The calendar is one of, if not the compelling driver of escalating tensions between the West and Russia over Ukraine. Winter provides Moscow maximum social leverage in the EU and Russia. The history of the region provides all sides an excess of reasons to suspect the worst of intentions. Geopolitics grants Moscow perceptions of a geostrategic upper hand as Berlin, London, and Washington work through actual changes or pressures (pandemic, economic and social) to heads of state in the past year.
President Putin enjoys imbalances of power unavailable to western leaders. He has no concern for what Russians might think of this latest incursion westward, including whether his calls to nationalism as justification motivates most of his country’s people. Energy, geography, and skewed geostrategic risk tolerance are both negotiation and strategic benefits no other world leader possesses. Ukrainian sovereignty is much more vulnerable to Putin’s calculations than it is sustained by NATO/EU/US protections.
US and UK embassy evacuations from Kyiv underscore Moscow’s advantage in the region. President Biden and Prime Minister Johnson’s decisions rightly protect the interests of their citizens in a volatile military situation over which the men have limited influence. Flows of heavy military materiel and potentially US troops to Ukraine or eastern Europe as required by NATO Article Five agreements show western support for Kyiv but also fulfill the pretext Putin might use for war. Transatlantic decisions can ratchet up pain yet most of that pain will be felt by European and Russian people.
The pain from sanctions is sharpest when substitution isn’t readily available. Vehicles, pharmaceuticals, and machinery are among Russia’s top five imports with much of it coming from the EU. Moscow’s revenue from gas and global finance are important to national GDP but matter less during a war-footing, regardless of the efficacy or reported stockpiling of foreign exchange and industrial goods. Tightly enforced economic and financial sanctions can make Russia an even tougher place to live but not for Putin and his war council.
Russia enjoys asymmetric advantages in geostrategic matters. Economic, financial, and values-based advantages of the West are unlikely to deter Putin from decisions he’s made about Ukraine. Averting war now won’t reduce pressures to adjust security expectations in eastern Europe. Putin may well have concluded that now is the best time to test new and or destabilized governments in Washington, London, and Berlin.
Investor focus this week on Federal Reserve, COVID and macroeconomic risks is unlikely to be re-ordered by developments in Ukraine unless the situation devolves further into a bilateral standoff between Washington and Moscow. With sanctions a growing possibility, reliable Ukraine-only trades don’t readily present themselves at least not to us – though geopolitical risk likely adds to the overall souring of sentiment in US equities.
