Less than a week since it started, Russia’s invasion of Ukraine passed through the acute stage and promptly became routine—something a bunch of international diplomats may resolve one way or another, playing their usual game of closed-doors give and take.
Stocks rallied to recapture all the losses of the previous days and then moved even higher on the assumption that such scares are certain to blow over and that any panicked market retreat represents a buying opportunity.
Usually, the collective wisdom of the market is correct. But there are times when a Black Swan event hits and the “business as usual” solution simply doesn’t work.
When U.S. housing prices started to decline in 2007, the collective wisdom claimed that the temporary softening (then still very modest) was a good time to jump in.
The Russian invasion of Ukraine may not be the end of the world or a prelude to a nuclear standoff between Russia and the rest of the world, but it is certainly a watershed. The winds of war, once unleashed, are difficult to tame.
What’s Up, What’s Down?
The latest developments, occurring since Russian president Vladimir Putin allayed market fears in his press conference on Tuesday, have been discouraging.
- Russian troops, wearing no insignia or identification tags, remain in Crimea, blockading Ukrainian military bases and naval installations and capturing border posts.
- Crimea’s autonomous parliament voted on Thursday to become part of Russia effective immediately and declared that all “foreign” military units (meaning, of course, Ukrainian) are henceforth considered occupiers and will be dealt with accordingly.
However, based on the Ukrainian Constitution, only a nationwide referendum can decide issues such as independence of a portion of the country.
- Russia doesn’t recognize the government in Kiev—even though it was appointed by a legally elected parliament whose composition has not changed since the start of the Ukrainian revolution—and claims it has the right to protect Russian speakers in Ukraine.
This was the same rationale the Soviet Union used to invade Poland in 1939, as a result of the Molotov-Ribbentrop pact to partition that country: Since the government in Warsaw fell, Stalin said at the time, the country of Poland ceased to exist, and Moscow has the right to protect Ukrainian and Belorussian populations in the border areas of Poland.
- As per the request of deposed Ukrainian president Viktor Yanukovich, who has escaped to Russia, Putin claims the right to use Russian troops on all of Ukrain’s territory. However, the Ukrainian Constitution allows only the national parliament in Kiev to request intervention by foreign troops.
- The West and much of the rest of the world, including some of Russia’s allies, have called Russia’s annexation of Crimea an act of naked aggression. Sanctions are being readied, and the United States has already imposed some visa restrictions and an asset freeze on a group of Russian officials guilty of destabilizing Ukraine. The U.S. Senate is debating more serious sanctions as well.
- Sergey Glaziev, economic advisor to Putin, has said that if U.S. sanctions are imposed on Russian state-owned companies and banks, which dominate the Russian economy, Russia would refuse to pay back loans owed to American banks. The upper house of the Russian parliament is contemplating confiscating the assets of U.S. companies in Russia if sanctions are imposed.
The situation is now at the point when it would be difficult for Putin to back off without appearing to withdraw with his tails between his legs.
For the West, it is not an option to let Russia gobble up Crimea; for this, it’s got to thank Hitler.
Unfortunately for Putin, the Great Appeasement in Munich already happened, and everybody still remembers it. U.S. and European politicians will not be able to shrug off Putin’s Crimea adventure as, to quote Neville Chamberlain, the advent of “peace in our time”.
It is part of human nature not to sweat the big things and to pay attention to immediate concerns instead.
“In the long run we’re all dead,” observed John Maynard Keynes. After all, the world lived in the shadow of MAD—Mutually Assured Destruction—for 40 years between 1950 and 1990, when Russia and the United States aimed their nuclear arsenals directly at one another. Meanwhile, tens of millions of people were born, raised kids, made money and died in their beds.
However, ignoring the new international reality is foolish. At the very least, we ought to look at companies that will directly suffer from escalating tensions between Russia and the world.
Sanctions—not to mention confiscations—would impact a wide range of multinationals in a variety of industries and sectors. Russia is now fully integrated into the world economy, and it has been earning around $350 billion a year from oil and gas exports and consuming with abandon.
It has also been investing in white elephant projects such as the Sochi Olympics (on which $50 billion was spent), as well as badly needed roads and other infrastructure, along with less badly needed palaces for its rich elites.
Russia’s own producers are weak, meaning that Russian consumers prefer foreign brands, either imported or locally manufactured.
Oil and gas multinationals are probably most directly exposed, starting with Exxon Mobil and Halliburton. However, oil and gas multinationals also are quite diversified, and they will surely benefit from higher oil prices, as well as from greater reliance on fracking technologies as Europe tries to reduce its reliance on Russian natural gas.
Car companies have been building factories in Russia, and GM and Ford are at risk—though not as much as the French-Japanese alliance Renault-Nissan, which holds a controlling stake in the indigenous maker of the infamous Lada Jalopy.
Citibank and Chase, along with a number of European financial institutions, are present in Russia and are doing a good amount of business there.
Foreign makers of consumer products, from soft drinks companies to fast food chains to clothing manufacturers, are all going to be negatively impacted. Luxury-goods makers of all kinds will be especially sorry to see the Russian market melt away.
But the most important problem is, of course, macroeconomic” Western Europe gets about one third of its gas from Russia, much of it flowing through Ukraine.
Any supply disruptions will hit the still-fragile economic recovery in the euro-zone. Greece, still the weak link in the EU, is heavily dependent on Russian natural gas.
There have been no serious international tensions since the end of the Cold War. For a quarter-century, financial markets have not known what it means to price risk of a superpower confrontation and how it impacts the global business climate.
For now, however, even with the clear risk of a return of the Cold War—and possibly worse international political developments—investors still see every dip in this stock market as a chance to buy-buy-buy.
This is, if anything, the ultimate proof that the stock market has reached another bubble stage.