erupted over rising petrol prices in the UK (partly due to higher fuel duty) the price for a litre of unleaded had just hit 80p.

• The Money Edit: Fuel prices hit record highs: how can you keep your fuel costs down?

What about interest rates?

One bigger concern with higher oil prices is that it may exacerbate inflation, which is already running high around the world.

This will make life even trickier for central banks. Higher energy and petrol prices push inflation up but they also cut into consumers’ disposable income – which is in itself recessionary.

Jason Hollands, managing director of online investing platform BestInvest, says: ‘There is now a real possibility that the Bank of England’s forecast CPI inflation peak of 7.25% in April will be exceeded, and inflation at those levels will be totally unprecedented for many of today’s investors.”

That could lead to interest rates rising faster than many people are comfortable with.