It was all Russia, all day on the news front to kick off the new week. That’ll remain the case for the foreseeable future.
It’s been quite a while since geopolitics mattered this much for market participants. There’s now a very real chance of a geopolitical fracas morphing into a market “Event,” with a capital “E.”
There are myriad spillover channels, with the most obvious being commodities, and thereby inflation, but severing Russia’s SWIFT access and the West’s decision to target Russia’s central bank put the spotlight of funding markets. Whenever funding markets are topical, something’s gone awry somewhere.
As for the ruble, Moscow needs a plan. It’s bleeding out and notwithstanding any gyrations typical of illiquid markets in a crisis, the direction of travel is likely to be weaker. And thanks to sanctions on the central bank, Russia is defenseless. “Taking away Russia’s ability to deploy foreign currency reserves held abroad looks like a short-cut to currency and banking crises, and will limit the central bank’s ability to finance government spending,” Bloomberg’s Sebastian Boyd said Monday. “So there’s a big breach in ‘Fortress Russia’.”
In Kyiv, air raid alerts were heard every 30 minutes and in Kharkiv, the mayor claimed Russia was shelling residential areas. Casualties were widely reported. “This is not a military operation, it’s a war to destroy the Ukrainian people,” the mayor said.
On Monday, ICC prosecutor Karim A.A. Khan QC, announced he was opening an investigation into the conflict. “I am satisfied that there is a reasonable basis to believe that both alleged war crimes and crimes against humanity have been committed in Ukraine,” he said. “Given the expansion of the conflict in recent days, it is my intention that this investigation will also encompass any new alleged crimes falling within the jurisdiction of my Office that are committed by any party to the conflict on any part of the territory of Ukraine.”
Meanwhile, the US kicked a dozen Russian diplomats out of the UN, a move Russia called a “gross violation by the host country,” and sources said Turkey won’t allow Russia’s Black Sea fleet to use key straits to the Mediterranean.
Putin is totally isolated. And, by at least some accounts, he’s lost the war already, even if he ends up “winning.” I joked over the weekend that Putin accidentally turned Volodymyr Zelenskiy into a military folk hero. Fast forward a few days, and that’s not a joke anymore. It’s real. The former comedian-turned supporting actor in Donald Trump’s first impeachment is quite plainly prepared to die for his country. And his troops and people have responded accordingly.
“Overall, the Russian military is performing extremely poorly: They still don’t have air superiority due to Ukraine moving its air defenses around, and Russian missile strikes having only hit old, static targets,” Rabobank’s Michael Every wrote, adding that “Russia’s attempts to rapidly seize Kyiv while minimizing losses to Ukrainian civilians and its infrastructure are resulting in massive losses on their side.”
Putin may still win. Absent direct NATO military intervention, he could always overrun Ukraine by going full-lunatic and sending the entire Russian military over its borders in a kind of desperate suicide blitz, but then what? Russia’s already embarrassing losses would mount, countless civilians would die leading to (more) allegations of war crimes and if Zelenskiy somehow managed to survive the assault, Russia would have to kill him in order to install a puppet regime. Except that murdering Zelenskiy would transform every man, woman and child into a guerrilla fighter. Apparently, Putin asked Belarus to help by sending its own troops into battle.
After citing reports of discontent among Russian conscripts, Rabo’s Every wrote that “it seems the Russian army, despite lavish budgets, has rotted away below an elite tip due to corruption and yes-men needing to please the unwavering ideologue at the top rather than pointing out that things are not going well.” He continued: “If so, Putin’s profoundly anti-Western regime ironically displays the same institutional failures — and flawed supply chains — his fans in the West bewail as our own peculiar failure.”
The final blow to Putin would come when the West decides to bite the bullet (apologies for the morbid pun) and introduce some version of an energy embargo, which Ukrainian officials have already demanded.
“It may eventually prove untenable for Western nations to continue to publicly exempt energy transactions, in order to shield their domestic consumers if there are high numbers of civilian casualties and President Zelenskiy makes a compelling public appeal for such action,” RBC’s Helima Croft said Monday, noting that it didn’t take long for Germany and Italy to drop their opposition to the SWIFT ban. Indeed, Germany performed a complete one-eighty, not just on SWIFT but on weapons exports to Ukraine and on its own defense spending.
“British Foreign Secretary Liz Truss came out [Monday] in support of capping the amount of Russian oil and gas imported by the G7 nations,” Croft went on to say. “We think the ‘If not now, when?’ call on energy sanctions will likely grow louder as Ukrainians continue to mount a fierce resistance to the Russian onslaught.”
If Russian energy is sanctioned, Moscow will effectively lose all access to hard currency, absent some scheme to launder its gold. If Kyiv falls, Russian energy will almost surely be sanctioned.
One reader suggested last week that Putin’s “checkmate” move would be to “turn off the taps.” As it turns out, the opposite was true. With the West having frozen CBR’s reserves and with Russian banks unable to access capital markets, the West may just decide to turn off the taps voluntarily, with sanctions. With no way to obtain hard currency, the Russian economy would implode in earnest. Hyperinflation, depression and all that comes with it.
Now that’s checkmate.
Russia may be forced to launder its gold? I hear there are some nice units available in Trump Tower.
Checkmate? More like Zugzwang? This all seems to be a matter of oil and global instability.
From 2014:
“Lavrov began by emphasizing that Moscow sees Crimea as an integral part of Russian territory. He then stated that Moscow has a military doctrine that “very clearly” outlines how Moscow would respond to threats to its territorial integrity. The military doctrine “very clearly” states that the “Russian Federation reserves the right to utilize nuclear weapons”
I am okay with that doctrine. All nuclear powers have a fairly similar version of that and, “if not then, when” would you use nukes? when your capital has fallen to the enemy?
The key point here is that no one is threatening Russian territorial integrity and/or proposing to cross its borders to achieve any kind of war aim. So, by their own lights, they do not have a casus belli for nuclear retaliation.
Now that I have seen something I never thought so would see, the sanctioning of a Central bank, I would think the final nail in Putins coffin would be to convince Saudi Arabia to turn on the spigots and drive the price of oil to the 50’s.
The Saudi’s do not have the ability to turn on the spigots. They are basically tapped out. We are heading into a world where the demand is going to be greater than supply that exists, within 12 months. Then we have another problem altogether.
If Germans are willing to wear one or two extra jumpers for the next month or two, then the warmer weather of spring will arrive along with the seasonal slow down in the demand for natural gas.
Is a significant (enough) subset of humanity willing to sacrifice for the benefit of another group? It absolutely has happened in our history, but not as often as one might hope. It might come down to how threatened the Germans are by Putin’s current and potential future actions.
+1.
Is it possible for Russian citizens and businesses to transact in Bitcoin or another crypto to avoid sanctions?
In theory, Russian govt, companies, individuals could buy BTC with rubles then pay for things with BTC.
But their rubles are devaluing fast, BTC transaction fees are punitive, how many sellers are taking BTC (you know, find that specialized industrial pressure valve you need to keep your factory running and ask the German manufacturer if it takes bitcoin) or shipping to Russia (airspace closed, FedEx and UPS not delivering) or willing to transact with a Russian company at all.
I’m sure that some high priority transactions are moving to BTC, but bitcoin transactions are public, many of the exchanges and wallets are within the jurisdiction of countries that have sanctioned Russia, and the non-Russian transacting party may be as well.
If BTC adds sanction-evader to cybercrime-enabler and terrorism-funder to it’s list of prime use cases, that’s not going to end up well for crypto.
I was with you till “If BTC adds sanction-evader to cybercrime-enabler and terrorism-funder to it’s list of prime use cases, that’s not going to end up well for crypto.”
Because, as you stated, BTC ledger is transparent, BTC is only semi-anonymous (vs cash – which is entirely anonymous) and therefore, so far, blackmailers and criminals who have tried to use BTC for their crimes have not had much luck with evading law enforcement.
If you’re a cybercriminal, a terrorist or a smuggler, be smart. Ask for dollars, in cash. Or raw diamonds maybe?
Note both Powell and Yellen making crypto = sanctions-evading comments. Most governments want to suppress/control unregulated crypto and/or substitute their own digital currency. Linking crypto to Putin is strategic and purposeful in my opinion.
Slate has a decent geopolitical article on Putinism that provides perspective in terms of Americans interactions with him, over the course of four presidents. The Atlantic Council also has interesting stuff. This Ukraine dilemma will probably not go away anytime soon.
George W. Bush Carries Some Blame for the Current Conflict With Putin
BY FRED KAPLAN
Checkmate works in games where the two sides are rational.
Yes, and the equivalent of kicking over the board is not a pleasant thing to think about.
The sanctions have been carefully constructed to allow payment for oil & gas, with select banks allowed access to the swift system.. can only presume this was a required carve out to get German support over the weekend ?
Truss can suggest sanctions, the UK buys zero (as close to zero as matters) Russian oil or gas.. they would suffer a financial cost in higher prices, but not go dark/cold. In reality when she says G7, she means Germany & Italy. Some estimates put German reliance on gas supplies at 55 %.. you cannot replace this, there is not the LNG, there are not the import terminals, there are not the ships. It is a closed system. The loss in supply can’t really be shared, can’t be made up by other countries.. Typically German gas “reserves” will draw, despite the imports, until June, so there is no reduction in demand for 3 months. Escalating sanctions to include energy therefore means domestic electricity blackouts, industrial shutdowns & lack of domestic heating, on a huge scale. I may be wrong, but I don’t think this is a sustainable choice for the German population.. I don’t know how this ends, but I don’t think it is energy sanctions
Truss’s day job is battling EU politicians over the Northern Ireland protocol & remaining Brexit issues, I may be cynical but I think her comments are designed to put Germany under pressure (in her mind anyway).. If in any doubt as to her ability to make ill thought out statements, reference her Sunday morning television appearance where she expressed support (help ?) for British citizens wanting to go to Ukraine to fight Russian forces..
“I do support that and of course that is something people can make their own decisions about. If people want to support that struggle I would support them in doing that.”
The government was subsequently forced to distance themselves from these comments, and other loose statements suggesting the current situation could result in “conflict with nato”
Energy traders are self-sanctioning as are trade finance providers. Increasing reports of Russian oil going no-bid. With Western majors pulling out of Russia and flow of technology / equipment interrupted, Russia’s production may be less stable. In short, Russian energy exports are not going untouched.
I am not sure this can be resolved via checkmate by either side. A checkmate on a lunatic with nukes does not necessarily yield a victory. The has to be a way out that’s acceptable by both sides for this to resolve
“A checkmate on a lunatic with nukes does not necessarily yield a victory”
How’s North Korea’s economy holding up these days?
That’s a good analogy 🙂
However, the nuclear (or military in general) capabilities of North Korea can hardly be compared with those of Russia (despite their leaders actively competing for the “craziest dictator of the century” prize). Hopefully it will never get to this but as things escalate it doesn’t feel like much is off the table.