President Vladimir Putin is more dangerous than generally assumed if global reaction to the war in Ukraine the past 48 hours is within a tolerable range of outcomes. The intensifying number and forms of pushback over the weekend against the Kremlin and its Russian loyalists elevate risks for all stakeholders unlikely to recede until negotiations begin and produce confidence building steps involving the list of stakeholders.
The widespread and coordinated nature of opposition to Putin’s invasion of Ukraine implies Russia’s isolation from much of the world will be reversed only after he stops the war on terms he may find unappealing. His incentives for de-escalation would seem many unless broadening military confrontation to include NATO and its nuclear capacity are acceptable elements of his strategy to reclaim Ukraine and other former USSR territory.
It is of historical and diplomatic significance that challenges to Putin’s aggressions come from European capitals as well as Washington. German Chancellor Olaf Scholz’s announcement of new military spending above the 2% statutory limit and direct shipment of armaments to Ukraine in reversal of a decision earlier this month are examples of cascading moves meant to protect Europe and dissuade Putin. Italian Prime Minister Mario Draghi’s public support of punishing Russia by limiting its banks access to SWIFT carries notable street cred given his tenure at the European Central Bank and the pain his economy could suffer.
G20 countries sanctioning a member’s central bank is unprecedented and, in our view, more expressive and economically damaging to Russia than the expulsion from SWIFT of some Russian banks. As of early this morning EST, the Central Bank of the Russian Federation was telling members institutions and their retail customers that liquidity was ample and unaffected. Nonetheless, a run on Russian banks began last Thursday and continues today, according to western media based in Russia (FT, BBC among others).
Chairwoman Elvira Nabiullina, a graduate of Yale and Moscow University, has advised Putin much of this century before becoming head of Russia’s central bank in 2013. Her success in building $650 billion of gold and forex reserves will be of less use to Russia if those reserves cannot be utilized easily or without a cost premium if the central bank remains sanctioned.
Other financial and commercial sanctions imposed last week by the US and other counties (including semiconductors from Taiwan and Japan) affect both the primary (beginning March 26) and secondary bond markets (beginning April 15) are additional examples of coordinated actions rarely used but relatively quickly agreed to in this instance, especially considering the collateral damage very likely to EU and Asian economies if the standoff lasts longer than a few weeks.
Many members of the G20 both near and far from the war theater have publicly joined the fight against Russia. The announcement by Turkish President Recep Erdogan (a sometimes ally of Putin) that Russia cannot use the Black Sea for warships communicates a level of concern not priced into Friday’s market action.
Congress returns this week with the Armed Services Committees of each body holding hearings on the situation in Ukraine. Emergency supplemental FY22 humanitarian and military spending very likely will be approved this week or next. The XAR defense/aerospace ETF is up 7% on Thursday and Friday trading, a bounce we expect to continue absent quick, clear de-escalation of hostilities in Ukraine.
Negotiations rarely produce mutually acceptable terms when background conditions include one side bludgeoning the other literally or metaphorically. While it’s difficult to see a quick cessation of war leading to an imminent rollback of global penalties against Russia, that path could be created by the Kremlin whenever Putin concludes it’s in his interest. The range of possible outcomes is widening regarding Putin’s appetite for war. Limited US economic and market fallout may continue but Russia’s nuclear forces going to high alert means US forces are in the same posture. This is uncommon and further elevates global geopolitical risks to markets.
