HC-AM Morning Report - Putin In Driver's Seat

Good Morning,

Here are this morning's headlines:

Russia & Ukraine- Unsurprisingly, the big news over the weekend has been conflict in Ukraine. Markets went into the weekend in a risk-off tone and there were fears of a huge sell-off come the opening bell last night. Those have been abated by news of a possible summit between Joe Biden and Vladimir Putin which will take place later this week, providing Russia don’t strike ahead of it taking place. The summit, which has been brokered by Emmanuel Macron, would be the first time the leaders have sat opposite each other since the summer of last year and will be seen (and hammed up by Moscow) as a victory, as their military might has forced America to the negotiating table – though Moscow’s demands still contain red lines for the US and vice versa. Moscow is clear that talks cannot go on indefinitely and a possible step if talks don’t go as hoped is that they could recognise the Donetsk and Luhansk regions as independent states, which would then likely follow them ‘supporting’ these states with boots on the ground – something that is logistically much simpler than a full-on assault on the country.

Ursula von der Leyen last night put some colour around what Moscow can expect in the way of sanctions if they do invade, saying that “Russia would be in principle cut off from the international financial markets” and that sanctions would be imposed on “all goods we make that Russia urgently needs to modernise and diversify its economy, where we are globally dominant and they have no replacement”. That’s a strong statement, but clearly it cuts both ways – with Russia having its own dominance in certain goods, as far as Europe is concerned – namely oil and gas. There has been no direct talk of sanctioning Russian exports of these products, though if they were cut off from the SWIFT network then paying for product would be an issue, but the knock-on effects of embargoing these goods from Russia (or if Russia took retaliatory steps and cut off exports of these products to the West) would be massive, with worst case predictions that gas prices could double from their December peaks and oil would sail through $100 per barrel without blinking an eye. Whilst supply of natural resources would be reduced westward, it would also be an opportunity for Russia to do more bilateral business with China, which is something sanctions would have very little impact on.

Storm Eunice & Wind Power- Storm Eunice reminded us of the immense power that weather has on the British economy. And tragically no less than four people were killed in the storm as wind speeds reached 122mph. Broadcasters are reporting that Eunice may have caused upwards of ￡350m, and similarly the Association of British Insurers (ABI) also stated that comparable storms have cost around ￡360m.

However, on Friday morning National Grid reported that wind power generation accounted for 42% of total energy given to the grid (while fossil fuels and nuclear energy accounted for 22% and 15% respectively). Given that on average, renewable resources account for some 19.3% of the energy contributed to the grid, the power generated from Eunice on Friday helped day-ahead UK power to drop over 10% to around ￡140 per megawatt-hour.

Nevertheless, though wind power generation accounted for 38.1% of the UK’s total energy sources yesterday, over in Germany it was as high as 79.1% and in Ireland 75.9%. This follows record breaking investment into wind power in the German economy last year with some 1.9 GW of fresh capacity installed in 2021 – an increase of 35% from 2020. This brings the total number of wind turbines in Germany to around 29,500 , a figure which may be sharply contrasted with the UK’s total of 11,037.

Hence, notwithstanding the immense power of Eunice, the fact remains that wind power generation is still behind where it needs to be if the UK is to meet its target of reaching net zero by 2030.?

Have a great day.

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