Putin codified the first phase in his annexation plans for eastern Ukraine in remarks affirming Russia’s recognition of two eastern regions on the Russia-Ukrainian border. Putin’s declaration that Russia recognizes the independence of the Donetsk People’s Republic and Luhansk People’s Republic creates his staging platform to “reunify” the rest of Ukraine. Donetsk and Luhansk have been under Russian-backed separatist control since 2014 when Putin last invaded Ukraine and seized control of Crimea.
Putin, now 69 with some ailments, would like to see the reunification of Ukraine with Russia as his legacy — and he may take some neighboring states in the process. Note that after Russia, Ukraine is the second-largest country in Europe, and its eastern border is only 500 miles from Moscow.
Russia’s military staging on the border with Ukraine was the largest military movement since World War II, and the potential for kinetic conflict with NATO and the U.S. is very real.
It seems clear that Putin has no intention of backing down, as the number of troops stationed on the border has only grown. Furthermore, the Kremlin is waging a misinformation campaign that seems to be having some effect. The Russians have thrown enough historical claims regarding the heritage of the region of Ukraine to plant some doubt in people’s minds as to its genuine heritage.
Russia-backed separatists currently control less than half of the Luhansk/Donetsk region. Which portion of the region did Putin recognize as “independent”? If it’s the whole area, the act will likely lead to war.
Russian “peacekeepers” have pushed across the Minsk Protocol buffer zone. According to the Russian government’s news agency, TASS, …
Putin decided to conduct an operation to denazify and demilitarize Ukraine. …Russia will not allow Ukraine to have nuclear weapons.
The term “denazify” suggests that Putin intends to remove the Ukrainian government by force, which means a full-scale invasion (the Kremlin has been labeling the Ukrainian government “Nazis” for years to justify incursions).
The attacks have started.
Source: News 18 Read full article
The markets were taken by surprise, with many hoping that Russia’s incursion would be limited.
Russia’s markets have been under pressure.
The ruble was sharply lower.
Russia’s bonds have sold off as well.
Brent crude oil blasted past $100/bbl.
Stocks tumbled across EM Eastern Europe.
Gold is going higher.
Grain futures are surging.
European Natural Gas prices exploded to the upside.
Russian-speaking population of Ukraine:
The war and the sanctions that follow will exacerbate supply chain pressures.
Economist Noah Smith believes the available options are less powerful than Western leaders seem to think.
Key Points:
- Russia’s exports are almost entirely natural resources, with oil by far the biggest part of the total.
- Because oil is fungible, stopping Russian sales would have little net effect. Export relationships would simply be rearranged.
- Natural gas is a smaller chunk of Russia’s exports, but harder to replace. Russia will lose substantial revenue if gas exports to Europe should stop.
- However, Russia’s trade surplus and FX reserves are large enough to manage this problem for some time.
- Europe will have to accelerate sustainable energy programs, re-open nuclear plants, and increase non-Russian coal and LNG imports.
- Financial sanctions on Russian banks could cause noticeable pain to the Russian economy without endangering the US or its allies much.
- Cutting Russia out of the SWIFT payments system, as some propose, would have limited effect if China allowed Russia to use its payment networks.
Today’s world economy isn’t like the old one where nations could be easily isolated. Russia has China as a relief valve, weakening all the Western sanction tools. The Russia-Ukraine conflict’s main economic effect may be to drive energy prices higher still, intensifying an economic slowdown that is already underway.
Western sanctions have sent the ruble into a nosedive, with the currency tumbling 30% overnight to an all-time low versus the dollar. In response, Russia’s central bank more than doubled its key interest rate to 20%, freed local bank reserves to boost liquidity and ordered exporters to sell 80% of their hard currency revenues. In a bid to shield the nation’s assets, brokers were also banned from handling sales of securities by non-residents, while Russian oligarchs were put on watch by many Western nations.
“A bank run has already started in Russia over the weekend… and inflation will immediately spike massively, and the Russian banking system is likely to be in trouble,” declared Jeffrey Halley, senior market analyst at OANDA. “These sanctions from the West are likely to eventually hurt trade flows out of Russia [around 80% of FX transactions handled by Russian financial institutions are denominated in USD], which will also hurt the growth outlook of Russia’s key trading partners including Europe and lead to greater inflationary pressures and risk of stagflation, we think,” added analysts at Nomura.
Over the weekend, Western governments said they would cut off a select number of Russian banks from the SWIFT international payment network, and sanctioned some transactions of the Central Bank of Russia. That will make it harder for Moscow to shore up the ruble, its economy and prevent the country from getting around existing sanctions. Russia has meanwhile sought to quell the panic, saying it has necessary resources and tools – like $630B of foreign reserves – to maintain financial stability, though the S&P cut its credit rating to “junk,” dealing a blow to the country’s capital markets.
Governments aren’t the only ones wounding Russia’s economy as a move to divest from the country takes hold among corporations. British oil major BP (BP), the biggest foreign investor in Russia, is selling its 20% stake in Rosneft (OTCPK:RNFTF) – at a cost of up to $25B – after coming under fire from the U.K. government. Up until now, BP has maintained that it was in Russia for business, not for politics, but its 30-year run in the country may now be unfolding.
The campaign spreads: Norway’s Equinor (NYSE:EQNR) is following suit, exiting its joint ventures in Russia and stopping new investments there. “We are all deeply troubled by the invasion of Ukraine, which represents a terrible setback for the world, and we are thinking of all those who are suffering because of the military action,” declared CEO Anders Opedal. In fact, Norway’s government has even ordered its $1.3T oil fund, the world’s largest sovereign wealth fund, to ditch its $3B in Russian investments.
Joining the campaign to isolate the country, UPS (NYSE:UPS) and FedEx (NYSE:FDX), two of the world’s largest logistics companies, have suspended shipments to Russia. Dell Technologies (NYSE:DELL) has also banned sales to the country due to new export controls that covered computers. Meanwhile, Meta Platforms (NASDAQ:FB) and Twitter (NYSE:TWTR) are in overdrive mode to remove fake accounts, while Apple (NASDAQ:AAPL) is facing growing pressure to cut off Russians’ access to the App Store.
To the skies: Just as air travel was picking up following the latest coronavirus wave, the European Union shut all Russian planes out of its airspace, as well as Canada. “That includes the private jets of oligarchs, and commercial airliners owned, registered or controlled by Russians,” said European Commission President Ursula von der Leyen. Delta Air Lines (NYSE:DAL) has additionally suspended its code-sharing agreement with Russian flag carrier Aeroflot, further choking off Russia’s access to global aviation.
Ukraine History – (cliff notes version)
First inhabited 32,000 yrs ago . Lots of European Empire fighting.
Jumping ahead 31,700 years:
- 1750 Ukraine became a separate nation state.
- 1783 Russian takes the Crimia peninsula , like they did again in 2014.
- WW1 1914-1918 Ukraine is part of the “Central Powers” siding with Germany
- 1917 Russia pulls out of war in the midst of Comunist revolution against Zarists. Ukraine also and has the same Comunist vs Zarist revolution
- WW2 1939-1945 Ukraine fights along with Russia against Germany [est 4.7 million soldiers] Yet in the western part a separatist army fights for Ukrainian independence.
- 1953 Stallin dies, Kruschev takes over. Previously he was head of the Comunist party in Ukraine.
- 1989 Soviet Union collapse
- 1990 Ukraine becomes a seperate nation state again
- 1994 US and other countries convince Ukraine to give up their nuclear weapons, ln exchange for these countries [including China] guaranteeing Ukraine’s sovereignty.
US Economy
- US COVID cases continue to ease.
- The flash Markit PMI report exceeded forecasts this month, suggesting that business activity bounced back from the omicron dip.
- Manufacturing price pressures persist, but the input price index appears to have peaked.
- Service firms have accelerated output price increases, which will feed into consumer inflation.
- The Richmond Fed’s regional manufacturing index shows stalling growth this month.
- Capacity utilization deteriorated.
- But businesses are more optimistic about the future.
- Price pressures are starting to ease.
- Home price appreciation accelerated in December.
- In 2021, home prices rose more than in any year since just after WW-II.
- Despite more robust pay increases since the start of the pandemic, home prices have left wages in the dust. This divergence is only sustainable if mortgage rates stay low…..but mortgage rates are rising.
- The Conference Board’s consumer confidence index ticked down this month.
- The Treasury curve keeps getting flatter amid concerns about economic growth. The 10yr – 2yr Treasury spread hit 35 basis points for the first time since the COVID crash.
- The market expects much higher inflation in the near term, but a faster decline later.
- Mortgage applications for house purchase are sputtering.
- Refi applications are falling quickly.
- High-frequency indicators suggest that home price increases are accelerating.
Market Data
- The S&P 500 is at support.
- The S&P 500 is in correction territory.
- The Nasdaq Composite entered a death cross.
- Consumer Staples was the only large-cap sector with a positive return last week.
- Many companies have been issuing negative guidance for Q1.
- Are mega-caps and growth stocks’ valuations still too high?
- Nasdaq futures are in bear-market territory.
Thought of the week
Teacher Debbie Moon’s first graders were discussing a picture of a family. One little boy in the picture had a different hair color than the other members. One of her students suggested that he was adopted. A little girl said, ‘I know all about adoption — I was adopted.’
‘What does it mean to be adopted?’, asked another child.
‘It means’, said the girl, ‘that you grew in your mommy’s heart instead of her tummy!’
Pictures of the Week
All content is the opinion of Brian J. Decker
