The Russian military was poised to take Kyiv on Thursday evening, closing in on the capital less than 24 hours after Vladimir Putin ordered his troops into Ukraine, plunging Europe into the worst security crisis in a generation.
In a sad testament to the desperation Putin brought upon his neighbor, Volodymyr Zelenskiy asked citizens to take up arms to repel an invading army against which the Ukrainian military had no chance from the outset (figure below).
Russian troops captured Chernobyl, crippled Ukraine’s air defenses and advanced up both sides of the Dnieper river. Media outlets cited lawmakers in Moscow, who said Putin will install a Kremlin-friendly government, purged of Western influence. The only question is what form that purge will take.
UBS began margin calls on clients who used Russian bonds as collateral, demanding cash or securities after haircutting the debt — to zero. As Bloomberg noted, when juxtaposed with market prices (around 50 cents on the dollar), the haircuts suggested UBS “essentially will no longer accept them as collateral.” Pictet reportedly took similar precautions.
The UK froze Russian bank assets, a move Liz Truss described as “totally shutting off [Russia’s] banking system from UK finance markets.” Additionally, the UK introduced export controls, banned Aeroflot from UK airspace and said it’s “working with allies to exclude Russia” from SWIFT.
The White House announced a raft of measures. Sberbank and all its subsidiaries are cut off from the US financial system. “This action will restrict Sberbank’s access to transactions made in the dollar,” the White House said, noting that Sberbank “holds nearly one-third of the overall Russian banking sector’s assets… and is systemically critical to the Russian financial system.” Sberbank’s shares plunged on Thursday.
VTB and 20 of its subsidiaries are likewise frozen out. No US person is permitted to deal with VTB. The US also froze assets from Bank Otkritie, Sovcombank OJSC and Novikombank, along with nearly three-dozen subsidiaries. Additionally, the White House banned transactions in debt and equity issued by AlfaBank, Credit Bank of Moscow, Gazprombank, Russian Agricultural Bank, Gazprom, Gazprom Neft, Transneft, Rostelecom, RusHydro, Alrosa, Sovcomflot and Russian Railways, all of which are now shut out of US markets.
Further, export controls ban the transfer of “nearly all US items and items produced in foreign countries using certain US-origin software, technology or equipment” to the Russian Defense Ministry or the Russian military in general, “wherever located.” On top of that, the US imposed a “Russia-wide” ban on the transfer of semiconductors, telecommunication, encryption security, lasers, sensors, navigation, avionics and maritime technologies, an effort aimed at “chok[ing] off Russia’s import of technological goods” and thereby crippling Putin’s capacity to maintain “a diversified economy.”
And on, and on. Earlier this week, I suggested that although the first tranche of US sanctions was restrained, there’s no denying America’s capacity to wage devastating economic warfare anywhere in the world. The only question is whether the White House is willing to countenance the severe human suffering that goes along with deliberately engineering runaway inflation and, ultimately, deep recession. Donald Trump had no such reservations when dealing with Iran, and the US has long maintained such a policy towards Venezuela. Joe Biden is now moving in that direction with Russia.
As tipped on Wednesday, Biden will tap the SPR as needed to alleviate the strain imposed by high gas prices. Biden called that “critical,” but suggested it’s more important to deter Putin. “This aggression cannot go on. If it did, the consequences for America would be much worse” than pain at the pump, he warned.
“Just today [Russia’s] stock market sunk to its lowest level in four and a half years, and the ruble weakened beyond its weakest daily settlement price on record,” the White House said, calling attention to a plunge in Russian shares that at one point reached an astounding 45%. In the same statement, the Biden administration promised that new US measures would “accumulate and suppress Russia’s economic growth, increase its borrowing costs, raise inflation, intensify capital outflows and erode its industrial base.”
Although Europe wasn’t on board with barring Russia from SWIFT, Biden said Thursday’s actions are tantamount to restricting Russia from doing business in dollars, pounds and euros. It’s not a death sentence, but it’s close.
King dollar has been mobilized. The White House on Thursday lampooned the Russian economy, calling it “brittle” and “one-dimensional.”
Gosh, it almost seems like we don’t need the giant 700 Billion dollar military budget! Assuming the sanctions work that is. If they don’t, well, Ukraine thanks us for our service.
Oh, we need it alright. This DoD boondoggle has cost $31b to date and will cost another $60b over the next 25 years — and it doesn’t even work.
https://www.bloomberg.com/news/articles/2022-02-24/troubled-littoral-ship-still-can-t-perform-its-mission-gao-says
I spent 6 years in the Navy, I’m well aware of the military’s willingness to blow money on things that rarely work as promised. When you have basically an unlimited budget you can do that. I also know that we could easily park a carrier group in the Black Sea and provide some kind of support to Ukraine. But nope, we just spend all that money to have presence, not to actually protect Democracy. I mean hell, we could launch some drone attacks over the Ukranian border and hit the Russian units parked there with zero risk of causalities. Watching this country fight against a force 4 times its size while we have a force larger than any other on the planet is bullshit.
Small correction, China’s standing total military manpower is 3.1 mil vs 1.8m in the US.
The dollar is almighty precisely because the US military will guarantee free flow of goods that used the dollar as the currency of exchange.
One could argue the military budget is cheap, given it allows us to “print” as many dollar-exchanged commodities as we want.
Where is choking Russia’s internet connections on the list . . .
I’m confused by this Ukraine situation. I assume that Putin’s mad scientist economic guru’s have models incorporating countless iterations of possible outcomes with endless strategies that have been highly analyzed, versus this attack being a midlife crisis for Putin that sprung up after too much vodka.
The sanctions by the West allies will potentially result in economic problems for Russian interests and additionally, if this attack proceeds in a destructive way, it seemingly decreases value in Ukraine stuff. Thus, how does a well thought out plan work in terms of gaining assets by destroying them?
Maybe this is simply madness, maybe part of a larger puzzle, but certainly curious.
Xi, take note.
That’s a pretty long list of sanctions, and it’s only day one.
The big ones remain in reserve, I think.
Now, let’s see urgent moves to sustainably free Europe from dependence on Russian exports and sever Russia’s infowar links.
I have to admit that I didn’t pay much attention to today’s market gyrations. Don’t think they have much information content, and anyway I wasn’t checking stock prices on 9/11 either.
The hysteria today is mind-blowing.. Putin’s actions for the last 3 months laid bare his intentions.. this is not genocide, he has no murderous intentions.. he just wants to redraw the map to put a soviet boundary around the Ukraine again.. there will be no war, there is zero chance of western military support so Ukrainians would be insane to risk their lives fighting a battle they are guaranteed to lose.. as for sanctions, they can live without access to the usd market for a lot longer than Germany can live without gas.. it is not a matter of price, they go cold and live in the dark.. for what ? Naming rights over the Ukraine ? Wont happen..
This is just a boundary change.. its brexit with a couple of cruise missiles rather than a vote.. Ukraine ended up part of the soviet empire rather than the eu..
I dont like it, its hyper aggresive, but its done…
Naming rights? Boundary change? Maybe you should talk to some people who live in Ukraine…or Russia, for that matter/
Exactly what Putin’s propaganda wants us to say.
Oh [wring hands, purse lips] I don’t like it, but it’s just administrative, and it’s done anyway, move on nothing to see.
Similar sentiments in 1939 when Poland’s borders were redrawn?
There are millions of people living in eastern ukraine who view themselves as russian.. they view this as liberation..
Aside from that, this is not genocide.. it is not ideal, i would rather it hadnt happened.. be outraged, you should be.. but it is not a war, its just real politik.. im only suggesting as dispassionate investors we accept the wests complete and utter impotency in affecting the outcome.. realise it is a local border issue we will do close to nothing about and it has no impact on asset values outside of russia/ukraine..
There are maybe a few million people in eastern Ukraine (out of a pop. of 44 milllion Ukrainians) who view themselves as Russian. Not all of them — maybe not even a majority — want to be part of Putin’s Russia. The separatist enclaves in the Donbas are small, and, until today, Putin-aligned forces controlled less than half that tomorrow. The democratically elected government of Ukraine would be happy to negotiate the concerns of the small Russian-aligned minority in the Donbas. That’s not what this about. It’s about oil, gas, and the small kleptocracy headed by Vladimir Putin — who has ripped the Russian people off to the tune of at least $50 BiLLION — grabbing as much as they can, while they can. Full stop.
It mind end up being bearish oil, as 105 usd prints & political impetus will bring shale/iran/venz back online faster than it would have otherwise
Late today, Ukraine’s Health Minister Oleh Lyashko said 57 people had been killed and 169 wounded. Russian police have detained anti-war demonstrators across Russia. This ain’t Brexit, it’s Putin playing Russian roulette. I have to wonder what Putin’s internet trolls are going to do after he is deposed – Russian style.
You are both correct.. but this isnt a forum for debating moral virtue.. we are here to discuss how markets and geo-politics intersect.. and my only point is .. ukraine doesnt matter that much, because escalation is impossible, the US wont engage militarily with russia and the EU just wont enter a sanctions war as they literally cannot live without russian gas.. its over.. we need to stop catastrophising the escalation, because there is no real escalation that anyone can live with..
I think you have totally misread the situation. If anything, Putin’s miscalculation is going to repair a lot of the damage to the Western alliance that Trump, the best asset Russian intelligence ever had, did while president.
Fair enough.. but i think you underestimate Putins check mate move..if he closes the taps on european natgas supply we will squeal like pigs..
Hey Ivan, do you know where your submarines are? In our cross hairs. Make my day.
H-Man, since boots on the ground is not a choice only the squeeze will work. Since Russia is dependent on oil for 70% of revenues that is the squeeze point. The Saudi’s taught Putin a lesson when Russia would not cut production a few years back. They drove the price of oil into the ground until Putin cried “uncle”. So don’t be surprised to see the Saudi’s show up again. Yellin also knows how to squeeze a currency. So it appears life in Russia could be fairly miserable in the near future.
Have you seen the oil price ? Have you seen the backwardation ? There is no “spare oil”.. russia produces about 10 pct of global demand.. are you offering not to drive your car to compensate ?
If the west sanction russian oil it just goes to asia, uses more time on ships, less efficient, but they will sell it, maybe at 100 rather than 105.. but they will sell it
Perhaps OPEC will play a role in this ridiculous situation, again and provide another opportunity for Putin to eat camel dung?
On 8 March 2020, Saudi Arabia initiated a price war on oil with Russia, facilitating a 65% quarterly fall in the price of oil.[1
Is there a pipeline to China?
H-Man, letters of credit in dollars are being cancelled for Russian oil. If buyers have to use rubles to pay for oil which they will buy in a falling currency market rather than dollars, Russia will be paid for oil with a worthless currency. Russia will be selling oil for nothing
Some of the comments above border on trivializing a conflict that’s already killed dozens of people.
Because the substance of those comments contains quite a bit of analysis, I’m going to let them stand.
However, I won’t tolerate the trivializing of lost lives. Period.
Also, I decide what this “forum” is for. And in this particular instance, I’ve decided that commenters who want to delve into normative issues are entirely justified in doing so given the senselessness of the tragedy currently unfolding.
So, if there were any questions as to whether I’m monitoring the discussion here, I think that should clear those questions up.
Hear, hear, Heisenberg; ir everyone just steps up for decency in the space in which they have some (or total) control the world will be a better place. Keep monitoring.
Fairly new here, now, that was the clearest explanation I’ve read yet of the Heisenberg Certainty Principle.
Still unclear on how hyperlinks supporting one’s argument/rant/incoherent ramblings are handled/permitted/approved.
Can I just add: Today’s reversal in U.S. equity markets was idiotic. Who are these people/machines and why do they get paid as much as they do?
@mfn I’d think combination of options hedging, “sound of cannons” reflex, and speculation that Kyiv will fall in no time.
@mfn In one of the recent Notes From Disgraceland @H had a useful article about the short term market gyrations and war. In the piece reference was made to some market research that can currently be read/downloaded for free at SSRN:
The effect of war risk on managerial and investor behavior: Evidence from the Brussels Stock Exchange in the pre-1914 era
Don’t be put off by the date. Read it through and it rang true after my lifetime of observation. The recent market gyrations (note date for this note) fit nicely with the proposed model. The US markets slotted nicely into the “far proximity” reactions both for “Threat of War” and “Act of War” expectations, so far.
It helps that Putin thinks like a 19th century old sckool geo-power-politics strategist I suppose. But since reading the research (short and non-technical as these things go) I’ve stumbled across other market research that supports the findings. The article lends itself to constructing a one page table for analysis of conflicts.
Label the table “War.”
First column “Threat of”, second column “Act of.”
First row “Near Proximity”, Second row “Far Proximity.”
Inside the cells you can add whatever variables the author discusses and their usual response you find pertinent to your current investment style/strategy. For example, dividends matter to me, whereas, IPOs are meh.
Of course, I’m not going to do that in this comment box. That is for the reader. But when you are finished you’ll have a concise ‘truth table’ for rapidly sorting out conflict-market interactions.
Like I wrote above my experience already lead me to very nearly the same conclusion as the paper’s, only, my understanding was not as crisply structured. Hence, no easy matrix came to mind. Wish I’d been able to grok the paper twenty years before it was published 😉 The only change I’d make after the first analysis of a conflict would be to add a third row, “ROC Proximity.” There are three key dates, 1914, 2000 (publication), and 2022 (today). The article does a good job of adapting the 1914 tech (etc) to the world of 2000 (way to complex to try and flesh out here, you just have to read it and decide for yourself based on how many of these ‘cycles’ you’ve been confused by in your past ;)). BUT THE WORLD HAS CHANGED IN 22 YEARS! Specifically, the technology of communications, markets, war, so a third column for your thoughts on this is called for as it relates to the ‘fundamental’ variables of value/asset-prices discussed. To me, as ‘single-minded’ observer, it is always useful to stick with Charlie Munger’s advice to minimize and focus on as few important variables as possible. 3 or 4 if possible. So I’d limit my adaptation/’updating’ to just Rate Of Change (ROC) in the broadest sense. I’d just finish up with the suggestion that the Thursday and Friday US market move reflects the same old same old pattern, but, with a ratcheted up ROC. What one should expect with HFT coded with 1994-2000 legacy mindsets, etc.
I guess it is impossible for me bow out without observing how “fragile” the microwave towers and other “nodes” are that make the HFT etc of markets in 2022 possible.
Mr HeisenenB, Thanks for the detailed list of Russian banks being sanctioned along with the export restrictions on technology etc. I was under the impression that the sanctions were pretty feeble and ineffective but I realize I was wrong after reading Ur list. How do U feel about a federal gas tax holiday ?? Is there a way to encourage Canada and Mexico to ship more oil to us or are the pipelines and our refineries capacity constrained ?? I’m skeptical that releasing more oil from the SPR or more barrels from Iran deal will lower crude oil price substantially.
I think both the proposed gas tax holiday and the sale of oil from the strategic reserve are both more likely to hurt the country’s fiscal health than make any real impact on inflation. What a typical person will save in gas tax is probably what they might spend on a couple of six-packs. This is spin not real help.
My sense is that this will be the first huge conflict in cyberspace. We have had over the last decade skirmishes between Israel and Iran and the US has probably replied to various North Korean and Chinese provocations and perhaps initiated some as well. But the plausible deniability cyberspace gives will make this a potential and tempting weapon. And, indeed that might be also what Putin meant in his threats of experiencing blowback ‘ you have never seen’ which all assumed to be a reference to nuclear weapons.
And those crypto fans should take note that this may be the emergency needed to impose tough restrictions on crypto flows, especially as oligarchs, Russia and sanctions busters turn to crypto as a solution to western financial sanctions. The Canadian Emergency Act in response to Ottawa’s trucker convoy, introduced extensive legal constraints on crypto currencies to cut funds and seize them. All the things that were not supposed to be possible, like governement control of digital wallets, proved to be emimently possible and imposed overnight. The game plan of crypto has always been to get too established, with too many important stakeholders to be properly regulated. This emergency will provide a perfect excuse to do what all governments really want to do. Never let a good crisis go to waste.
Finally, I hope we are all realizing how important it is to keep President Zelensky alive and out of Russian hands. He is the only politician from that government we know and he has huge symbolic value to us and the Ukrainian people. He is like De Gaulle at the start of WWII and must be kept safe somehow.
Zelensky’s presidential campaign was funded by and he is supported by several Ukrainian oligarchs tied to banking and media in Ukraine. Those oligarchs have been tied to corruption within Ukraine.
The Ukrainian oligarchs who control Ukrainian banks are as corrupt as Putin and the Russian oligarchs. This situation is a mafia turf war and both the Russian and Ukrainian people will be significantly harmed in the process.