By Michael Calvo Elhauge
Michael Calvo Elhauge is the Founder & CEO of PACTUM PARTNERS, an organization founded on the understanding that sophisticated family offices, aligned through shared missions, visions, and values, would benefit from a partner dedicated to fostering co-investment and peer collaboration. An international multilingual family office advisor, Michael has directly counseled over 200 single family offices globally.
Dr. Willem Hendrik Buiter, CBE is an Adjunct Senior Fellow at the Council on Foreign Relations, Adjunct Professor at Columbia University, and Member at the Advisory Scientific Committee of the European System Risk Board (ESRB). Dr. Buiter has served as the Global Chief Economist and Special Economic advisor at Citigroup, Chief Economist and Special Counsel to the President of the European Bank for Reconstruction and Development, and as an original Member of the Monetary Policy Committee of the Bank of England. In academia Dr. Buiter has held professorships for over 30 years including; Princeton University, Yale University, London School of Economics, and Cambridge University. He has also served as a consultant to the International Monetary Fund, the World Bank, the International Development Bank, the Asian Development Bank and the European Commission, as well as to many central banks and finance ministries.
I had the privilege to interview Dr. Buiter, CBE on the Geopolitical macroeconomic impact of the Ukrainian crisis. The following article summarizes key insights gleaned from the conversation. Dr. Buiter expects to see a global bifurcation of economic spheres, the regionalization of trade, investments, and limitations on interregional personal mobility.
There will be a gradual bifurcation between the financial systems of the two economic blocks, on one side we have Russia and China and on the other side the United States, Canada, United Kingdom, Japan, Australia, New Zealand, and the European Union – the “Western block”. Dr. Buiter stated that we could, “Call it the new cold war, although the China-Russia block is unlikely to become as economically self-sufficient as the former Soviet Union and Warsaw Pact…which had very little by way of international connections.” We will see increased self-imposed official regulatory, legal, and tax obstacles on investments between the two spheres and a significant reduction in cross-regional asset allocation between these two blocks. We should expect to see significant reallocations on behalf of family offices, private wealth managers, and global investment vehicles.
Dr. Buiter highlights that, “we have seen the peak of globalization … we will now see the rise of regionalization.”
China should not expect to have sanctions imposed on it, although a larger confrontation between the United States and China should be expected in the instance that China were to provide Russia with direct military support. This would have profound economic consequences for the globe, resulting in a massive global recession and negative growth. China will remain the dominant partner in the China-Russia block, as China accounts for 18.7% of global GDP versus Russia’s 1.8%. As the world rebalances China could benefit from lower prices for oil and gas imports.. China is not expected to overtake the United States (at 24% of global GDP) by the end of the decade, we should expect to see parity between the powers.
The U.S. Dollar will remain the dominant global currency. The Federal Reserve will pursue the digitalization of the currency, with both a wholesale and retail dimension. The political situation in the United States has resulted in a deeply divided Congress; as a result sensible economic measures will be hard to get through. Despite this we should see the digitalization of the currency in the short term.
Europe will be uniquely affected by the Ukraine crisis resulting in a short-term disruption damaging economic growth for a couple of years, although it will be manageable. This will particularly disrupt non-ferrous metals, grains, gas and oil. It will take time for a reallocation or redirection to address supply issues but alternative sources can be found for all critical commodities.. With regards to the refugee crisis we will similarly see a short-term disruption but over the long-run the addition to the labor supply will boost economic growth, as Ukranians are highly skilled and educated.
The disruption of supply chains resulting from their vulnerability to geopolitical and pandemic risks will result in a substitution of resources. We will see supply chains becoming diversified, shortened and more robust; greater resilience requires redundancy, which is costly. This diversification of sources of key imports represents a shift away from the traditional, “just in time” to “just in case” solutions – a focus on hazard mitigation. The new emerging political domains or blocks will shape future supply chains. There will be a decrease in demand for key sources of supply from non-value aligned blocks. Countries will pursue insurance of supply chains, in the form of a diversification of multiple suppliers across regions, the shortening of the supply chains, the avoidance of logistical risks, and the reshoring of production capabilities. There will be a lack of willingness to be dependent on key final products from regions that have become geopolitical rivals.
Industries that will have long-term growth as a result of the crisis; defense, cyber warfare, cyber security, crypto industries (proof of stake), technology, biomedical, logistics, shipping, warehousing, storage, and alternative energy. We should see a short-term growth in non-Russian fossil fuels. With the emphasis on reduced dependence we see a higher tolerance for their use and production. For example we should expect the United States to boost their shale based oil and natural gas production. The same holds true for coal, but to a lesser degree. We should see a short-term decrease in the hospitality, tourism, and luxury industries.
Family Offices and UHNW: Pursuing Anonymity
Family Offices and UHNW individuals will have increased incentives to pursue tax havens that hide the identities of their UBO’s. However there will be less tolerance for that behavior, and government crackdowns will be more rigorous, in the OECD countries and indeed the G20.. It will remain possible to escape fisca-financial scrutiny, although benefits will be more limited, risks will be higher, and it will ultimately be more difficult. As pressure increases these UBO’s will increasingly be at the mercy of their tax havens. There will be more stringent limits to the degree upon which wealth can be anonymously and safely allocated.
With regards to investors in the China – Russian block, we will see the reallocation of foreign assets owned by entities in the Western block to Western block countries, and to South-East Asia, Africa, the Middle East, and Latin America, where countries will be open to foreign investment and most importantly providing foreign domiciles.
Cryptocurrency assets could be used as a vehicle for achieving anonymity by UHNW individuals in attempts to hide from foreign or domestic authorities; we have seen them used quite a bit in Russia recently.. The durability of anonymity will be fragile: although the owner of the digital wallet is anonymous, the transactions are all observable, permitting the authorities and other third parties to figure out the likely owner or nation to which they belong. Crypto assets will remain as an attractive vehicle for anonymity in the short-term but will not last.
Family Office and UHNW: Geopolitical Crisis Management
Family Offices and UHNW individuals have to be aware of key geopolitical and economic developments. It is important to have at least one person who follows these developments closely. Do so by cultivating a culture of constant education, by receiving regular updates of accurate data and by rigorously analyzing these data.. A one or two person team following the news cannot expect to glean all the necessary insights Therefore, supplement the in-house capacity with outside experts. This is particularly important for families with operating businesses. Great sources for accurate data and/or advisory services include; The Council of Foreign Relations, Chatham House, and Avonhurst.
In these times of unprecedented uncertainty and change, it has never been more important for highly sophisticated family offices to develop crisis committees capable of tracking all possible strategic eventualities, and pre-populated with global experts. This will enable the family offices to rapidly address the crisis management process in order to transition to opportunity management. Identify the crisis early, with retained experts who understand your situation, and can advise you on how best to implement well-prepared contingency plans to rapidly address the situation.