Risk Commentary
Overview
The need for accurate, timely information is especially acute during troubling times, and the rapidly developing situation in Ukraine fits the bill. In this installment we will discuss the dichotomy between words and actions and probable outcomes, including the recovery.
Party Talk
The following are words of a major political figure:
“He thought he could divide us at home in this chamber and this nation. He thought he could divide us in Europe as well. But Putin was wrong. We are ready. We are united…. But I want you to know that we are going to be OK.”
A normal interpretation would be that Putin’s aggressions would be blunted and all would return to a normal state. However, the true situation is very different.
Uncensored Read
While unrealistic comments calm voters, the truth will come out over time and the truth is rather ugly in this case. Per the Institute for the Study of War (ISW), “Russian forces are completing the reinforcement and resupply of their troops north and west of Kyiv and launching an envelopment of the capital likely aimed at encircling and ultimately capturing it. This effort will likely accelerate in the next 24-48 hours.” Below is a map of Ukraine indicating Russia’s near control of southern, eastern and northern borders, and a near encirclement of Kyiv. With the encirclement, organized resistance becomes problematical.
The Aftermath: Ukraine
If Kyiv falls, Russia is likely to do the usual: establish checkpoints, curfews, suppress opposition, and watch Ukraine lose much of its hard-won vitality. It is unlikely that the population will see Russia, or a government established by Russia, as legitimate and therefore the benefit of the invasion is likely to prove elusive.
The Aftermath: Russia
Regardless of the outcome of the war, Russia is now tarred as a rogue state with massive restrictions on its banking sector, exports sector, investments, and general access to the Western world. Whether intentional or not, Putin has succeeded in uniting the Western world (against it).
The Aftermath: The European Union
The assumption that Europe could ignore defense spending targets and rely on protection from the US, has been tested and is unrealistic. As is often the case, the U.S. is chary to commit troops to fighting a war which might quickly escalate into a major conflict where it has little strategic value.
The unspoken dilemma is that Western Europe is dependent on Russia for energy and in turn, Russia is dependent on Europe for hard currency.
The Aftermath: The United States
The US’s military capabilities have been in doubt since the Afghanistan fiasco, and its sidestepping Ukraine has done little to allay those concerns. While providing direct support has always been doubtful, more could have been done.
The Aftermath: China
For those watching events carefully, it is easy to conclude that Russia was provided tacit approval from China for the invasion, and probably much more in the form of hard currency. However, the pain and stigma Russia is suffering are likely to give Xi much to think about before undertaking a similar action against Taiwan.
The Aftermath: The Markets
While there is little doubt regarding the tragedy of the situation, the impact on the markets is likely to be fleeting. See the below from Enrique Abeyta.
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