Rabobank: “We Will Soon Find Out If Russia Is Going To Blink”

Rabobank: “We Will Soon Find Out If Russia Is Going To Blink”

By Michael Every of Rabobank

Last off-ramp or ramp-up?

Markets are filled with inveterate optimists. (For the record, I define myself as an optimist wrapped in a pessimist: my wife would add, Churchill fashion, “inside a nudnik”). If you are an economist, “things mean revert” or are “all about GDP”; as such, bad things don’t happen or don’t last. Just don’t mention that they don’t mean revert, or ask about how ISIS sees GDP, for example. If you are on the sell-side, you have to sell – we all have to eat. If you are on the buy side, you want markets higher – because you have to eat wagyu. If you are a financial journalist, you want market readers – and the opposite of the mainstream press “if it bleeds, it leads” mantra rules. As such, it was no surprise yesterday that markets tried to do exactly what I had flagged they would – retreated to their next strategic line of denial that “this is not a proper invasion of Ukraine proper”, and then that “these are not proper sanctions”.

To be fair, there was a slim hope that we still had a last off-ramp. Western sanctions were, with the surprising exception of Germany pausing NordStream 2, milquetoast. They will see Russian oligarchs move yachts around, and cash, but they will not stop a Russian war machine rolling. They don’t hit SWIFT, or key Russian banks, or energy, grains, fertilizer, or metals – so most Russian exports. And they hit very few things on the import side. Some also posited that perhaps President Putin could claim reinvading what he had already invaded once was a win and just sit there, grumpily; the West could sit on its weak sanctions, smugly; and then markets could ramp up again, rampily,… because maybe the Fed wouldn’t have to do as much too. Win, win, win!

Yet then Putin underlined ‘Minsk is dead’, so there is no peace process to pretend to stick to; that his two new “republics” officially claim the larger territory of the two Ukrainian oblasts (regions) which they were carved out of – which the FT notes on Twitter “is as close as you can get to declaring war”; and that Kyiv must declare neutrality and that it won’t join NATO, hand over Crimea officially, and the newly-claimed oblasts…or, the implication was, war looms.

US President Biden declared Russia’s recent actions against Ukraine mark the “beginning of an invasion.” Not implied or imminent, but actual. True, US sanctions again deliberately missed the real targets, aiming again at sovereign debt, for example, in an economy running a budget surplus; and Biden offered a hope that diplomacy can still prevail even at this late stage. But this *is* an invasion now, officially.

Kyiv of course refused to acquiesce to Moscow. The country’s defence minister, until now a calm voice, stated Plan A was diplomacy to avert war, but if that fails, “Plan B is to fight for every inch of our land and every city and every village. To fight until we win, of course.” Ukrainian President Zelenskiy stated “Ukrainians are a peaceful nation. But if we remain silent today, we will disappear tomorrow. Self-confidence. Confidence in the country. Confidence in victory. He then mobilised army civilian reserves, one step away from full conscription of the population that would shut down much of the civilian economy, and introduced new economic measures to encourage local production, assuredly with war in mind.  

Last night Asia time, Russian forces were already shelling a power plant in Ukrainian held Luhansk: this morning there were reports of a massive explosion heard in Russian-held Donetsk; and US Secretary of State Blinken’s proposed meeting with Russian Foreign Minister Lavrov was cancelled.    In short, we will soon find out if Russia is going to blink, and we do have that off-ramp, or if we just passed our last opportunity for markets to ramp up.

Why wouldn’t Russia pause to see if it can get by threat of force, for free, what it would otherwise have to fight for? Yet as I stressed yesterday, Russia’s maximalist demands –partition and Finlandisation– are not going to be met by Kyiv. There is no Minsk framework to stall with. If Russian demands aren’t a bluff –and why would they be?– then logically it will take war to achieve them.

Perhaps that *still* won’t see a sudden mass Russian troop move deeper into Ukraine. Yet it would be a constant economic war aimed at destabilisation; a constant attempt to wear Ukraine down; and a constant attempt to try to weary the easy-to-tire West from standing behind Kyiv to ‘just make this all go away and let markets ramp up’. Is that an off-ramp, or a long hard shoulder to bump against for months? Is Russia hypothetically parking troops in new bases in Belarus (now run by Moscow again) and in their two new “republics”, and nibbling away at the larger oblasts they want to hold? And after Putin’s Monday speech deconstructing Ukrainian history and statehood, and his defense minister’s denial of Ukrainian rights to any sovereignty, the logic is not that they want those two oblasts, but all of the ones added by Lenin in 1922. Is Russia waiting until summer, when there is no mud, and sweeping in when Europe is back to focusing on what really matters, like beach holidays? Perhaps short term, if one refuses to look ahead to such fat tail risks (if they are still tail risks)…

…but in that scenario Ukraine would be even better armed and organised, raising the costs/risks to Russia; and Kyiv’s latest actions suggest they *finally* expect something more kinetic – “imminently”. (Which was considered a taboo word there until recently.)

So, no, I am not surprised the S&P just entered correction territory despite the markets starting to price out some of the Fed hikes they had previously priced in on the back of this “geopolitics”; but US futures were trying to ramp up as usual at time of writing, assuming weak sanctions mean ‘less risk’ rather than flagging to Russia that it is low cost for them to continue moving forwards.

Meanwhile, China is watching this transpire and would also face a huge decision if the off ramp is missed. Its recent cooperation with Russia leads it towards at least tacit support for Moscow, but its deep opposition to splittists and separatists, as well as to denying the sovereignty of other states, is not something easily squared with that. So far the preferred solution is to watch its language very carefully and to call for calm and dialogue. But if shooting starts in earnest, a side will have to be chosen – ironic given it is a choice usually involving China and the US.

If China were to lean to Moscow under those circumstances it would hugely exacerbate anti-Beijing sentiment in D.C., increasing the likelihood of even more aggressive legislative action there. So, could Beijing dump Putin for at least tacit support for Biden? That seems extremely unlikely given the deepening Sino-Russian co-operation in many areas and their long shared border – and the deepening Sino-US suspicion on most fronts. However, if you want a fantastical reason to ramp up, look to that ‘Nixon’ trade – not to milquetoast Western sanctions as a warning to a Russia not yet rolling across Ukraine proper it no longer recognizes the sovereignty of.

Tyler Durden
Wed, 02/23/2022 – 10:44

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