by Greg Valliere, AGF Management Ltd.
STILL ANOTHER CRISIS: The U.S. and China are at odds over the Olympics, the Iranian nuclear talks have no chance, fiscal policy is a mess as a debt ceiling deadline approaches — and now there’s a call this morning between Joe Biden and Vladimir Putin over a potential Russian invasion of Ukraine.
HIGH STAKES FOR PRESIDENT BIDEN: After the inept withdrawal from Afghanistan, the U.S. needs to show allies — and adversaries — that it will confront Russian aggression.
PUTIN HAS SEVERAL OBJECTIVES: He wants assurances that Ukraine will never join NATO, he wants to pressure Western Europe with an implicit threat to reduce natural gas shipments this winter, he wants Western sanctions lifted, and he wants to defend pro-Russian separatists in eastern Ukraine.
THE THREAT OF AN ALL-OUT WAR is very unlikely, even if the U.S. sends sophisticated weapons to Ukraine to confront up to 175,000 Russian troops later this winter. There’s no public support in the U.S. for military action, and the Russian public could quickly tire of casualties in a conflict that might bog down.
SO THE CLEAR ALTERNATIVE IS DIPLOMACY, hopefully beginning this morning. We think the temperature will lower a bit today, as Biden makes it clear that the U.S. could ramp up economic sanctions, including cutting off Russia’s access to the international financial settlement system, called SWIFT, while also imposing a series of restrictions on its banks like those imposed on Iran.
THIS CRISIS COULD SIMMER FOR MONTHS, with Russia engaging in cyberwarfare and claiming that Ukraine is a threat to Moscow, when obviously it’s vice versa. Border skirmishes are possible but Putin is too clever to launch an all-out invasion; he simply needs to keep pressure on NATO and peddle the fake news that Ukraine is the real aggressor.
EVEN WITH U.S. RELATIONS WITH CHINA sinking again and talks with Iran at rock-bottom, there’s a major difference between now and a two or three years ago: U.S. relations with NATO are solid, the threat of major new sanctions has teeth, and a tough response from Biden will have overwhelming support in Congress.
THERE WILL BE NO WAR, AND UKRAINE WILL NOT JOIN NATO: An uneasy stalemate is likely for months to come, with Moscow stirring the pot in the Mideast while supporting cyberwarfare against the U.S. The “Havana Syndrome” will persist, an increasingly menacing attempt to affect the health of U.S. embassy personnel.
MEANWHILE, THE MARKETS can focus on very good news: growing evidence that the omicron variant is not particularly lethal, a solid U.S. economy, and signs that policymakers are determined to confront inflation. A 3/4 percent federal funds rate a year from now isn’t a huge threat for the markets or the economy, and either is Ukraine.
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This post was first published at the AGF Perspectives Blog.