Amid invasion and fifth wave, Russia and Hong Kong are feeling the wrath of unintended consequences

Emotion appears to have overtaken Putin’s reasoning, opening his country to unforeseen destructive effects, while Hong Kong struggles to deal with the consequences of its pandemic policies
For investors, the key defensive mechanism is diversification and unemotional risk assessment

Richard Harris

Published: 4:30pm, 3 Mar 2022

Why you can trust SCMP

“Never, never, never believe any war will be smooth and easy, or that anyone who embarks on that strange voyage can measure the tides and hurricanes he will encounter. The statesman who yields to war fever must realise that once the signal is given, he is no longer the master of policy but the slave of unforeseeable and uncontrollable events … Always remember: however sure that you are that you can easily win, there would not be a war if the other man did not think he also had a chance.”

Winston Churchill – soldier, war leader and author of My Early Life: A Roving Commission – knew a thing or two about wars and bestowed his advice to future leaders in his books. Unfortunately, it seems that this one was not covered by Russian President Vladimir Putin’s book club.

If truth is the first victim of war, the second is battle plans that fail on first contact with the enemy. By ordering a full-scale invasion of a sovereign country within Europe, Putin has exposed himself to the law of unintended consequences. He is no longer master of policy but its slave.

01:51

Ukraine invasion: Russian missiles strike Kharkiv; at least 10 killed and 35 injured

This is odd as Putin, who is normally clever, had his opponents right where he wanted them. He was ably playing the game of salami slicing in Ukraine, combining it with highly proficient information warfare and using the London courts to attack his opponents and stash money. In deploying half of his army to invade Ukraine – which is huge in area – he has swapped his upside for a future of downsides.

Even if, as seems possible, the Russians occupy and destroy the 1,500-year-old city of Kyiv, they could easily be tied up in a 15- to 20-year insurgency that will produce tens of thousands of maimed Russian soldiers and hundreds of thousands of civilian deaths. The Russians are less squeamish than the Americans about rules of engagement – not the finest of legacies.

It seems Putin has let his emotions take over. He has called Ukrainian President Volodymyr Zelensky – who is Jewish – a “neo-Nazi” even as Russian tanks crossed the border. Centralised decision-making and emotion create fertile ground for unintended consequences. Russia can only lose this very costly war of attrition – just ask the United States.

Putin’s invasion has mobilised broad global support against Russian interests, primarily inspiring economic and trade sanctions. No small country likes to think they could be invaded next. Nato countries are on high alert, and even Germany has pledged to increase its defence spending.

Russian banks are banned from the Swift financial messaging system. Russian planes cannot fly over large areas of global airspace, and Russia’s central bank foreign reserves are frozen. The European Union is considering Ukraine for membership, which they would not have dreamt of doing before.

From a military perspective, defenders who are protecting their homeland and families will always be more motivated than an invading army. Mercenaries from former Soviet republics are flooding in. Foreign military analysts hover satellites over every move of the Russian forces, recording their strengths and weaknesses with a professional eye. The consequences for Russia are rampant inflation and severe economic shortages for its people.

But how do investors avoid unintended consequences? The key defensive mechanism is diversification and unemotional risk assessment. If you have not already fixed the roof when the sun was shining, it’s too late to worry when the market has fallen on the news. Investors must now manage the current narrative and not be tempted to make bold moves like selling everything.

It is likely this war will hasten a global economic recession. Higher oil prices, trade friction, inflation and interest rates are not the recipe for economic growth. Nevertheless, for this year at least, the US Federal Reserve is likely to be persuaded to keep interest rate rises mild for fear of triggering a crash, even if inflation remains north of 5 per cent.

US Federal Reserve chairman Jerome Powell testifies before the House Financial Services Committee on Capitol Hill, in Washington, DC, on March 2. The impact of the conflict in Ukraine on the US economy is “highly uncertain”, and the central bank will need to adjust quickly to ensure the post-pandemic recovery continues, he said. Photo: AFP

Not being bold means staying in big company equities such as technology and pharmaceutical companies as well as consumer staples, including food and low-ticket goods. A rotation into pro-oil equities excluding Russia is likely, but not too much as the oil price is likely to top out with new supply from the US shale pumpers and Opec.

High geopolitical tension usually supports the US dollar and gold. Bitcoin and other cryptocurrencies might benefit as wealthy Russians flee from the rouble. Closer to home, China is stabilising after last year’s self-inflicted lockdown shocks, and select sectors such as electric vehicles are providing investors with a bet on the future.

Meanwhile, the law of unintended consequences strikes home. Hong Kong’s Covid-19 case numbers are soaring, not because isolation rules were too weak but too strict. As a wealthy society, we are admitted softies. However, faced with the threat that a positive test leads to incarceration for two weeks in a construction cabin, with a hole in the floor for relief and three antisocial roommates for company, there might be little incentive to report illness.

According to government statistics, more than 70,000 people – almost 1 per cent of the city’s 2021 population – left Hong Kong last month. Many of them are leaving to escape testing lockdowns. Sadly, only some of them plan to return.

Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster and financial expert witness