The global economic chaos caused by the Ukraine war
PremiumRussia’s action has acquainted us anew with chaos theory by unsettling much that was taken for granted
The London Metals Exchange (LME) has had to suspend trading in its benchmark nickel contract for a week, reopening on 16 March, after the price soared to more than $100,000 a tonne. The culprit, paradoxically, was not a technology gremlin that undid its trading systems, but a Chinese billionaire who over the past several months had taken a massive bet that nickel prices would fall. Instead, prices moved sharply upwards after Russia’s invasion of Ukraine, and Xiang Guangda was forced to close his positions, pushing nickel contracts up again.
There are few better examples of business hubris and the laws of unforeseeable consequences than the fable of Guangda, whose company Tsingshan Holding Group is one of the world’s largest producers of nickel and and the world’s largest of stainless steel, and the LME. Russia is one of the world’s top suppliers of nickel as well as of wheat, which is why the war it started has sent commodity prices soaring, from wheat and corn to nickel. The founder of Tsingshan,had begun betting on a price fall long before Russian President Vladimir Putin started threatening war this year. Guangda, who gave up his job with a state-owned enterprise and along with his wife started the company with $107,000 borrowed from friends in 1988, built his company to one with $56 billion in revenues last year and operations and partnerships in Indonesia and Australia. Nicknamed ‘Big Shot’, the billionaire has mostly seen good times roll for the past three decades. War must have seemed as implausible as believing space aliens could land in Beijing. Last week, Guangda was blaming unnamed foreigners for his misfortunes. Nikkei Asia reported that he had likely received help from the Chinese government to secure a credit line.
Higher global foodgrain prices, as Russia and Ukraine account for a quarter of the world’s grain trade, and heavier oil and gas bills because Russia is a major exporter are hastily being factored into economic forecasts for lower growth and higher inflation. But the Tsingshan affair is a siren warning that times of economic stress throw up other problems, usually financial excesses amplified by derivative contracts but also sometimes political upheaval. It is worth remembering that the Arab Spring uprising started in 2010 after food prices shot up because of a series of unconnected events that hurt the grain output of major producers. Other than the 2008 collapse of Lehman Brothers and the financial crisis that followed (or maybe not even then), we have not seen a world where so many unlikely events follow one another.
It is hard to imagine a city as central to the global tech supply chain as the Chinese city of Shenzhen under complete lockdown, as it is this week to halt the spread of Omicron. More than a decade ago, a colleague and I had to interview factory workers outside the gates of a Foxconn-owned iPhone-making plant in Shenzhen of almost a quarter of a million employees about labour conditions there. We used to grumble about never being allowed in. Today, Fortress China and President Xi Jinping’s zero covid tolerance strategy mean that not only is Shenzhen locked down, but many foreign correspondents must cover China from Taipei, Seoul or Singapore. This makes the world’s second-largest economy even harder to study. We can only guess what the declaration after Putin met Xi in early February of a friendship “without limits" actually meant.
Shenzhen and southern China is so critical to the global economy that it is hard to foresee what supply disruptions are around the corner. US policymakers may have felt reasonably confident that the US economy could motor along with higher fuel prices for a while, but must have counted on its fracking industry to make up for Russian imports in time. But top executives in this industry warn that the machinery they need to ramp up output will be delayed by supply chain disruptions, some of which predate the surge in nickel and stainless steel prices.
Much higher and more volatile shipping prices were a feature of 2021 as reduced capacity collided with huge demand for goods over services in the US, an unintended consequence of staying home to avert covid infection and generous stimulus packages by the Trump and Biden administrations. This year’s unpredictable variant in that industry could be a shortage of manpower: Russia is the second biggest contributor of commercial seafarers and Ukraine the sixth. Many Ukrainian sailors are rushing home to fight for their country while many Russian maritime workers are unable to fly out to where shipping companies need them to board container ships because so many airlines have suspended flights to Russia.
One of the epicentres of unintended consequences right now is what the British press is deriding as ‘Londongrad’. For decades now, London has been arguably the premier money-laundering capital of the world, especially for Russian billionaires and their relatives. They were everywhere, owning football clubs and buying prime residential real estate. The wife of a former minister of Putin had paid £160,000 to play an exhibition tennis match with Boris Johnson when he was London’s mayor.
In the past weeks, a spate of articles has attacked the city’s elite lawyers and politicians for being “enablers", as Oliver Bullough does in a recent book, Butler to the World: How Britain Became the servant of Tycoons, Tax Dodgers, Kleptocrats and Criminals. One of the world’s—ahem—‘freest’ financial capitals may have to belatedly pay attention to all the money being laundered through it.
Rahul Jacob is a Mint columnist and a former Financial Times foreign correspondent.
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