In this episode of the UNLEASHcast interview series Jon gets some time with former UNLEASH keynote speaker and Russia-Ukraine expert economist Danny Thorniley. Danny gives his predictions on the economic outlook for the region and the knock-on effects globally. This is unparalleled insight and worth a listen..
Check out the audio above, or the full transcript beneath…
Jon Kennard: Okay, we have a very special edition of UNLEASHcast today. What I normally do is, after the recording, I ask the interviewee for a little bio, so I can introduce them and stitch an introduction on the front, but I’m not going to do it for this one. Instead, I’m going to ask you to do it yourself, actually, Danny, because I don’t want to misrepresent or underplay your experience in this area, so could you just tell the listeners, and possibly also the viewers in time, a bit about who you are and your experience in the area that we’re going to be talking about?
Danny Thorniley: With pleasure, Jon, and it’s been a pleasure to work with you and your colleagues at UNLEASH over the years in the live events, pre-COVID, and looking forward to the future. I’m a British national, but I’ve been living in Austria for 38 years, in Vienna. For what it’s worth, I studied at Oxford University, and I have a PhD in Soviet political economy. I’ve worked with about 300 corporations for 25/30 years, doing business and giving advice globally, but very much on Central Europe, and EMEA region Europe, Middle East, and Africa. The big baby in that was the Soviet Union and Russia, and I’m working intensely with 300 clients on the Russian market, CIS, obviously, it’s very tumultuous, and we’re doing scenario planning and so forth. My first trip to the Soviet Union was 1978. I was a very young man then, by the way, it’s a long time ago. In normal times, pre-COVID, then for a window since COVID, I spend about 40% of my time in Russia. I have many friends and colleagues in the business world, all the major companies you can imagine, and I have many normal Russian friends, who are teachers, nurses, and night watchmen. That’s me, Jon.
JK: Thank you. To just say at the outset that, obviously, the most important people that we’re thinking of in this situation are the civilians in Ukraine and soldiers involved in the conflict as well, and anyone affected by it, but today we’re going to be talking about the economic knock-ons and effects of what’s happening with the Russia-Ukraine invasion. My first question is whether, undoubted decades of experience, is this something that you could have foreseen? Is this something where everything was pointing in this direction? What’s your perspective on how quickly it happened? And anything around that?
DT: Thanks, Jon. Well, first of all, I’ll say you know, we’ll talk about economics, business, maybe and other things, and you talked about the human cost. This is the worst crisis of any kind I’ve seen for the region in 40 years, there’s no shadow of a doubt. Its economic, political, social, psychological, emotional, everything. I think it is the biggest existential threat to liberalism and social democracy that we’ve faced since the end of the Second World War.
Europe, and the West has come together pretty strongly and also efficiently. The sanctions on the Russian Central Bank were a surprise for everybody, and really knocked Putin sideways. That’s when he declared his threat of nuclear war, by the way, his central bank was frozen, he can’t do anything against the dollar for the Wall Street, so the threat becomes a nuclear war, etc, etc.
I think Europe will also diverge itself, no matter what, from Russian energy which will have a seismic impact on European economy and a very negative one medium term for Russia. Also, I would say at the start, answering your question, that internationally, we will see it will be bad and negative for years, that’s the best case. Although there is talk, of course, on a ceasefire, neutrality and a dirty compromise deal which might come about, and that’s the only thing. However, in any scenario, the developments internally with Russia are fearsome. I believe that the current regime in Russia has started and is taking Russia and its Russian people into a very, very dark place. There are other ways of describing it, but for public domain I’ll leave it at that.
Your questions, Jon, no one foresaw it, and if they say they did, they’re fibbing, I predicted weeks and weeks before, and days before that there’s a 50% chance that nothing would happen and there was a 45% chance that would be some military incursion from the Donbass. Well, how that will develop was pretty tricky to imagine and not good. I rated the chance for full scale invasion, what we have is 3-4%.
One of my portfolio investment clients, and a friend in New York, said, ‘Danny, we made the same estimate, and it’s cost us $400 million so far, and counting by the day.’ Other investment funds have lost and will have lost billions and billions going forward. Their portfolios are trillions, so a few million here and there is the chicken feed.
Very, very few people saw it because it defied logic, rationality, and common sense, so on one level, anybody who predicted this will not happen, rationally, got it wrong. The consequences of these actions, which are myriad, and innumerably negative for Russia, are taking place and will take place, so if there’s any benefit in early hindsight, everybody got the forecast wrong, but everybody got the understanding of the consequences right, except the Russian leadership.
They may realize now that they’ve painted themselves three or four times over into a corner, and how they get out of that is meant to be very difficult indeed.
JK: My next question is about the Ukrainian economy. How do you think it can survive, adapt, and what’s the medium- and long-term outlook?
DT: The best case, which has developed in the last couple of days, which one has to be very cautious about and skeptical, is that there could be a ceasefire, neutrality, non-NATO, which could have been done a few months ago without this, but then you’ve got the sticking part of Donbass and Crimea. There could be some dirty deal about sovereignty around that as well, so that’s the best-case scenario, but nothing, then the West doesn’t say, well, everything’s fine and dandy now. The psychology has changed, and it will take months and months and months of reform or peace treaty, and months or years for sanctions on Russia to be removed.
I think there is still a big likelihood and probability that Russia tries to grind out a military victory — I put victory in inverted commas – and a puppet regime is installed with President Yvonne. Then massive economic comprehensive sanctions are imposed on this puppet regime of Ukraine, and a government in exile is found in Poland or Berlin, headed by the hero of our times President Zelensky or not, who may die in the rubble of Kiev, which will be a moral outrage for the West, and let’s see where that horrific scenario could go. In this scenario, Jon, there is no economic future for Ukraine. It’s an occupied or semi occupied divided country, with comprehensive global sanctions slapped on it entirely economically dependent on Russia, with an ongoing part is at insurgency war taking place. This is the horror scenarios of the Russian military. They either trying to find a dirty ceasefire now, or they’re going to get bogged down in the next three, five years.
Russia has a track record of frozen conflicts, for example Georgia ir Transdneister in Moldova. This is a bloody big thing, to have a frozen conflict of 40-odd million people in continental Europe, Eurasia, is beyond imagination, and I think beyond the management of the Russian economy, and the Russian military. The economic outlook in that mid case, bad scenario, Jon, is not good. It will be two or three years of bleak occupation, sanctions, low economic growth, and no Western investment.
We know the 2 million+ refugees who have left Ukraine, by the way, just to let you know, it’s difficult to find truck drivers in Central Europe at the moment because most of them are Ukrainians, and they’ve gone back to Ukraine to fight. 175,000 people have crossed the border from Poland into Ukraine, and we see and hear these stories as well.
I think on the economic side, we’re seeing a lot of the people leaving are talented, well educated, and I’ve heard already that they’re coming to Western companies and saying we want to do our startup in Poland, Czech, or Slovak. Also, negotiations are starting for FinTech companies in Ukraine to set up and reestablish themselves in Central Europe.
The best-case scenario back to the dirty compromises, then, of course, there’d be massive reconstruction of Ukraine by the West and international Western institutions, IMF, World Bank, development bank, and so on. That would be a positive. As I said, it’s too early to say about this positive ceasefire scenario. At the moment, I give it a 20% chance, three days ago, I gave it 1% chance, so let’s see where we go.
JK: You published a recent research paper at the end of February, about the conflict as it was then, one line I caught from the end of it, about the corporate knock-on, was “corporate costs will be higher and margin squeeze for longer in terms of the supply chain.” How long do you think the long term effects of this will go on, in terms of how it’s going to reverberate around the world to the West, America and further afield?
DT: By the way, until February 24, my clients, in Russia, were reporting stupendously good results. 2021, for many of my clients, was the best year in decades in Russia. One of our automotive clients said, ‘Danny, January was the best month in 40 years, only beaten by February of 2022.’ That’s where we’ve come in Russia, and the impact on Russia will be massive, instead of 2.8% growth this year, it will be minus 5-10%.
On the global and Central European economy, what tends to happen — I’m doing it, I noticed the IMF are doing it, and the big institutional banks are doing it — are revised projections of the global and Eurasian GDP outlook. What tends to happen, I’m afraid, Jon, as you make a revised estimate downwards, then you’re obliged a few days or a few weeks later to make another revision downwards. That’s where I feel we’re going.
For the global business environment, as you well know and the audience well knows, before this crisis was the rising, sticky inflation, consumer prices above trend. Input costs and production costs were at an elevated record levels across the world. Supply chains couldn’t adapt to the boom recovery of 2021 from the collapse of 2020, but it looked viable, interest rates were going to go up, and we’d have slower secular growth. This was the prediction and plan, and things would get better. Already, we revised that from things will get better in Summer 2022 to things will get better end of 2022 with the start of lower inflation and better growth.
Now, with the Russian invasion of Ukraine, we have a deteriorating situation where all numbers which were trending this way before, deteriorated. Every market in the world, I believe, will have less growth this year than we expected three or four weeks ago, and that was on a downward trend. Supply chains and inflation will stay higher, much longer than we’d anticipated because of supply chains, logistics and so on. Any improvement on the inflationary front will be postponed to the spring or summer of next year — stagflation, of course, is the term often used. I don’t think we’re in for hyperinflation because the central banks are more adept at managing it. We may not get the stagflation in the sense of on the numbers at the moment that I’m projecting for the European, global economy, IMF and the World Bank today, we still expect growth.
The good news is 2021 was so high, the revised 2022 was not bad, and even the revised-revised 2022 is not into negative territory, not yet. We will have, of course, the balancing act of the central banks now. We’ve got inflation and it’s sticky. Before Ukraine, we we’re going to raise rates and we’re managing inflation that will come down. Now, of course, to avoid stagflation, the central banks have to be more sensitive than they would have been. Yes, we want to raise rates. Yes, we’ve got to control inflation. But my God, we can’t plunge our weakening economies into ‘stag’, the deflationary environment.
This is the challenge. We will see, I think the US Federal Reserve raised rates yesterday, they said more to come, and we expected that. That will probably certainly help the dollar, but rates globally in Europe and the UK will start to tick up. Quantitative Easing is a thing of the past. I think that’s the model, less growth, higher inflation, higher interest rates, more political risk, existential threats, happy days.
JK: I’ve got one more question. Well, one more thing to add to this. It’s difficult to want to end these things on a high or find some sort of hope, and I don’t want to be flippant about it. Obviously, I’ve heard stories, and I’ve seen stories of people are using Airbnb, for example, to send money to Ukrainian families with no intention of staying in the places in Ukraine, but just as a direct way of using technology to transfer money for families that need it, who are caught in the crisis, and the conflict. From your experience are you hearing any such stories of hope or rallying, in terms of how the biggest cities in Ukraine are being able to deal with this conflict at all in Kiev or other cities?
DT: Surprisingly, some links are being kept open, and mostly the transportation and military equipment is coming into the country, which is another indication of the military mismanagement of the Russian military. I think things are more bleak, in general. What we have seen is the massive surge of affection for the Ukrainian people, Ukrainian refugees. It is universal, perhaps unprecedented. Why his hands have been telling me that the polls, and the polls have told me, ‘yes, we’re accepting Ukrainians, and many of them will want to take jobs, it’s a different refugee surge, etc.’
Things will get tighter and more tense and fraught as time goes on and as the European economist come down. There’ll be envy and resentment in societies, human beings are human beings.
The very positive I think, is both the political economic response and the emotional response to these people who face a tremendous tragedy.
I too, Jon, this is my most sober presentation I’ve ever given, and I give many of them, three or four a day, when I’m talking about clients, but normally, I’m a very light hearted, funny guy with a great sense of humor. There is one story that I love and it’s on the lighter side is that the consequences, negative consequences to Russia, as I said, uncountable contingency planning of Russia, and the Russian leadership was negligent, and they haven’t seen hardly anything of what’s happening. They did not foresee the following: the Global Cat Federation, and I didn’t know there was a federation globally for cats, has suspended and banned all Russian cats from all activities and competitions within the Federation. Now, the Kremlin didn’t see that one coming. More semi-seriously, there are 31 million cats in Russia. I know this because I work with three or four pet food companies. There are 19 million dogs, so what the Russian elite have done with their invasion, is they’ve alienated 31 million cat owners in Russia. Now cat owners globally are pretty psychotic people — no offense, I’m sure if you own a cat you’re a nice person but you know what cat owners are like. Now, you got 31 million disgruntled Russian cat owners, and maybe that will be the tide for the change in the future.
JK: Thanks so much for your time, and the insight on this whole situation. I spoke to you around Christmas just to catch up and see how we could work together in 2022, having watched one of your previous unleash keynotes, which was just brilliant. No slides, just speaking to the people off the bat and very funny, but I didn’t predict this was the first thing that we’d be talking about. I’m kind of sorry it is, but it’s great to get your insight on this today. Thanks.
DT: Thank you very much. I’m looking forward to working with you and your colleagues throughout the year and all good luck to them. And you know, I always say to when I’m doing a Russia presentation to Russia; udachi – good luck. And I really do mean it of course now to all our friends across Russia, former Soviet Union, Central Europe as well, but all of us need to take care and stay safe.