QD view – Russia and Ukraine – can we really continue to turn the other cheek?

The events unfolding in Ukraine are awful to see and, to date, the response from the UK government woefully inadequate. The focus of sanctions has been on persons and businesses connected with the Putin regime. Perhaps now we should be going much further.

Which investment companies are exposed to Russia?

In the investment companies sector we have one fund, JPMorgan Russian (JRS) with a portfolio  focused almost entirely on Russia, Baring Emerging EMEA Opportunities (BEMO) which changed its name and mandate to reduce its Russian exposure but still had just over a quarter of its portfolio in the country at the end of January, 10 global emerging markets Investment companies that are permitted to invest in Russia but in practice have little or no exposure and the odd global fund that holds stocks like Sberbank and Norilsk Nickel.

At last night’s close, JRS’s NAV was 609.5p, down from about 980p at the end of October last year, despite the soaring oil, gas and metals prices that have been helping shore up Russia’s economy. Unburdened by conscience, the temptation would be to say that JRS is cheap. However, with Russian forces unleashing a major military assault on Ukraine, it is now reasonable to ask whether, rather than pussyfooting around sanctioning the odd individual, it is time to say that no western money should be invested in Russia until Putin goes.

How will western governments respond?

Clearly a significant response is required and if the UK government decides to go for a radical move, cutting ties quickly, this could spell the end for the trust. Even if it doesn’t, there is now a real concern that this is just the start of a slow and protracted end for the trust. There is also the risk that, if the UK and other governments decide to seize Russian assets, which is a well-trodden path during conflict and now looks highly likely, JRS could find itself caught in retaliatory crossfire. Looking at the market’s reaction this morning, JRS is already down 21%. Clearly, JRS is cheaper than it was yesterday, but I don’t think this is enough to justify the additional risk.

The end game?

I have spoken with a Russian friend of mine this morning who thinks that the regime is banking on the lack of energy security in Europe and believes that, when push comes to shove, Western European governments will grudgingly accept the situation and ask for the gas to be turned back on. To me, this is a very big gamble and one I think is unlikely to pay off as it seems that Russia is quite successfully galvanising opposition against itself.

We all stand together

Instead of creating division, I am increasingly seeing a view emerging from other commentators that a line has to be drawn somewhere, and there is now a strong case for us to ban all dealings with Russian companies and the elite who control them. Clearly, such an approach is not without its risk or challenges. We will have to work out permanent ways of getting by without Russian gas and metals, and we would probably need to ban anyone with a Russian passport from our country – unless they can claim to be a genuine refugee from the regime – and seize all assets owned by Russians in the UK, at the risk of reciprocal action. However, with its latest move, Russia has underlined that it is just not prepared to respect international norms and cannot be trusted to play nicely with its neighbours. For investors, we live in a world with a growing emphasis on ESG and, for many, it is becoming much harder to justify investment in what is, sadly, a pariah state, even if those companies might actually benefit from the reduced competition that some of the new sanctions will likely bring.