Russia’s war has surely changed many things, even before it is over. One is counter intuitive: it has made the powerless feel some sense of power, through collective action. I am talking not about governments but ordinary people. It turns out we hold the keys to membership of the club of ‘open’ economies. It is not a right: it has to be earned and we can take it away. Economic exclusion is not a form of warfare, however. It is the peacekeeper. It remains to be seen whether it can also be a peacemaker in the event of a state of war already existing. This is an optimistic stance. There must be a question whether this mass populist exercise of power, which carries a price, will last. Will Putin, ever the cynical rationalist, ultimately be proved right about our soft and selfish societies?

It has long been argued that the more integrated nations were through trade in goods and services, and the more dependent each was on global capital markets, the less likely any one was to go to war with another. It hasn’t always worked in history because war and empire building were seen as routes to self-sufficiency and independence. This is not what Russia’s war is about. The concept of rebuilding Greater Russia or Imperial Russia is not about economic identity. Unlike the USSR’s WWII territorial gains, it does not resolve Russia’s economic weaknesses. It expresses Russian nationalism and it aims to annihilate threats to that visualised national identity. But it doesn’t make the state as a whole, and specifically the Kremlin kleptocracy, any less dependent on access to markets for both imports and exports. This is not just about raw materials: Russia’s own manufacturing is both narrow and dependent on international supply chains. Putin presumably thought Russia would never lose that access: too many nations it trades with would not be willing to pay a price. He may have miscalculated.

It must have come as a surprise to him, but also surely to us, that he has unified not just nation states but global consumers and investors in revulsion at the thought of doing anything that might reward or sustain Russia’s inhumane aims and methods. Putin may visualise his enemies in terms of national leaders and weak democratic institutions but that was part of his miscalculation. The enemy turned out to be the mass of ordinary people in those weak democracies who have found their voice. Governments have followed their lead because that’s what governments do in democracies.

The fact that open economies were collectively willing to isolate Russia, to a degree few would have expected, is grounds for optimism about the bigger picture for global security. This has to be the form that enlightened self-interest takes in order to perpetuate the system of open and integrated economies. I don’t discount the importance of strengthening military capabilities in order to deter gambles like Putin’s. But I believe the willingness of ordinary people to enforce the rules of the club at a cost to themselves is a potential game changer.

This is of scant comfort to Ukraine. The dynamics of the war may have already been determined, firstly, by Russia’s failure to achieve its objectives and, secondly, by the fact it is being punished for even having those objectives. No party chose this mix and it is one that is just as likely to make Russia more dangerous as less. There is no obvious ‘off-ramp’ for an autocratic leader who has tried and failed. Economic isolation is, however, a potent threat to others who have not passed a point of no return and can still make choices about their engagement with the rest of the world. China will doubtless be taking note.

This game change affects us as stewards of private wealth. It is much bigger than ESG. We have been as sceptical as our clients about ESG. It has many aspects that relate to a moral compass but it is not easily read, being both nuanced and widely gamed. Our clients do not push us on ESG but they are likely to expect us to invest as if we are instruments of their wish to exclude immoral actors at the country level. Right now we have no choice in respect of Russia, as any holdings in our Emerging Market ETFs are effectively frozen. But what if China fails to rein in Putin and even supports him militarily? Why would our clients then not want to exclude China from their portfolios as part of their desire to see China excluded from our open markets? And what about individual businesses, particularly as the initial horror wears off and the profit motive tempts them back into doing business with Russia?

This poses some practical problems for us because of our use of ETFs. We will need to find a solution. The simplest is to exclude the entire allocation to Emerging Markets or replace it with more selective regional subsets. It may not stop there as it addresses nations but not individual companies.

These are important implementation issues for managers investing in diversified global equity markets. More important than implementation, however, has to be any general implications for asset-class returns. The diversified equity portfolio relies on an evidenced-based presumption that the ‘market system’ can survive wars. Permanent equity capital destruction has resulted from confiscation, the Russia Revolution being a case in point, but not directly from war. The same is not true of bond investments, however. Default can arise from a wide range of circumstances including war and revolution.

The market system is a complex and adaptive process made up of millions of different actors all over the globe. For Fowler Drew, as a quantitative firm, it is distilled in a global model of the equity return-generating process. The process is modelled at the level of equity-market indices. These indices are by design themselves adaptive and survival-orientated, due to construction rules that drop failing companies and add successful ones. The actions and reactions, often turbulent as now, that lie behind the return trend and variance in these long data histories are not always visible. Even after the event we may struggle to identify the factors that really explained the actual period returns. I would hazard a guess that amongst the factors, in the future, will be this process of imposing, at a cost, a collective moral compass on company and state behaviour, as rather optimistically outlined in this article.