War Drums

Risk sentiment remained fragile Monday, as European shares warily eyed developments in Ukraine, where both the US and the UK are withdrawing diplomatic personnel as the risk of a Russian invasion mounts.

The State Department on Sunday ordered family members of embassy workers in Kyiv to leave the country and warned that the US wouldn’t be “in a position” to evacuate American citizens were Russia to invade. “US citizens in Ukraine should be aware that Russian military action anywhere in Ukraine would severely impact the US Embassy’s ability to provide consular services, including assistance to US citizens in departing Ukraine,” the State Department said, in an updated travel advisory.

All other Americans currently in Ukraine were encouraged to leave as soon as possible. The US doesn’t know now many American citizens are currently in Ukraine.

On Monday, the UK began withdrawing its own personnel from Kyiv. “Officials say there have been no specific threats to British diplomats, but about half of the staff working in Kyiv will return to the UK,” the BBC reported.

The UK Foreign Office went as far as issuing a press release accusing the Kremlin of plotting to “install pro-Russian leadership in Ukraine… as it considers whether to invade and occupy” the country. The UK said former Ukrainian MP Yevhen Murayev is being considered.

“The information… shines a light on the extent of Russian activity designed to subvert Ukraine, and is an insight into Kremlin thinking,” Foreign Secretary Liz Truss said, before cautioning Vladimir Putin that “any Russian military incursion into Ukraine would be a massive strategic mistake with severe costs.”

The “strategic mistake” bit depends on what, exactly, Putin’s strategy is. Absent direct NATO support, Ukraine is a walk-over for the Russian military (figure below, from RBC).

So, for the Kremlin, it’s a matter of weighing the potential economic impact of sanctions. “There is the question of whether any of the sanctions being discussed in Western capitals will deter President Putin if he is intent on bringing Ukraine firmly back into Russia’s orbit,” RBC’s Helima Croft wrote, adding that “leading sanctions experts contend that the West could potentially change Putin’s calculus if these nations were prepared to impose serious sanctions on the key Russian financial institutions (VTB, Sberbank, Gazprombank) and on energy exports [but] barring Nord Stream 2, Washington has already indicated that it will seek to exempt energy from the punitive measures currently being prepared [and] given that a number of Western asset managers hold the Russian financials, a key question is whether the US and its European allies would really blacklist these institutions.”

Joe Biden is considering whether to deploy “several thousand” troops, along with warships and planes to Eastern Europe and the Baltics. “In a meeting on Saturday at Camp David… senior Pentagon officials presented Biden with several options that would shift American military assets much closer to Putin’s doorstep,” The New York Times reported, citing administration officials. “The options include sending 1,000 to 5,000 troops to Eastern European countries, with the potential to increase that number tenfold if things deteriorate.”

European equities weren’t amused. Shares were already under pressure following last week’s rout on Wall Street. The Ukraine tensions exacerbated things. The Stoxx 600 was poised for an outsized two-day selloff (figure on the left, below).

Russian shares, meanwhile, plunged as much as 8% (figure on the right, above). The ruble was the worst performing EM currency and the Swiss franc reached its strongest levels versus the euro in a half-dozen years.

JPMorgan said Monday that Eurozone shares should be ok. Although Mislav Matejka conceded that the Russia-Ukraine situation is worrisome for European equities, a localized military conflict likely wouldn’t dent stocks for “too long.”

RBC’s Croft juxtaposed the Saudis’ approach to Russia during the short-lived crude price wars in early 2020 with Western nations’ sanctions threats. “The Saudi leadership strongly signaled that they were willing to endure enormous economic pain — by causing the collapse in oil prices — to drive the Russians back to the negotiating table and force them the accept a deep production cut,” Croft wrote, before dryly noting that “the Saudi Crown Prince did not have to contend with midterm elections.”

When it comes to timing around a prospective Russian invasion, it’s also worth noting that Xi has likely “asked” Putin to avoid marring the Winter Olympics. A refusal, on Putin’s part, to adhere to decorum around hostilities during the Games wouldn’t go over well in Beijing.

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13 thoughts on “War Drums

    1. Are you willing to take the opposite side of that argument and suggest Xi would be pleased with the outbreak of war instigated by an ally of his over whom he supposedly has some influence during a Winter Olympics that’s already playing out against a COVID surge in China and at a time when the Chinese economy is on the back foot? If you’re asking whether I’ve discussed the issue with Xi personally, the answer is “no.” That assessment is common sense. It doesn’t mean Putin is going to listen. But you can be absolutely sure they’ve discussed it.

      1. This wasn’t meant as a a slight. I’m just wondering if you’ve read something on the subject. The Olympic angle is not one that I’ve seen come up.

        1. A conspiracy theory adherent might argue that Putin is/was supposed to wait until the Olympics were over so the China could ratchet up tensions with Taiwan at the same time. Stretch US capability to respond on two fronts simultaneously.

          Two weakened leaders who might benefit politically from a limited military conflict working together. What could possibly go wrong?

      2. How long can 100,000 troops hang out along the Ukraine border in the middle of winter in tents I imagine—I wonder if that’s a practical issue worth considering? It’s 16 F in Kiev tonite(I looked it up on weather.com–thankfully I’m in Scottsdale, AZ)

        1. Much longer than they can when the snow melts and the ground turns muddy. Global warming has it’s bright side? Putin Goose Steppes into the muck gets bogged down. What is it with short insecure old world men and Russian mud? Pretty sure local farmers won’t be sad to see the tanks leave before Spring.

  1. Games start Feb 4th. If the thesis is correct about China/Russia/Olympics, Putin needs to go this week or wait until late February after the games are long over. It is really hard to game this one. I am not clear why this came up now? Markets seem to be catching up with this problem…. sentiment is terrible right now for stocks.

  2. Wow. Welcome back market-pricing! I’m old enough to remember when super power stand offs, nuclear and rocket tests, domestic insurrections and worldwide pandemics actually used to affect market sentiment and index levels. What’s next? A climate change discount??

  3. Yes recent history shows Russia really cares about decorum around Olympics, as long as you ignore the invasion of both Georgia and Crimea.

  4. RBC’s Helima Croft wrote that “leading sanctions experts contend that the West could potentially change Putin’s calculus if these nations were prepared to impose serious sanctions on the key Russian financial institutions (VTB, Sberbank, Gazprombank) and on energy exports [but] barring Nord Stream 2, Washington has already indicated that it will seek to exempt energy from the punitive measures currently being prepared….”

    What a joke. Same as it ever was, same as it ever was.

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