‘No Breakthrough’

Peace talks in Istanbul yielded “no breakthrough,” the Kremlin said Wednesday. Lots of work remains to be done, Dmitry Peskov told reporters.

Peskov’s sober assessment was at odds with the wishful thinking that pervaded market sentiment Tuesday, when stocks welcomed the notion that Russia might pull back from some positions around Kyiv.

Military strategists and Western officials more generally were skeptical, suggesting instead that Russia’s “withdrawal of troops” likely just meant shuffling its units to consolidate gains in the east and perhaps cut losses around the capital, where Vladimir Putin’s war machine has been stalled for weeks. Russia isn’t, two sources close to the Kremlin said, “moving preemptively to defuse the conflict.”

Putin may have accepted the futility of the Kyiv siege, although any such recognition wouldn’t be made public and Russia will surely continue to terrorize the city. It seems likely Ukraine will be asked to cede Luhansk, Donetsk and territory around Crimea, as well as agree to neutrality in order to secure a real Russian withdrawal from the rest of the country. Of course, Volodymyr Zelenskiy isn’t likely to hand over a fifth of Ukraine’s internationally-recognized territory, and Moscow surely knows that narrowing the focus of Putin’s “special operation” would allow Zelenskiy to shift his own fighters to the east, thereby eroding Russia’s foothold. Sometimes I wonder if Russia might actually lose the war.

For now, it’s a quagmire. And who could’ve predicted that? Apparently not Putin, and because he won’t blame himself, somebody else has to answer for it. Remember: “There should be a specific person who can be hanged.”

“We do see a fighting pullback of over-stretched Russian forces from Kyiv, which from day one they never had the manpower to take if they faced serious urban resistance,” Rabobank’s Michael Every said Wednesday. “However, those Russian forces are pulling back to the eastern front to try to encircle 80-100,000 Ukrainian troops holding the line there, not going home to buy stocks, even if the Moscow stock exchange is open again,” he went on to write, before daring market participants to “imagine what the suddenly pragmatic Russian negotiating position will be if that encirclement succeeds and how bloody the fighting is about to get in Ukraine’s agricultural and industrial heartland as they try. Stocks can’t.”

No, stocks can’t. Just like they can’t imagine the US recession the 2s10s (and 5s30s) is predicting and the downturn Bill Dudley says will become “inevitable” once Jerome Powell triggers the infallible Sahm Rule.

“Investors had gone more risk-on than the environment probably called for, as there had appeared to be little progress on the Ukraine-Russia negotiations — if anything, rhetoric from the US side only got stronger,” Bloomberg’s Vassilis Karamanis wrote, in a daily column. “Doubts remain on whether this is indeed solid progress,” he went on to say, referencing a hypothetical curtailment of military action around Kyiv. “The market wants to trade on the basis that it is.”

Meanwhile, Germany activated the first phase of an emergency energy plan in the face of Kremlin demands that Europe pay Russia for gas in rubles, something the G-7 says it won’t do. German Economy Minister Robert Habeck indicated the risk of a full-scale disruption is now real, but unlikely. “This is about monitoring the situation,” he told a press conference. The second phase is “alarm,” the third “emergency.” “We’re not there yet,” Habeck remarked, noting that “the situation would have to worsen dramatically before we reach those stages.”

In a statement, Michael Vassiliadis, president of Germany’s chemical workers union, warned that cutting off Russian energy would mean shuttering the country’s entire industrial complex. “Exploding energy prices, but above all a possible gas embargo, would hit energy-intensive industry — the mother of the industrial network — hard,” Vassiliadis warned. “The consequences would not only be reduced work hours and job losses, but also the rapid collapse of the industrial production chains in Europe, with worldwide consequences.”

For his part, Peskov appeared to concede that Putin’s Thursday deadline for the implementation of ruble payments wasn’t realistic, although he didn’t put it that way. “This process is more drawn out, technologically,” he said.

Domestically, there are growing calls for Putin to demand ruble payments for other commodities, including grain. For example, The Russian Union of Grain Exporters pressed the central bank to create a mechanism for foreign buyers to pay in rubles, according to Kommersant. Just like contracts for energy, the majority of grain deals are struck in foreign currencies, but the union wants Elvira Nabiullina to work with foreign banks who serve grain buyers on the provision of ruble liquidity. Turkey, Egypt, Iran and Saudi Arabia came up. Egypt’s situation is particularly acute. I suppose I’d gently note that, on some interpretations, it’s literally illegal to work with Nabiullina on grain, or anything else.

Peskov on Wednesday said a proposal from Duma Speaker Vyacheslav Volodin on expanding ruble payments beyond energy “needs work.”

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8 thoughts on “‘No Breakthrough’

  1. I did not know what the Sahm rule was so I looked it up. It strikes me the same way the Phillips curve did some years ago. A useful concept that may or may not work in the real world anymore. The pandemic has impacted these types of rules. If you tick the box that you will have a recession with a .5% increase in U-3 unemployment (rolling of course), what happens when the labor force/labor force participation rate goes through a shock down and then recovers? In my book, a clear sign of a real recovery is if the U-3 gauge goes up temporarily, due to the labor force increasing from folks coming back to look for work. Maybe the rule works, but it is likely not as reliable as before.

  2. Germany. How could they be so stupid? I mean, markets have a way to keep participants humble so I hope you’ll believe me when I say – I saw that one coming back in 2014…

    Or if you allow me : from my now defunct blog : http://theredbanker.blogspot.com/2014/03/ukraine-russia-new-crimean-war.html

    “I don’t doubt that this crisis will end up with Putin in control of Crimea. Not only does he already have it but he cannot back down without being immediately attacked internally for what would be a major display of weakness. Not that he is likely to feel like backing down in any case…

    The response of the western world is more open to question. The EU is tied up due to Germany’s reliance on Russian gas. The US has more freedom of action. Thus, I think we will see some tougher sanctions out of the US than out of the EU and, thus, it will be less than crippling for Russia.

    If only Germany was willing, the EU would be well placed to truly screw Russia’s economy. Confiscate all the Russian money floating across the EU. Stop buying their gas. Send back all the sons and daughters of pre-eminent Russians now studying and enjoying the life of Riley in the West. Forbid Russians from holidaying in Nice, Monaco, Courchevel and Megeve. Exclude Russia from the G8. Make it a pariah state like South Africa used to be.

    There’s no end to the humiliations, insults and economic woes we could heap on Russia without having to fire a shot.

    This would be a return to a full-blown Cold War and, while I think it is utterly idiotic, given the total lack of any upside for anyone involved, I think it is warranted. The times of Empires has passed and, while The Great Game was cool and entertaining for the kings and tsars who never had to do the dying personally, nowadays a leader’s focus ought to be on making his populations as materially safe and wealthy as he can. It’s actually a far more complicated game than the war-games of old.

    But I don’t quite believe that the West will go nearly that far. We’ll see…

    Another set of more open questions revolves around the Ukrainian East. Do the Ukrainians give Putin some pretext to invade Kharkiv or Donestk? Do they try some kind of drastic payback? I know some of my friends were pointing out that, though Ukraine no longer has nuclear weapons (since they were ‘tricked’ into giving them up in 1994 against solemn promises – including by Russia – not to interfere ever with its sovereignty and borders) they have nuclear plants… and thus nuclear waste. They could fairly easily manufacture some pretty nasty ‘dirty’ bombs… I am not saying this is likely to happen. There’s no way the Ukrainian government would be so reckless. This is just the kind of talk my humiliated and resentful Ukrainian friends use to vent their anger and frustration.

    And this, in my opinion, will be the longest lasting impact of Putin’s actions: the destruction of any goodwill within Ukraine towards Russia.

    One day, Putin will be gone – retired or dying at the helm of Russia, if he goes the full autocratic way.

    However, the hatred he sowed will not die with him.

    A great many Ukrainians have always felt close to Russia – and to Belarus, too – it’s the same people, after all. But when a big brother keeps on beating the shit out of his little brothers, well, eventually, this lead to family dramas, brotherly hate and even… fratricide.

    The Russian people, beyond some short-term feel-good emotions with the return of their imperial glory, will get nothing out of this, long term. Quite the contrary.

    What a waste!”

    Holds up pretty well after 8 years, if I say so myself.

  3. This crisis is existential for Russia as well as a so called Dollar Hegemony… This is little to do with Ukraine if you disregard Geographical location and the role of Nazism in WWII. My father fought in the Hungarian Army during the Stalingrad offensive and was fluent in Russian and familiar with Ukraine as it was part of the Soviet Empire. He took a lot of Photos and left an elaborate diary as part of his memoirs . Interesting stuff….

  4. Reports based on US intelligence * that information is being withheld from Putin concerning the military and economic situation. Would not be surprising given the risks of giving him “bad news”.

    Have to assess Putin’s next steps assuming he thinks the war and economy are both going better than reality.

    Would imply a longer war.

    The apparent volume and accuracy of US intelligence about internal Kremlin developments must be driving purges and paranoia there.

  5. “Sometimes I wonder if Russia might actually lose the war.”

    I’ve been wondering about that for a few weeks. the more I consider that possibility the more I feel like we may see an unconventional response to a conventional loss. Hopefully that proves to not be the case.

  6. “quagmire” … as for Russian troop movements, to paraphrase James Carville, “it’s about the mud stupid!” Start watching http://www.weather-forecast.com/maps/Ukraine like you trade commodities in a pit for a living. Where does Putin redeploy, near rails that allow rapid access southward to drier ground? Among the Russian’s many logistical fiasco’s was their complete failure to successfully utilize Ukrainian rail. Considering how dependent the Russian military is on rail that was curious. Heard a report of Russia sending rail cars loaded with civilian light-trucks south towards the war. So many variables, so few brain cells.

    Another thing getting short shrift in sound-byte media (besides the 1 million cargo containers stacking up in EU rail yards) is India. Specifically, a deeper appreciation of the extent of Putin’s treaties and business arrangements he made with Modi in the months leading up to I-day (Invasion Day). I was wondering why he waited to invade so close to the starting of the thaw. Perhaps he was getting ducks in a row that would prove critical to sustaining the war effort? With Russia’s help India will probably be the third largest energy consumer in a decade or so. On the other hand India is taking an increasingly aggressive stand on China’s whole Belt and Ro[a]d initiative leaping frogging past India into the ME and Africa like India is invisible or something. Can’t imagine how the elites in India are feeling about Pakistan becoming a debtor vassal of China, but, looking at the extent of mutual cooperation between India and Russia for conventional weapons I’d wager India isn’t feeling warm and fuzzy about China’s moves. Let’s not forget Indian and Chinese troops actually went at it in a vicious hand-to-hand brawl last year [1]. Obviously, anything to do with India is horrendously complicated, and made orders of magnitude more so when one realizes how incredibly little we really know about India internally due to a multitude of language barriers. Consider just this. From day one english speakers made contact with the subcontinent 99.99% of written word communication with the now ~1.35 billion folks in India has been filtered through a sliver of the Brahmin caste. The massive lion’s share of potential social and political information Westerners might wish to analyze is not just uninterpretable, it is unreachable. And it never will be otherwise, as this goes much deeper than merely illiteracy.

    One thing is for sure. Indian is playing hardball. She knows her economic interests are in her region, but, her most powerful geo-political ‘allies’ are located elsewhere. Tricky business.

    [1] These are not bosom buddies: http://www.rte.ie/news/world/2020/0617/1147900-india-china-soldiers/

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