“Everyone is f***ing stunned” according to the Kremlin sources of respected Russian-born American journalist, Julia Ioffe. Apparently, no one in the Putin regime expected a full-scale war or the sanctions currently raining down on Russian oligarchs and economic interests. It is not just expectations in the Kremlin which have changed. All is utterly changed except for the human tragedy of war. Of course, we hope for conflict to end as soon as possible so we are watching the following tectonic shifts in global geopolitics and finance very closely….
United States: The US media once again has been inexcusably slow to pick up on global shifts. The reality, despite domestic polling, is that President Biden has managed to put together the most unified global response to a rogue regime since 9/11. Even more striking, is that he has let the EU take the lead with attention grabbing headlines re yacht seizures and suspended Nord Stream 2 projects. However, be under no illusion the biggest “shock and awe” weapon deployed so far was the freezing of Russian central bank overseas assets. We will return to the weaponisation of finance later but the simple fact of financial life is that 60% of most central bank reserve assets are dollar denominated and that requires the use of the New York Federal Reserve and access to the US banking system. No Joe, no go.
Europe: Brexiteers must be wiping their eyes. These headlines about Moldova, Sweden, Finland and Ukraine itself seeking EU membership were never in the red Brexit bus script. And there’s more. Historic first time decisions to supply military weapons and Germany’s massive planned increase in military spend are extraordinary developments and show the power of a $10 trillion economic and political community taking action. In contrast, the UK has been completely sidelined with an embarassingly cack-handed response to the plight of Ukraine refugees and a suspiciously slow imposition of sanctions on Russian oligarchs and banking assets.
Ukraine: It has been said so many times this week that Ukraine voted for a comedian and got a leader. Sadly, the UK and US got The Suspect(thanks John Crace/The Guardian) and the Orange Toddler respectively but there’s a renewed hope that credibility and the concept of leadership has received a massive re-weighting in geopolitics. President Zelensky has not only displayed personal bravery and “walked the walk” but by reason of his credibility he has been able to persuade the West to help his nation in ways which nobody believed would be politically possible. Those individuals who have trotted out bare-faced lies on behalf of Johnson, the GOP and Trump can forget about their leadership ambitions from this moment onwards. Credibility delivers, spoofing just doesn’t “get it done”.
We wrote about SWIFT last week as the “G-mail of banking” and a rather blunt stick to use as sanction. However, it has become quickly apparent that there is a far bigger stick to use thanks to globalisation. In the global banking system financial assets, irrespective of ownership, reside in various international jurisdictions and currencies. And if it’s a Russian owned asset it faces three new problems:
- The assets can be “frozen” and therefore not accessed by Russian owners. This financial sanction has been applied to Russian oligarchs and banking entities in Europe, UK(kinda!) and the US.
- If the asset is equity in a Russian company that’s also a problem. International investors who have decided Russia is “uninvestable” are frantically trying to sell those bonds and shares. This has forced the Russian regime to frustrate those efforts by closing the Moscow stock exchange. The last time that happened was in 1917 which was also a rather dangerous time to be an “owner”.
- Even if one could sell an asset one needs to find a buyer. And that’s proving difficult. There’s not an institution in the world that wants to be seen facilitating or participating as a buyer of Russian assets. That even includes supposedly exempt oil and gas assets. Check out this morning’s news that Srgutneftgas, the Russian oil producer, has failed for the third consecutive session to sell its Urals crude product via its regular tender. Even at record discounts, there are NO buyers of these oil assets.
As mentioned previously, the buyer of last resort in this instance, the Russian central bank, has been crippled by US sanctions. The Putin treasure chest of $600 billion built up over the years and sitting in various financial institutions is estimated to have more than $400 billion of its emergency funds in deep sanctions freeze.
All eyes are on the destruction of Ukraine but actually it has become a race against time for the Russian economy too. For context, the Russian economy is roughly the same size as Spain’s with $1.4 trillion of annual economic activity(GDP). JP Morgan believe the collapse of Russian GDP in Q2 could be as severe as 35%. If we consider the global economy as a daisy-chain of connected activity the evaporation of GDP at that scale puts the financial shock value into US sub-prime territory circa 2008. My own sense is that the damage could actually be worse as the isolation of Putin begins to move into North Korean mode. Consider the following developments:
- Global trade: Yes, Russia exports lots of items but you need transport. And the biggest logistics player on the planet, Maersk, just said “Nyet”.
- Global services: Propaganda can only do so much but when the average Russian viewer realises football, Formula 1, tennis etc have left their their TV channels the sense of isolation and disappearance of multinational advertising/sponsorship will be very real. Apple, Microsoft, Mastercard, McKinsey and Accenture are not just leaving sport. They are leaving town.
- Corporate destruction: A combination of trading suspensions and buyer boycotts has resulted in the shares of Russia’s largest companies cratering by more than 80%. These companies will have debt too and that will still have to be paid just as interest rates have doubled to 20% in Russia. That equity-debt pincer movement is lethal for companies and their balance sheets. Also, it is fascinating to see news in the past few hours of Lukoil, Russia’s number 2 oil company, breaking ranks and calling for an end to the fighting in Ukraine.
It is not a huge surprise to hear Russian authorities making plans for martial law and capital controls but this misses one rather awkward point. The war of aggression in Ukraine is estimated to be costing $20 billion per day; that seems high but a cratering ruble, higher interest rates, domestic stock market carnage and higher-than-expected military equipment losses/ abandonment on the battlefield will probably get you close to that average daily cost number for the first 10 days of aggression. So, if the Russian central bank has only $200 billion of reserves(not in dollars either) rather than the originally planned $600 billion plus of emergency funds then every additional day that tanks are parked outside Kyiv is critical to the sustainability calculations for the Russian state.
Another feature of how Ukraine is winning the messaging battle with the Kremlin can be explained by a fresh approach by NATO and its allies. Rather than let Putin build a ‘Donbass oppression’ narrative the US and its allies have shared relatively large amounts of information about military build-ups, weaponry and activity which has established credibilty and helped Ukraine win international support. In this respect, media has been ‘used’ intelligently but there has been a more interesting and more proactive shift in approach in recent days and it originated very close to home.
The interview by David McCullagh on Irish broadcaster, RTE, with the Russian ambassador to Ireland has been a viral social media hit but is well worth viewing again and again. McCullagh employs a very simple tactic in eviscerating the misinformation attempts(lies) of the Russian ambasador and this interviewing ‘set up’ should be used by all serious media going forward. Bluntly, McCullagh quoted back the lies, or wrong info, spouted by the ambassador in recent weeks and asked how his new statements could be credible.
Watching the pitiful attempts in recent days of the likes of Farage, Wallace, Trump, Pompeo, Raab, Patel and Johnson to distance themselves from previous episodes of misinformation should be an opportunity for all media to refuse to give credibility to any new statements from these individuals. Enough is enough.
Right Wing Politics Unmasked:
It wasn’t just Vladimir Putin who unmasked his true self in recent days. The murky, greedy and shabby politics of the Conservative party in the UK and the Republican party in the US have been laid bare. Russian money has been synonymous with these political groupings for years and the lack of curiosity about Putin’s true intentions re election interference, NATO destabilisation, social media conspiracy, cybercrime and Brexit must have consequences. And not just for the poor Ukrainian population. Frankly, the information about malevolent Russian intentions has been available publicly for years so it should be made clear that lack of curiosity, obfuscation and disguised funding was as good as complicity. Any corporate entity with connections to the Murdochs, Fox, GOP and Conservative Party funding platforms could be forced to “socially distance” from the populist virus quite soon…
Apart from the human cost which cannot be measured, financial markets are beginning to “wobble” about the ultimate economic costs. Wobble might be the wrong word as some of the market gyrations have been seismic. For example, the Moscow stock market had a “17- sigma” event this week ie the probabilities of the Russian market collapsing at this speed and quantum should not happen in the “lifetime of the universe”. Furthermore, word from the all-important bond market is that moves in certain German bunds, US TIPS, Russian bonds and overall price volatility have secured their places in the financial history books. On a more fundamental level the cost of Putin madness can be seen in the “tax” imposed on the global economy in two very obvious ways….
- Oil prices rocketing towards $120 hurts all economies.
- Wheat prices up 40% in a week shows the impact of Ukraine and its status as “the breadbasket of Europe”.
It’s difficult in the darkest hours to see the positives but hold two very important thoughts. Firstly, the world has truly come together again to stand up to Putin. The international muscle memory of taking pain for the greater good during Covid-19 has clearly helped leaders message that they must do “the right thing” now or the later consequences will be much worse. Secondly, this re-education of populations away from short-termist lies, promises etc can only be a good thing ahead of seriously tackling an even greater global challenge; the climate emergency is now and the just published UN IPCC report pulls no punches about “a brief and rapidly closing window” for action. So, difficult choices to reduce dependency on Russian fossil fuels and to urgently seek climate friendly alternatives to $120 oil can only be a good longer term development for our world.
Indeed, President’s Zelensky’s now famous words could be applied to our own potential extinction event…. “The fight is here. I need ammunition, not a ride.”