It was a small news item as these things go, so you may be forgiven for missing it. Last week, Russia’s financial oversight agency, Rosfinmonitoring, placed former world chess champion Garry Kasparov on its list of “terrorists and extremists.” Russia sanctioning Kasparov, a high-profile critic of Vladimir Putin, is hardly earth-shattering, but the move by the Kremlin is emblematic in ways you might not consider.
I’ll get to the big picture, but first more on Kasparov, who spoke at a private club in New York City the day after his specious designation. Kasparov, 60, author of the prescient 2006 volume Winter Is Coming: Why Vladimir Putin and the Enemies of the Free World Must Be Stopped, drew a crowd of some 200 besuited sophisticates who, between bites of wild striped bass Veronique, hung on his every word. The former grandmaster’s remarks were off the record, but I was able to speak with him by phone this week.
“Putin awarding me this title shows the value of my work,” he told me of being deemed a terrorist. “That I did something very useful for the cause of freedom.” Given the assaults and murders of Russians around the globe, including just this week, Kasparov is concerned about his well-being but feels safer in New York than London. “Europeans and Brits in particular have paid no attention to Russians who have been infiltrating their society,” he says. “New York is more protected, though there’s no guarantee. I have dramatically reduced the number of countries that I can visit. My kids counted that I have gone to 104 countries. Now I would feel safe going to 10% of them.”
As for imprisoned Wall Street Journal reporter Evan Gershkovich: “He’s a hostage,” Kasparov says. “We should all remember that Putin is a terrorist or a mafia boss and sees Gershkovich as a valuable asset to exchange or squeeze concessions out of others.”
Kasparov told me that “dictators like Putin lie about what they have done, but tell the truth about what they are going to do,” referring to the fact that Putin stated clearly that he wanted to expand Russia. Kasparov says the West needs to stop pussyfooting around and help Ukraine defeat Russia, which will bring down Putin. “In war as in chess, you have to identify your goal,” he says. “And strategy in a war is you must win.”
Advertisement – Scroll to Continue
As for Putin using nuclear weapons, Kasparov says he is “really skeptical about any serious threat of nuclear weapons, even tactical nukes, being used or even considered by Putin.” The Russian leader is “an oligarch, not a fanatic who wants to die for a cause.”
Why should we listen to a chess player when it comes to foreign policy? Leaving aside that Kasparov has been fighting for reform and democracy in Russia for the past 18 years, I’d argue that as perhaps the greatest chess player of all time, he knows as much about strategy and assessing an opponent as anyone in the Department of Defense or the Central Intelligence Agency.
How Kasparov’s lot ties into money and markets is simple. Geopolitics, really a manifestation of humanity’s collective impulses, ultimately drives economics—though perhaps in unappreciated ways.
Consider, for instance, the two wars currently being waged in Ukraine and the Middle East. It would seem these conflicts make the world more dangerous than ever. And yet the
Advertisement – Scroll to Continue
is at a record high, annualized U.S. gross domestic product just grew 3.2%, and unemployment is at 3.9%. There doesn’t seem to be much fallout in fortress America, right?
Even countries in the crosshairs appear to be resilient. Using the imperfect proxy of equity markets, most of the rest of the world seems to be shrugging off these two Armageddons-in-the-making. Yes, GDP declined 0.3% in the fourth quarter and may be still shrinking in Germany, but the DAX is just off its all-time high and up 17.3% over the past 12 months. Even in Israel—where GDP declined 19.4% in the fourth quarter because of the war—the Tel Aviv 125 Index has climbed 10.2% over the past 12 months, more than recovering its losses after Oct. 7, and is down only 8.7% from its January 2022 record high. Bullishness there may reflect the fact that Israel has faced existential threats before.
If our global straits are so dire, then why aren’t markets reflecting it?
Advertisement – Scroll to Continue
“Geopolitical experts love talking about how the situation is fraught,” says Ruchir Sharma, chairman of Rockefeller International and founder and chief investment officer of Breakout Capital, which focuses on emerging markets. “When the Gaza conflict escalated in early October, there was talk about World War III from pretty respected analysts. Nine out of 10 times the geopolitical risks never materialize, and when they do materialize, you’ve got bigger things to worry about. I don’t like to classify any period, including now, as being particularly geopolitically challenging because the world is always in a flux.”
Sharma, the former head of emerging markets and chief global strategist at Morgan Stanley Investment Management, notes that “the big transmission mechanism for a geopolitical crisis is usually the price of oil, which has been remarkably stable over the past year or so.”
More broadly, he says, in the days after the terrorist attacks of 9/11, the S&P 500 fell by 12% but recovered its losses a month later. And looking back at market reactions to 25 of the most significant geopolitical crises since World War II, the S&P 500 dropped on average by around 4%, bottomed out in 15 days, and recovered in 33 days. Which is to suggest that trading on fear is a strategy for only the nimblest or luckiest of profit-takers. It also reminds us of that most ancient and comforting of investing chestnuts—stocks usually go up.
Advertisement – Scroll to Continue
While the impact of geopolitics on broad indexes tends to be a wash, its effect on sectors and stocks is far more meaningful and—antenna up here, investors—can lead to significant and sustainable trends.
Let’s start with Sharma’s “transmission mechanism,” or petroleum products writ large. So yes, benchmark Brent crude oil at $81 a barrel now trades more or less where it did in 2018, after crashing during the pandemic, spiking with Russia’s invasion of Ukraine in 2022, and then falling back. This, even with some shippers now bypassing the Bab el-Mandab (“Gate of Tears”) Strait between the Red Sea and Gulf of Aden to avoid Yemen-based Houthi militia attacks. Instead of going through the Suez Canal, many European-bound vessels are choosing to circumnavigate the Cape of Good Hope, adding some 16 days to the trip at an increased cost of half a million dollars in fuel alone. Tanker rates are up 20% since December, according to the U.S. Energy Information Administration.
But crude’s relative price stability masks some massive market moves beneath the surface—none bigger than the explosion in U.S. energy production. Increased drilling in the U.S. is a direct response to a clarion call for energy independence, a geopolitical, bipartisan urge so powerful it has outweighed the Biden administration’s climate-change exigencies.
In a report released this week, the EAI says the U.S. is now producing 13.3 million barrels a day, more than double the output from a decade ago. And this: “The United States produced more crude oil than any nation at any time…for the past six years in a row.”
Providing energy to our allies furthers this trend. “The structural importance of the U.S. as an energy producer and exporter of natural gas to Europe is going up on the back of Russia and Ukraine,” says Ian Bremmer, founder and president of Eurasia Group. Last year the U.S. exported 7.6 trillion cubic feet of gas (No. 1 in the world), up from 1.5 trillion cubic feet 10 years ago—with over 60% now destined for Europe. Five years ago the U.S. exported essentially zilch to the Continent, while last year Uncle Sam supplied 48% of its liquefied natural gas (LNG), which amounted to some 15% of its total. (Norway, Qatar, and African exporters have also increased their share.) Meanwhile, Russia’s share of European gas imports dropped from 40% in 2021 to less than 15% in 2023.
Not surprisingly, domestic energy exchange-traded funds like
and
are both up over threefold since 2020.
Advertisement – Scroll to Continue
Energy, the biggest U.S. exporter of LNG to Europe, has rocketed up from $33 in 2020 to $182 last November. Since then its shares have slipped mostly because excess supply has crimped prices. French energy giant
also in the business of exporting U.S. LNG to Europe, has seen its stock benefit as well.
Despite the Biden administration’s recent “temporary pause on pending decisions” of LNG exports (in part due to “the impact of greenhouse gas emissions”), geopolitics still wins the day. “Through existing LNG production and export infrastructure, the U.S. has—and will continue—to deliver for our allies,” the White House stated.
Still, notes Beata Javorcik, chief economist at the European Bank for Reconstruction and Development and professor of economics at the University of Oxford, natural-gas prices are four times higher in Europe than in the U.S., prompting Europeans to move in other directions. “The war has accelerated the green transition because it is viewed through the prism of energy security,” she says. “That’s a big change for countries like Poland, which were reluctant to embrace energy transition. Now it is a political and geostrategic necessity.”
The drop in trade from Europe to Russia has created an opportunity for China, Turkey, and other countries, Javorcik says, which are supplying Russia with trucks, engines, and machinery and other goods. And these countries are “using currencies other than the U.S. dollar and the euro to invoice their exports to Russia,” she says. “Now two thirds of Chinese exports to Russia are invoiced in renminbi. In 2016, it was 10%. I would expect these trends to continue.”
As Garry Kasparov knows all too well, Putin and his cronies are always working the angles. You may not see their dirty deeds reflected in the S&P 500, but somehow, somewhere, they’re moving a market. And worse.
Write to Andy Serwer at andy.serwer@barrons.com