Is New Global Political Balance an Opportunity for Private Equity?

The outbreak of the Ukrainian war as led to major economic consequences: 

1. Interruption of trade between Europe and Russia 
2. Increased military spending  
3. Need for new energy infrastructure 

This economic turbulence brings major challenges and opportunities for global business as those changes will likely require fresh capital. This can potentially be provided by private equity. 

Interruption of Trade Between EU and Russia 

As a form of sanction, both the EU and Russian blocks have committed to gradually reduce trade and their dependence on one another. 

Up to 2021, the EU was a net importer of goods from Russia as it exported €89 billion, while importing about €158 billion in goods and services.

Russia mostly exported crude and refined petroleum, at roughly €70 billion and natural gas at €20 billion, while EU mostly exported machinery ($23bn), vehicles ($10.5bn), pharmaceutical products ($9.5bn) and electrical equipment (about $9bn). 

It is worth mentioning that the EU was a net exporter of capital to Russia as it was invested €279 billion, while receiving €153bn per year in return.

Major oil and gas companies are owned by the Russian state or linked to it, so it is reasonable to assume that the government will intervene to support them should they experience a phase of decreasing sales.

Meanwhile, in Europe, there is potentially greater need for PE investment as two categories of companies are experiencing difficulty: 

1. Companies operating in energy-intensive industries  
2. Companies that used to export to Russia 

Companies operating in energy-intense industries (chemical, cement, paper…) witnessed their cost of energy sharply increase over recent months as the price of gas doubled.6 Those companies potentially need funds to become more energy efficient or to start producing renewable energy on their own. 

Other industry which had Russia as a major market (machinery, vehicles, pharmaceutical products, electrical equipment)7also experienced a sharp drop in sales and a surge in spare capacity. These challenges may lead to consolidations or the necessity of investment to diversify their client base and product portfolio. 

Increased Military Spending  

In 2021, military spending stretched past $2 trillion for the first time due to escalating tensions between China and Taiwan and Ukraine and Russia.8 Nowadays, this expenditure is even higher because several nations worldwide are planning to sharply increase their military budgets.9 This growing market will be an opportunity for PE firms as weapons producers need capital to expand capacity and develop new products and technologies. 

Need for New Energy Infrastructure 

In coming months, European nations will need more infrastructure to ensure their gas and electricity needs. Therefore, investment will be necessary to preserve the supply of electricity and gas.  

1. New pipelines with African and Caucasian nations 
2. Bio gas and renewable energy plants 
3. Plants to transform LNG (liquefied natural gas) from North and South America 

PE can contribute to the development of all those areas by providing both capital and knowledge.