In recent years, there has been a trend to expect "black swans" in the world economy. An English proverb says: "Curses, like chickens, come home to roost". It seems that this folk wisdom is most often remembered today by ordinary citizens of Europe who are facing a rapid decline in living standards. After all, it was not swans who arrived but rather the "chickens" of anti-Russian sanctions who returned to their homeland.
The sanctions imposed by the West against the Russian Federation were designed to destroy the Russian economy. But it turned out to be much stronger than it was initially imagined, and it has not collapsed so far. "Current data shows that the Russian economy is weakened, but is gradually strengthening ... Social media trolls are posting videos intended for a European audience that show Russian gas stoves running all day at full capacity. Something that costs hundreds of euros in Berlin or Paris, in Moscow, only a few rubles. There is something childish in these mockeries, but there is also a deep truth. The economic war between Russia and the West has entered a rather sensitive phase. "As Europe falls into recession, Russia climbs out", writes the British magazine The Economist.
Recently, on October 11, the International Monetary Fund published its latest forecast, according to which, in 2023, Russia's GDP will decline by 3.4%. Of course, this is also an unfavourable assessment, but in its previous report, the IMF predicted a collapse of Russia by 8.5%!
Almost simultaneously, the head of the World Bank, David Malpass, announced the risk of a global recession next year due to a slowdown in the growth of leading economies. In his opinion, the increase in interest rates leads to an even greater burden on the economy. As a result, inflation has become the main problem for many countries.
David Robert Malpass - American economist, President of the World Bank.
The Winter of Discontent
The cause of inflation and recession is apparent. By unleashing the sanctions war against Russia, the West, and primarily Europe, cut themselves off from the lion's share of Russian energy supplies, which have served as the basis for the growth of the European economy over the past decades. The consequences were not long in coming. According to the Eurostat agency, in August of this year, inflation in 19 eurozone countries reached 9.1% annually, setting a historical record. At the same time, the most significant contribution to the dynamics of inflation was the rise in the price of energy carriers, and their prices rose by 38.3%. For comparison, products added 10.6%, clothing, household appliances and cars – 5%, and services – 3.8%.
In Europe's largest economy, Germany, inflation reached 8.8% in August, the highest in 50 years. The UK recorded a forty-year high of 10.1%. In Estonia, inflation reached 25.2%, in Lithuania - 21.1%, in Latvia - 20.8%.
According to forecasts, the real problems in the energy sector of Europe have not begun yet. They will come next winter. "Europe has prepared as well as it could. Its infrastructure is at the limit. We face a harsh reality when we have physical limitations, and we cannot replace Russian gas soon. This means that we must double our efforts in reducing demand and consumption," the Wall Street Journal quotes Professor Michael Bradshaw from the University of Warwick Business School.
But, as the newspaper notes, many things can go wrong. If the winter is cold, demand will increase, stocks will run out, and prices will rise to such a level that it will be a massive blow to corporate and public finances. "Due to low temperatures, competition for LNG supplies between North America and Europe may begin. In addition, wind turbines will slow down if there is no wind, and if the winter is cloudy, solar power generation will be reduced," writes the WSJ.
Of course, citizens' cold homes and empty wallets are incredibly unpleasant phenomena. But, in the end, bearable. The only catch is that the problems will not go away with the warm spring, and the effect of anti-Russian sanctions will not go anywhere. The current energy crisis in Europe is a marker of Europe's serious risk of losing its production, financial and investment potential.
According to the Chinese newspaper "Huanqiu Shibao", against the background of the crisis in Europe, more and more enterprises find themselves in a difficult situation, and the United States is allegedly rushing to "help" them. But Washington's goal is clear – to make the EU dependent on itself.
"If even more industrial companies move to America, Europe is likely to deindustrialize and step by step lose its economic viability and global competitiveness. From the point of view of investments, it is becoming increasingly difficult for enterprises to obtain new financing… The Fed's continuous increase in interest rates has prompted investors to turn more strongly to the States, and the recently adopted "Law on Reducing Inflation" in America will attract more European capital to its industry – chemical, battery, and the development of alternative energy sources," the Chinese edition writes.
Money votes with its feet
The situation is no better in the financial sector. Thus, according to Bloomberg, in just one week, from August 31 to September 7 of this year, investors withdrew USD 3.4 billion from the equity funds of European companies. As a result, the total outflow of investments over six months reached USD 83 billion. In particular, an investment company BlackRock and the region's largest asset manager Amundi got rid of European assets.
In addition, analysts at Bank of America and JPMorgan Chase lowered their forecasts for the end of the year for the Stoxx 600 and Euro Stoxx 50 indices, respectively, Bloomberg notes.
At the same time, the agency emphasizes that this trend is explained by the energy crisis caused by sanctions against Russia and the threat of recession in Europe.
This outflow of funds from Europe is the largest in at least 15 years. At the same time, other regions, primarily the US, continue to attract capital. According to Amundi's top manager Matteo Germano, Europe is "more prone to a stagflationary shock", which is exacerbated by geopolitical tensions.
Financial expert Stefan Riese agrees with him, saying in an interview with German TV channel N-TV: "In light of the current situation, the United States, more than ever, is becoming the most reliable market with the lowest risks". According to the expert, the reason for the behaviour of depositors lies in the Ukrainian crisis, which, in turn, provoked an energy crisis that greatly affected Europe. The United States does not depend on Russian energy resources and is not so much affected by energy price hikes, so investments in American enterprises now look much more attractive.
The Decline of London
Europe not only weakens its industry, loses investments, but also loses its status as a leading financial centre. This is especially true for the UK. In particular, the London Stock Exchange is gradually losing its leading position globally. In terms of trading volume and market capitalization of companies listed on it, it is already inferior not only to the New York Stock Exchange and NASDAQ but also to Chinese and Japanese sites (Shanghai, Shenzhen, Tokyo). Its performance is comparable to that of Hong Kong, Saudi Arabia (Tadawul) stock exchanges and Indian sites.
According to a study conducted by EY, in the first 9 months of 2022, the London Stock Exchange was not among the top ten global exchanges regarding the number of IPOs and the number of funds raised. It lost to the stock exchanges from Shanghai, Shenzhen, South Korea, Hong Kong, Frankfurt, Dubai, New York, Bombay, Abu Dhabi, and Singapore.
This is a sure sign that London is no longer the "financial capital of the world". It is less and less attractive for investors and shareholders. Evidence of this is the withdrawal from the London Stock Exchange of such companies as Ryanair (Ireland), Naspers (South Africa), and Sinopec (China). On October 17, Rosneft also announced its withdrawal from the LSE since staying there makes no economic sense. At the end of 2021, the average daily trading volume of Rosneft's global depositary receipts on the London Stock Exchange amounted to less than USD 19 million, which is ten times less than the peak values of 2011. If in the first five years since the IPO, the share of the LSE in the total volume of trading in these securities was about 56%, then by 2021, this figure has decreased by 3.5 times to 16%.