Guest Post: Reflections On The Ramifications Of The Ukraine War For Malta 

The world capital markets started this year on a negative trend, largely due to increased expectations of steep increases in interest rates to be implemented in the coming quarters by the Federal Reserve and the European Central Bank as they start reversing the cheap money environment and this in the face of increased evidence of rather steep upward trends in inflation. 

In the previous years, monetary easing had been pushed to extremely low levels to alleviate world recession and the economic effects of COVID such that banks had to pay negative interest rates on their balances with central banks and likewise debt securities of highly-rated bond issuers gave negative yields. Neither debt securities nor equities like increasing interest rates and in fact January produced substantial negative returns for both types of asset.

February saw a much more sinister threat to economic stability. The post-World War II European era of peace and economic growth spanning over 75 years suddenly appeared threatened.  

Russia was suddenly rearing its ugly expansionist head and threatening its neighbour Ukraine in a bid to stop the latter from even contemplating joining NATO. Naturally Ukraine, as an independent sovereign country had every right to self-determination and to decide who are its allies. It knew who to fear.  

But Putin would have none of it and – as feared and in spite of the repeated denials by Putin of any intended aggression – the Russian build-up of its military machine along the northern, eastern and southern borders of Ukraine inevitably led to the latter’s invasion in much the same way as Russia had stopped in the bud all humanistic aspirations of previous communist satellites Hungary in 1956 and Czechoslovakia’s Prague Spring in 1968.  

On 24th February, Russia launched a multi-pronged invasion of Ukraine. The Russian troops lacked the motivation of Ukraine defenders, ably led and motivated by its “comedian” president Zelensky. Western Europe became alarmed and, for the first time in decades, the US and Europe made a united front, imposing an unprecedented array of economic sanctions against Putin’s Russia and his oligarch friends and providing military and humanitarian assistance to Ukraine.  

The West’s united front must have surprised Putin as much as the Ukrainian resistance. NATO, which had largely become an anachronism as the Cold War gave way to peace and economic development in the post-Gorbachev era, has suddenly been revived as the western world realised that a new cold war has set in.

Russia and its only European ally Belarus have become isolated. Flights to and from Russia are stopped. Russian and oligarch assets have been seized, including the Central Bank of Russia’s immense reserves in hard currency. Payments to and from Russia are no longer possible as Russian banks have been excluded from the SWIFT interbank payments system.

An extremely disturbing element of this regional war is the founded fear of it expanding into something much more serious. Putin has lost his cool and a fierce response threatens not only Ukraine but also any other neutral country that contemplates joining NATO, specifically singling out peace-loving countries such as Sweden and Finland. The small Baltic countries suddenly feel threatened once more by the Russian bear.  

Putin goes so far as kindling the fire of the use of nuclear armaments.  Indeed there is concrete fear of the use of at least tactical nuclear heads especially if the Ukraine invasion continues to expand only at a snail’s pace, exposing the rust in the Russian military machine and in the motivation of its troops.   

The elements of all this entire situation spilling into a World War III are all there with all the dangers of the reciprocal destruction of the warring parties.

In the face of all this, the capital markets continued their downhill trend although as yet there is no free fall. Indeed these geo-political events may go some way in convincing US and European monetary authorities to slow the otherwise steep interest rate rises that had been planned, and this in order to avoid killing in the bud a post-Covid recovery resulting in stagflation, or rather economic stagnation at the same time of high inflation.

However, the pre-existing inflationary flames have now been inflamed.  Commodity prices have shot up, especially oil and natural gas now that there are real risks that the tap of Russian gas and oil to Europe, especially to Russian oil-dependent Germany and Italy, may be closed altogether. Russia and Ukraine were amongst the main world suppliers of all sort of natural resources as well as of wheat. 

For the foreseeable future, these exports have been abruptly halted. The consumer will shortly be seeing much increased cost of living as the prices shoot up, especially petrol and foodstuffs.

The Maltese consumer has so far been spared increased cost of petrol, courtesy of the impending general elections.  The rise in fuel prices in Malta will have to wait for the Pope’s visit.  The Pope’s visit may have to be cancelled but the steep increases in diesel and petrol and anything else can not.

The peaceful aspirations of the western world population are threatened by all this sudden change in geo-politics. The possibility of this regional war expanding to something much more devastating are all there to see.  

Although it may seem cruel and selfish, the West has done well not to put boots on the ground in Ukraine to defend against the Russian aggression, but to limit itself to economic retaliation and to the provision of military hardware and humanitarian support to Ukraine.  To involve one’s self directly militarily would have caused Russia and NATO to come into direct combat with uncontrollable consequences, although this self-restraint cannot be exercised if a NATO country such as a Baltic state is attacked. 

The Western resolve to combat expansionism must not wane.  The lessons learnt in 1938 that appeasement and passivity in the face of aggression does not work must not be lost.  The world has entered into a new cold war era and only a firm resolve not to be allowed to be bullied can save the world from much worse.

One thing that the Western world population must not do, however, is to confuse the Russian population with Putin and the Russian regime.  The Russian population is a victim of Putin’s adventurism as well.  The rouble is less than a third of what it was weeks ago and the life savings of the Russian population have been decimated and their quality of life may well revert to what it was a generation ago. 

There have been unprecedented protests against this war in all the cities of Russia and there is no doubt major, albeit below the surface, discontent in the Russian population.  No one person should suffer and be penalised for the sins of his father.  Indeed, the Russians need to be liberated as well.

One last reflection on Malta.  

This episode shows how wise it has been to anchor Malta with the West via the European Union.  It has been a pleasure to note how one of us, President of the European Parliament Roberta Metsola, is at the very front of this institution’s decision making apparatus in this political crisis. 

On the other hand, the Maltese government, alas, has shown once more, in repeated episodes, how it misses the wood from the trees and how its priorities are not aligned with those of peace-loving countries. 

Instead of the coming together of nations and the expression of sincere solidarity with the Ukrainians, the Maltese government resisted the calls for the cessation of the cash for golden passports and purchase of Maltese (and hence European) citizenship by Russian oligarchs at the same time that the European Union imposed large scale economic sanctions against the same oligarchs.  

Malta resisted the lifting of Covid-related restrictions on the entry into Malta of Ukrainian refugees, with the Minister of Health finally giving in but telling us all of how he callously insists that these refugees would have to pay their way whilst staying in hotel accommodation during the quarantine period.  Labour-leaning press and television, including of course national broadcasting, are replete with sympathy for the aggressor rather than the victims of unprovoked aggression. 

When will they ever learn?

Paul Bonello is the Managing Director of Finco Treasury Management Ltd, licensed investment services provider and stockbroker.

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How do you think the war will affect Malta?