✪ BlackRock CEO Larry Fink said that the Russian invasion of Ukraine “has put an end to the globalization process we have experienced over the last three decades.”
“The magnitude of Russia’s actions will play out for decades to come and mark a turning point in the world order of geopolitics, macroeconomic trends, and capital markets.” said Larry Fink, CEO of BlackRock in his annual letter to shareholders published on Thursday.
The head of the world’s biggest asset manager sent the letter to shareholders on Thursday warning of dark days ahead for the world economy, signaling that inflation is of particular concern.
Fink predicted that the war will force countries to re-evaluate the extent to which their economies are interdependent on others. It could also spur economies to develop greater reliance on local manufacturing, according to Fink.
“Russia’s aggression in Ukraine and its subsequent decoupling from the global economy is going to prompt companies and governments worldwide to re-evaluate their dependencies and re-analyze their manufacturing and assembly footprints — something that Covid had already spurred many to start doing,” he wrote.
Russia has been hit with crippling sanctions over what it calls a “special military operation” in Ukraine. The measures have targeted Russian banks and wealthy oligarchs, there’s been a closure of airspace to Russian planes, and the export of key technologies has been banned.
The sanctions also include a freeze on around $300 billion of Russia’s central bank hard currency reserves, an unprecedented move that Russian Foreign Minister Sergey Lavrov denounced on March 23 as “theft.”
Fink noted in his letter that capital markets, financial institutions, and companies have gone beyond government-imposed sanctions, moving quickly to terminate longstanding business and investment relationships.
He predicted that Russia’s decoupling from the global economy will prompt governments and companies to re-evaluate their manufacturing and assembly footprints more generally and reconsider their dependency on other nations.
“This may lead companies to onshore or nearshore more of their operations, resulting in a faster pull back from some countries,” Fink wrote. There will be challenges for firms as they seek to rejig supply chains, he said. “This decoupling will inevitably create challenges for companies, including higher costs and margin pressures.”
Howard Marks, the billionaire co-founder and co-chairman of Oaktree Capital Management, also wrote a letter to investors expressing similar sentiments, warning that inflation is likely to become a long-term consequence.
“The recognition of these negative aspects of globalization has now caused the pendulum to swing back to local sourcing,” Marks wrote. “Rather than the cheapest, easiest and greenest sources, there’ll probably be more of a premium put on the safest and surest.”
The United States and the European Union, who had been experiencing economic hardship well before the invasion, imposed crippling sanctions on Russia, which have exacerbated rising energy prices and roiled markets.
Fink said that the sanctions against Russia were tantamount to “economic war” on Moscow and said the firm will make efforts to anticipate just how the unfolding crisis will affect investors.
BlackRock’s portfolio includes assets worth a total of an estimated $10 trillion. Fink wrote in his letter that the company has suspended any purchase of Russian equities.
“Over the past few weeks, I’ve spoken to countless stakeholders, including our clients and employees, who are all looking to understand what could be done to prevent capital from being deployed to Russia,” Fink said.
He said the Russian war in Ukraine marks a turning point in the decades since Moscow was brought into the world capital markets thanks to the rise of globalization.
“I remain a long-term believer in the benefits of globalization and the power of global capital markets,” Fink wrote. “Access to global capital enables companies to fund growth, countries to increase economic development, and more people to experience financial well-being.”
“While companies’ and consumers’ balance sheets are strong today, giving them more of a cushion to weather these difficulties, a large-scale reorientation of supply chains will inherently be inflationary,” he added.
Fink said central banks find themselves in a challenging moment, weighing how fast to raise rates in a bid to curb surging inflation, which has been exacerbated by the conflict in Ukraine and the associated energy price shocks.
“Central banks must choose whether to live with higher inflation or slow economic activity and employment to lower inflation quickly,” he said.
The Federal Reserve last week hiked rates for the first time since 2018 and Fed chair Jerome Powell said on Monday that the U.S. central bank must move “expeditiously” to raise rates and possibly “more aggressively” to keep an upward price spiral from becoming entrenched.
Annual inflation in Russia accelerated to 14.5 percent as of March 18, the fastest pace since 2015, the economy ministry said on Wednesday, as the battered rouble sent prices soaring amid biting Western sanctions. ✪
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