Ride Of The Valkyries: What Do The Latest Events In Russia Mean For Markets

By Peter Tchir of Academy Securities

Ride of the Valkyries

Rarely does a T-Report write itself, but this is one of those occasions! A paramilitary (or simply military) group named Wagner. A ride to Moscow. Almost impossible not to conjure up the iconic helicopter scene from Apocalypse Now.

Academy has published two brief SITREPS on the events of the past 48 hours in Russia. We are having multiple discussions on the subject attempting to sort through the possibilities and you should expect another SITREP on this “incredible” development. “Incredible” from the standpoint that virtually no one saw it coming, that it is the first real “challenge” to Putin and that somehow, Belarus apparently played the role of mediator.

For now, some key takeaways are:

  • General (ret.) Deptula – “a huge opportunity for the Ukrainians
  • General (ret.) Marks – “definition of chaos and uncertainty” and “focusing on the control mechanisms of Russia’s vast nuclear arsenal
  • General (ret.) Walsh – “fluid” and “Xi is tied to Putin”
  • General (ret.) Kearney – “For Prigozhin to live a long life..”
  • Fluid is probably the key word in all of this as the situation continues to develop.

What Does This Mean for Markets

At this stage, there is so much uncertainty around what happened, how it happened and what will happen next that it is difficult to predict anything for markets. But, I think we are in position to lay out several plausible scenarios and what it would likely mean.

Ukraine makes advances, the Wagner group removes itself from this conflict to focus on their other “business” initiatives and Putin is forced to the table (potentially literally forced by Xi).

  • From the perspective of Ukraine, NATO, Europe and even humanity, this would be the best outcome. It would pave the way to a truce while some final “treaty” is agreed to.
  • Europe benefits as refugees can start the process of returning to their homes and talk of rebuilding Ukraine will spark growth discussions.
  • A year ago, this would have been deflationary, but now, that is far from clear, as Russia has found new buyers of its commodities and seems unlikely (or even unable) to return to selling cheap fuel to Germany and the rest of Europe rather than to China (and India). A year ago, I would have expected oil to sell off significantly on any peace news, but oil was over $100 then, not $69 and these new buyer/seller arrangements were not as entrenched as they are now.
  • The rebuilding of Ukraine could be inflationary. Depending how quickly it starts, where the money comes from (possibly Russia’s dollar reserves) we could see another spurt of inflation as this reconstruction will be expensive and resource intensive.
  • I’d buy a commodity dip, favor European and Emerging Market stocks, overweight companies that benefit from “reconstruction” and would expect rates to initially rally (along with an initial commodity sell-off) only to reverse higher.

Some sort of “regime” change in Russia.

  • This seems highly unlikely. While Putin was at the very least, embarrassed, by the events of the past 48 hours, he remains firmly in charge. There were no mass defections from his base or the regular military.
  • If a regime change does occur, even though the new person in charge is likely to be a person of “questionable morals” (being polite) they would likely back down on the war in Ukraine and open negotiations. No point, even if you are a bad person, not to take a step back and consolidate the riches you would have won as the leader of Russia.
  • From markets standpoint, it probably plays out similarly to a peace deal.

Retribution and renewed focus from Putin.

  • The wildcard, all along in the fight for Ukraine has been Russia’s possession of nuclear weapons. We’ve known from the start his willingness to commit atrocities on a large scale and that he was largely indifferent to his own troops, but he has stopped at the nuclear option. If he feels threatened, does he escalate? We still see it as extremely unlikely that he resorts to nuclear weapons, and while his inclination may be to lash out even more viciously at the Ukrainians, he is likely getting pressure from Xi to restrain himself. Xi’s connection to Putin has not been a good look for Xi and some “cornered animal response” doesn’t seem to be in China’s interest. While Putin will do what Putin wants, we have to assume there is pressure from China for him to act with restraint.
  • Anything other than nuclear (which we don’t see as an option) isn’t likely to do much to markets. We’ve settled into the status quo and this would just be viewed as yet another escalation, likely to dissipate over time.
  • While it doesn’t seem likely, it isn’t entirely possible to dismiss the potential that this whole event was some sort of charade. Russia was reported to be moving nuclear weapons to Belarus. It is easier to reach Kiev from Belarus. And now, “suddenly” this splinter group, no longer taking orders from Moscow, is there. Could this be some shift in how Russia plans to continue its attacks on Ukraine? Seems unlikely, yet, the entirety of the last 48 hours seems and unlikely, and Russia does seem to be the master of “false flag” operations. This would trigger weakness in risk assets, if however unlikely it is, it turns out to be the reality of the situation.

Status quo.

  • Ukraine is able to take some advantage of this change in Russia, but the lack of air support, the unwillingness of NATO to let Ukraine take the fight to Russian soil, etc., leave us more or less where we’ve been – a slow grind, hurting both sides, with the rest of the world looking for signs that both sides will come up with the pretext to start realistic peace negotiations.

Bottom Line

We are probably the closest we’ve been to seeing a defined path to peace since the invasion occurred, but its impact on markets will be muted as the world has changed a lot in the past 18 months.

There is some small risk that this all gets worse before it gets better.

I will leave you with this quote “Russia is never as strong as she looks; Russia is never as weak as she looks” since it seems appropriate for the current fluid situation.

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