President Putin today signed a decree to recognize the independence of two separatist regions of Ukraine. This action is consistent with our view that his shrinking options are a factor likely forcing his hand in the very near term. More aggressive military action in Ukraine would signal he believes China can help Russia manage through western sanctions sure to stunt its economic growth which has been robust lately.
Headline risk related to the Russia-Ukraine conflict is intensifying but tangible risks remain unpredictable. Putin surely knows he cannot achieve geopolitical objectives for Ukraine on the battlefield. Russia’s strengthening military posture in the region can force the West to explain how Kyiv’s right to self-determination doesn’t consequently increase Russia’s geostrategic risks. While overall uncertainty remains high, Putin’s incentives for all-out war against Ukraine seem to contravene Russian domestic stability and Putin’s realistic geostrategic concerns.
President Biden is in Washington while Congress is on recess, affording the White House unfettered media control which enhances the ‘single voice’ all commanders-in-chief desire. National security advisor Jake Sullivan said this morning that options for diplomacy are diminishing only to have Russian Foreign Minister Sergei Lavrov one hour later say diplomacy should continue. The value of diplomacy rises only if the two sides find reason to accommodate more than temporary or headline de-escalation.
Invasion isn’t inevitable but certainly is possible given Russia’s air, sea, and land up-tempo posture. Western leaders are unified that Russia cannot be allowed to determine Ukraine’s sovereignty (especially in the Donbas region). Reassurances to Putin that NATO presents no threat to Russia can always be interpreted as a ruse. War will bring harsh sanctions with a relevant question of whether that financial and economic deprivation is more easily sustained by the imposers or the targets. The White House is poised to introduce the first salvo of those sanctions in response to the decree, specifically an executive order precluding new investment, trade, and financing in either of the two separatist regions. In our view, President Biden’s swift response will be appropriate and smart as it communicates to all stakeholders that no provocation will be tolerated.
We are persuaded by military and geopolitical risk analysts’ arguments that Putin can’t and doesn’t win by waging war against Ukraine (the Atlantic Council, the Center for Strategic and International Studies, and GeoQuant, specifically). The standoff is a contest of attrition. War will test command and control discipline of NATO allies and Russia, and the world’s ability to absorb new economic drag including higher energy prices particularly in Europe. Direct and collateral damage from sanctions will test China’s reliability as a substitute for high-tech goods and services to Russia, as well as the West’s ability to see through short-term economic dislocation.
None of this is new but it all seems to be coming to a head sooner than later. What is clearer is the global test of democratic governance principles versus the push of authoritarian rule. More than the historical pursuits of Putin in the former USSR, Ukraine today is about geopolitics going forward. Over the course of this year, we agree with the view that market relevant policy risk runs through central banks’ decisions, though geopolitical risk likely will dominate headlines through this quarter.
