Mazars’ George Lagarias: “‘Cancelling’ Russia will be expensive”

by | Mar 7, 2022

George Lagarias

George Lagarias, Chief Economist at Mazars, comments:

“Developed markets mean to behave as if Russia simply does not exist anymore. Western sanctions over the Ukrainian war are great and far-reaching, far beyond Russia and its nationals. While economic sanctions might have the intention of agitating Russians to find a way to discard Mr. Putin, there is no guarantee that this will happen. But what is certain is that the war and the sanctions are throwing the post-pandemic economic calculus into chaos.

“Supply chains that were just beginning to recover after tremendous pressure are now facing another massive hit. Input prices will, in all probability, soar. The IMF predicted 4.4% global growth for 2022, but risks are now on the downside. Rising prices will also change the central banks’ inflation calculus in ways we can’t yet predict. By some estimates, oil prices could reach $150 per barrel. The Fed’s decision between supporting risk assets and fighting inflation is getting a lot more difficult. Failure on those fronts could compromise its independence. Europe, meanwhile, is preparing for a cold winter. It’s not just the price of energy at stake but also its availability.

“The war in Ukraine and the concomitant reactions will have consequences we can’t yet imagine or, frankly, predict and plan for. As economic concerns take a backseat over geopolitical objectives, so will final decisions and, inasmuch as policy affects them, the returns for risk assets. This is what textbook “systematic risk” looks like, and it is un-hedgeable. But unlike anything we have seen in the past forty years, this instance comes with high inflation which prevents central banks from mitigating the bulk of that risk. It also makes holding cash as an alternative a very expensive proposition.

“Investors with a high tolerance for risk may choose to roll the dice. But for the critical mass of portfolio holders, those for whom risk is a measurable quantity and financial planning is part of the equation, we think that the best course is to avoid taking significant action before the dust settles and trust in the long term properties of diversified portfolios.”

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