War Exposure

War is hell. I’m dismayed at the violent destruction the planet’s allegedly most intelligent species is willing to inflict. We spend years creating, innovating, building only to tear it all down again because of political disagreements.

Look around you at what you have: running water, electricity, warmth. It could all be taken away in a flash, by the fragile egos that run the world.

1: Italian and French banks are most exposed to Russian assets, while US bank exposure remains low – especially after adjusting for the size of each economy. If and when Russian debtors go into default, the European Central Bank may need to absorb the shock via quantitative easing and capital infusions. However, according to Wells Fargo, the risk to European banks remains low, since Russian exposure is below 1% of total claims for all listed countries in the chart.

Still, when considering overall portfolio and direct exposure as a proportion of GDP, Ireland and Netherlands also look particularly exposed (second chart).

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2: Ag commodities are priced on the global market, so a shortage in one region tends to affect prices worldwide. Generally, food might still be available for most – it simply becomes more expensive.

Regionally, however, the story might be different. While prices rise worldwide, risks to physical supply may be specific to geographic locations. The chart below shows Russia’s major export partners for wheat and maize. If Russian production is disrupted, these countries must find new physical sources of food to feed their populations. This creates an extremely challenging situation as there’s only so much to go around.

Meanwhile, North American crop production appears under threat due to an ongoing drought. So it remains doubtful that producers can compensate if the European breadbasket fails.

3: Similarly, a disruption in Russian oil production is expected to be among the largest in history. Goldman Sachs estimates the war could take 3 million barrels/day offline.

Note that as a proportion of total oil production, the current stresses remain lower than those of the 1970s.

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