by Greg Valliere, AGF Management Ltd.
Insights and Market Perspectives
VLADIMIR PUTIN’S EXTRAORDINARY SPEECH yesterday — bitter and paranoid, with no willingness to negotiate — reinforced the worst fears of U.S. officials. Putin is clearly itching for a full-fledged invasion, which he would justify if there are Russian casualties this week in Donetsk and Luhansk.
PRESIDENT BIDEN CANNOT AFFORD a perception of appeasement (not after the Afghanistan fiasco), so the mild U.S. sanctions imposed yesterday — only on the two breakaway regions — will have to get a lot tougher if Putin’s troops push deep into Ukraine.
MUCH MORE AGGRESSIVE SANCTIONS are likely; the initial reaction from the White House — that this may not be a full-fledged “invasion” — will encounter withering criticism from anti-Russia hawks in Congress. Biden has to announce fresh sanctions, probably today. (The Nord Stream pipeline will stall.)
TWO WAYS TO READ THIS WEEKEND’S DEVELOPMENTS: The really negative theme is that Putin, increasingly unstable and isolated, is determined to reverse NATO’s move eastward. He wants to restore, at least partly, the old Soviet Union map and he wants a Russia-China alliance to check the West. From the Baltics to Taiwan, this is ominous.
SECOND, THERE’S A LESS NEGATIVE SPIN that Putin may stop at the two breakaway regions, just as he stopped at Crimea nearly a decade ago. If Putin can convince the West that he simply wants to protect Russians in eastern Ukraine, that could avoid massive sanctions and a bloody war — both of which would damage Putin’s political support within Russia.
PUTIN’S OFF-RAMP would be to claim victory in the east, while agreeing to a deal brokered by Emmanuel Macron that would lessen the NATO presence in countries near Ukraine.
BUT ONCE THERE ARE RUSSIAN CASUALTIES — which seems inevitable — an infuriated Putin will have his pretext to strike deeper into Ukraine, striking Kyiv with cyberwarfare and targeted assassinations, and ultimately installing a pro-Russian government. Ukrainian patriots will resist; a guerrilla war could linger for weeks or months.
FOR THE FINANCIAL MARKETS, the fear of a widening war will persist well into the spring, with upward pressure on energy and grain prices, and a renewed appeal of the safe haven of U.S. bonds. A 50-basis point rate hike from the Federal Reserve next month looks increasingly unlikely in such an uncertain climate.
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This post was first published at the AGF Perspectives Blog.
