In a brilliant essay, Tim Harford looks at the brinksmanship Putin is playing with the rest of the world over Russia’s nuclear capability.
This morning that threat seems the more real as his forces nearly damaged a Ukrainian nuclear reactor. Whether setting fire to part of the facility was intended as a threat or just more of the serial incompetence of Russia’s troops, we have yet to discover, but the recklessness is the same.
Putin holds a weak hand, except for the one card that no rational person would ever choose to play. But the essence of brinkmanship is to introduce a risk that nobody can entirely control. If the risk becomes intolerable, you may win concessions. I am 99 per cent sure that Putin is bluffing, but a 1 per cent chance of the end of the world is and should be more than enough to worry about.
The 1% chance is of course that Putin is mad and out of the control of any governance.
Which brings me to an interesting question. Just why has he got so much of our money?
Simon Pilcher, CIO of Britain’s largest pension scheme (USS) was heard on Radio 4’s today program on Wednesday (6.20am) explaining why USS weren’t investing any more money in Russia. To which the rational question must be,
“why were you choosing to give Russia money before the attack on Ukraine?”.
Simon Pilcher is reported as saying that
“We think there’s a clear financial, as well as a moral case with respect to divestment of our Russian holdings. We’ll be looking to sell.”
Meanwhile , Bill Browder, CEO of Hermitage Capital and a leading anti-Russian corruption campaigner, said:
“It’s been obvious for quite a while that Russia has been an uninvestable country.
“Any fund manager who still owns shares in Russia has some serious explaining to do to their clients about why they ignored all the warning signs.”
One answer to the question was that while it was 99% certain Putin was going to invade Ukraine, we preferred to believe the 1% chance he wasn’t. So we kept the money where it was and Putin called our bluff.
The amoral majority
But there are other practical reasons why our money is invested in Russia.
It is virtually impossible for a multi-billion pension scheme like USS or BT not to be invested in Russia. That’s because even such large funds invest in clusters of countries with the investments landing indiscriminately, I use my language deliberately.
When we invest in emerging market funds, or even sovereign debt funds, we invest into a basket of countries which are likely to include Russia and Ukraine, because the investment follows the composition of an index decided by S&P, or FTSE or MSCI or Russell or a similar index-maker.
These indices cannot unilaterally choose to exclude countries on the basis that the world considers them “pariahs” and in any event, I heard no calls to exclude Russia from such indices from pension schemes such as USS (and BT who are also choosing to cease sending Russia new money).
Actually, I and I suspect many others have received approaches from one index manager on my views on whether to exclude Russian markets from its indices. And there is a further question about sovereign debt and another about companies that trade in Russia but are listed on overseas markets like the London Stock Exchange.
MSCI and FTSE Russell will remove Russian listings from their indexes next week. Both index providers began consultations in late February regarding the accessibility of the Russian equities market as sanctions escalate and the Moscow Exchange remains closed.
Too late of course for investors who may wish they had Bill Browder as their fund manager.
Charts weren’t really invented for the kind of calamities that have beset Russian equities
and once MSCI and Russell have ditched Russia , where do the new flows go?
A lot of friends to Russia are among the economies which will benefit from pulling the money from Russia.
Add to these the none too savoury regimes in Brazil and Saudi-Arabia and it’s clear that wherever you invest in under-developed markets , you are likely to be sponsoring poor governance, poor social policy and environmental policies unlikely to sustain the planet.
Moral or immoral?
Russia has got so much of the money that backs our pensions because of indices that include but will soon exclude Russia.
But if this money is shipped off to China, Brazil or Saudi Arabia, will it do more good? Are we really taking a moral stand by reacting to market events? Would the braver stand be to invest with more discretion?
I find markets neither moral or immoral but amoral. They simply deploy capital to where it is needed and there is little that the CIOs of BT or USS or the 91 funds of the LGPS can do about that.
Listening as I did yesterday to the LGPS managers debating “impact” yesterday, I was struck by just how little was made of the impact of the billions invested in Russia.
What can we do?
I contacted my fund managers to find out how much of my pension money was invested in Russia and what was likely to happen to those investments. I haven’t of course got an answer yet, I will no doubt get something but it is pretty well impossible for a retail investor , using funds, to get accurate answers to these questions without access to better tools than I have or can afford.
If you employ a wealth manager, you may get better answers, but there is little you can do now about getting out of stocks which are currently pretty well worthless.
The reality is that our money is propping up Putin and has been for years. Bloomberg report that if just MSCI exclude Russian stocks from their indexes $32 billion could be pulled from Russia.
The man who many regard as criminally insane is using UK pension fund management in his war on Ukraine and for all our talk of ESG policies, we appear to have considered Russian corruption “investable” until the invasion of Ukraine.
I think that CIOs would be better admitting their governance has been weak and their investment decisions at best amoral.
A madman — or a toddler — can get away with certain actions because he cannot be deterred by threats or because his own threats seem more plausible. But you don’t need to be mad to secure these advantages. You just need to persuade your adversaries that you might be.
The value at risk from Putin’s wider threat to the world is immense, I doubt that threat was on many business’ risk registers, because it stemmed from a disorder that we find hard to contemplate. But now that this threat has been tried by Russia, what is stopping any of the countries listed , from having a go?