Melee

Equities fell sharply and bonds surged in the US as markets looked on in disbelief at the rapidly deteriorating situation in eastern Europe.

After drawing international condemnation for shelling a nuclear plant, Vladimir Putin signed laws permitting asset seizures and criminalizing domestic support for international sanctions against his regime. Russians calling for sanctions risk being imprisoned for up to three years. The publication of “fake news” about the Russian military is now illegal. It goes without saying that the Kremlin gets to determine what’s “fake” and what isn’t.

The BBC said its journalists will no longer work inside the country. “This legislation appears to criminalize the process of independent journalism,” BBC Director-General Tim Davie said, in a statement. “It leaves us no other option than to temporarily suspend the work of all BBC News journalists and their support staff within the Russian Federation while we assess the full implications of this unwelcome development.”

Facebook was blocked nationwide by the Kremlin. It’s hard to see how any journalists or Western media outlets will be able to function in Russia under the new laws, which Speaker Vyacheslav Volodin said are designed to inflict “severe” punishment on “those who lie.” All media not pushing the Kremlin’s line are effectively persona non grata.

Talks with Putin are out. For now, at least. Although Jen Psaki said the door for diplomacy is “never” closed, Joe Biden will not “chat” with Putin while Moscow is “in the middle of an escalatory war in a sovereign foreign country.” Antony Blinken said the situation is almost destined to get worse.

The US is now considering banning Russian oil imports as support grows on Capitol Hill. Citing the ubiquitous people familiar with the matter, Bloomberg said “conversations are taking place within the administration and with the US oil and gas industry on the impact such a move would have on American consumers and the global supply.”

Another source cited in the same linked article noted that Russia is already in extreme peril. The currency is collapsing, stocks haven’t traded in days and default seems likely. One analyst suggested that “any restrictions on Russian flows would cause pain exclusively on the side of the buyer because the Russians can easily place their fuel oil in China or India.” Maybe, but Putin’s energy is getting the cold shoulder. All indications are that the Russian commodities trade is being shunned. Not everywhere, of course. And not by everyone. But there’s significant friction.

JPMorgan warned of a “collapse.” “The exodus of foreign direct investors from Russia has been impressive, even as authorities are trying to slow it via regulations. In the near-term, it is nearly certain that over-compliance with sanctions and restructuring of broken supply chains will substantially constrain business activity,” the bank’s Anatoliy Shal wrote. “The duration of voluntary pause in doing business with Russia is harder to gauge and will probably depend crucially on how the conflict evolves — unfortunately, the conflict appears increasingly likely to be protracted — with some of the past business relations likely never to return,” Shal added. “A shift in European policies toward lesser energy dependence on Russia seems guaranteed, suggesting, among other things, a longer-term impact to Russian growth.”

European shares suffered their worst week since the onset of the pandemic amid the melee (figure below).

It was the third consecutive weekly loss and the eighth in nine.

Last week witnessed the largest outflow from European equities on record (figure below). The $6.7 billion exodus came in the days following Putin’s invasion.

“Russia/Ukraine means a bigger ‘Inflation shock,’ a smaller ‘rates shock’ and a bigger ‘recession shock,'” BofA’s Michael Hartnett said, calling the Fed and the ECB “hopelessly trapped.”

He cited surging crude prices, the “military-sanctions escalation cycle” and the prospect for market “accidents” in flagging the potential for a “global recession.”

War, he went on to note, is inflationary. Investors just witnessed the most stunning one-week performance for spot commodities on record. On BofA’s math, this is also the “strongest start to any year since 1915” for commodity prices.

I see little utility in editorializing any further on Friday afternoon. The risk now is clear. Putin is backed into a corner and he seems to be running out of options. Writing Friday, Goldman’s Mikhail Sprogis and Jeff Currie said “the difficulty involved with liquidating gold reserves and the presence of a large current account surplus means Russia will likely focus on capital account restrictions to manage the ruble exchange rate.”

“Selling gold in any meaningful quantity will require finding a buyer willing to transact with the Russian Central Bank thus facing the risk of violating sanctions,” they added. “A current account surplus of $200 billion, however, means that if capital outflows can be spread over several months they could be offset by inflows from export revenues.” Once again we’re back to asking the same question: What happens if the West gets more aggressive at targeting exports?

Regular readers will recall that when the US announced the first tranche of sanctions in response to Putin’s recognition of the separatist republics, I flagged Janet Yellen’s use of the word “lasting” to describe the damage her Treasury department planned to do in the event Moscow pushed the issue. Writing in the same note cited above, JPMorgan’s Shal said that although the level of uncertainty makes “the precision of guesstimates naturally very low… what is clear is that Russia’s growing economic and political isolation will lead to lower growth in the long-run.”