Rabobank: If Putin Has Lost, So Have Markets

By Michael Every of Rabobank

This will be a longer than normal Daily: we live in extraordinary times and a few extra paragraphs are needed to cover it. However, let’s start with the key point: Vladimir Putin has lost this war – and so have markets. The greatest risks lie in how much damage he is prepared to inflict on to attempt to deny that fact.

The ferocity of Ukrainian resistance is the polar opposite of the collapse of the Afghan government, which exited in jets filled with US cash. On Friday, as Bloomberg was reporting Kyiv would fall in hours, the US offered President Zelenskiy an airlift out. His response: “The fight is here: I need ammo, not a ride.” He is prepared to die for his cause, in contrast to leaders who won’t even risk a bad opinion poll. Zelenskiy’s people have rallied to him – as will a new foreign legion of volunteers from abroad. One Twitter meme doing the rounds is that “Kyiv is willing to consider NATO membership of Ukraine.” Any dreams Putin had of imposing a puppet regime, or of carving up and holding Ukraine, have been shattered by cries of “Slava Ukraini!” (Glory to Ukraine!).

Overall, the Russian military is performing extremely poorly: they still don’t have air superiority due to Ukraine moving its air defences around, and Russian missile strikes having only hit old, static targets. Russia’s attempts to rapidly seize Kyiv while minimising losses to Ukrainian civilians and its infrastructure are resulting in massive losses on their side. According to the Ukrainians, as of Sunday Kyiv claimed to have taken out: 540 IFVs, 16 airplanes, 18 helicopters, 102 tanks, 504 APCs, 1 Buk-1 system, 20 armoured cars, and 5,000 soldiers. The latter is a third of the total losses suffered in the entire Soviet-Afghan war (1979-89).

There are now reports of Russian conscripts looting or begging for food or fuel, which suggests supply chain collapse; of them pouring fuel away to not be able to drive on to Kyiv; and of mutinies. It seems the Russian army, despite lavish budgets, has rotted away below an elite tip due to corruption and yes-men needing to please the unwavering ideologue at the top rather than pointing out that things are not going well. If so, Putin’s profoundly anti-Western regime ironically displays the same institutional failures –and flawed supply chains– his fans in the West bewail as our own peculiar failure. Rumors are that Russia’s top general, Gerasimov, has been fired.

However, at time of writing Putin‘s troops were finally taking towns in the East and gaining key ground in the south, with new attacks apparently underway on Odessa. Moreover, there were fears Russia and Belarus would double down to try again for Kyiv, and/or to seal the Ukrainian border with Poland and Slovakia to stop supplies coming in from the West, which will raise the risk of clashes with NATO.

If Putin wants to win militarily he will have to get even more destructive; yet the more he does, the more Ukrainians and the West will resist. War is a continuation of politics by other means. There is no political means by which Putin can reintegrate Ukraine with Russia: he has irretrievably broken the ‘Russkiy mir’ (Russian world) he wanted to recreate. Some now start to fear Putin may decide if he cannot hold Ukraine then he will cause massive damage in order to punish it for its defiance.

Yet if Putin has lost, so have markets. The relief rally on Friday was due to two factors besides options covering: 1) Ineffective Western sanctions, as besides food and energy not being touched, the lack of seriousness was seen in Europe seeking carve-outs for the likes of Gucci and Prada (Italy) or diamonds (Belgium); and 2) The view Russia would win rapidly, exemplified by Ukraine’s ambassador to Germany telling the press ministers he had talked to told him “You Ukrainians have only a few hours left. There is no point in helping you now”. Yet Zelenskiy’s defiance undermines point 2 and has captured the Western public’s heart such that its leaders have now reversed point 1.

First, Europe has woken up from a 30-year geopolitical slumber. Ukraine will be resupplied militarily by NATO members and the EU – including sending military aircraft, and within hours. Previous holdouts like Germany and the Netherlands will send Stinger missiles. There has been a total reversal of the past 30-years of German policy: Berlin will raise its defence spending to more than 2% of GDP, put this in its constitution, and initiate an immediate EUR100bn defence fund, while building more LNG terminals and renewables to diversify away from Russian gas. Presumably other low-defence spending EU/NATO members will follow. Even Cold War neutral Sweden is sending military assistance (and Kosovo, like them and Finland, is considering NATO membership). In short, despite possible upcoming Russia-Ukraine negotiations, this war is far from over, and is likely to get uglier ahead.

Second, Russia is being removed from the global community, economy, and financial markets.


Russia is no longer wanted in the FIFA football World Cup, with other countries not willing to play against it, and has lost the right to host the Champions League final, F1 racing, and even the Eurovision song contest.
TV station Russia Today and Sputnik News radio have seen a slew of resignations and been banned from the EU, as well as demonetised on social media.


Russia has been kicked out of the Council of Europe – prompting former President Medvedev to say it no longer needs diplomatic relations with the West and, chillingly, is now free to reintroduce the death penalty.
Kazakhstan refused to send troops to support Russia despite Moscow just having saved its regime from unrest.
We are seeing a wave of de-Putinisation, as previously sympathetic politicians scramble to revise their views. (Although in the US, where the atmosphere has been poisoned more by Russiagate, conservative commentator Dinesh D’Souza proclaimed in a binary choice of the liberal establishment over Putin, he would still opt for Putin.)
The UN Security Council will hold a rare emergency special session of the 193-member General Assembly on Russia’s invasion of Ukraine today.


Russia already faces strict technology export controls.
Now the EU are refusing to export to or service Russia’s fleet of Airbus planes, which will soon see them grounded; the EU, and Canada, will not let Russian flights in; and Russia will not let Western flights through its airspace – so expect longer, pricier flights to hit freight and tourism hard, again. The train tracks from Russia to Europe via Ukraine have been dynamited, so no goods can flow. Trucking to Russia may be halted by Poland and Slovakia. The Black Sea is effectively closed, following a slew of attacks on civilian shipping. There was even a brief moment where it appeared Turkey would close the Bosporus to Russian shipping – it still can according to the Treaty of Montreux if it announces it feels threatened. Russian commercial ships are also being seized under sanctions.
A slew of oligarchs have been sanctioned, as have Putin and Foreign Minister Lavrov. The White House has declared: “This coming week, we will launch a multilateral Transatlantic task force to identify, hunt down, and freeze the assets of sanctioned Russian companies and oligarchs – their yachts, their mansions, and any other ill-gotten gains that we can find and freeze under the law.”
Key energy exports are still being left untouched – but don’t think Russia may not turn off the gas as its own weapon.
The EU must be ready to expect more than 7m Ukrainian refugees, the European commissioner for humanitarian aid and crisis management, Janez Lenarcic, said after a special meeting in Brussels on Sunday.


There were already US and EU blocks on certain Russian banks, and now there is a partial SWIFT ban for almost all Russian banks – although exactly which and over what time period is still unclear. This excludes energy trades, but reportedly many are walking away from contact with Russian oil in case further sanctions hit in the next few days. Effectively, lines of communication between Russian banks and the rest of the world, and Russia is being placed in the same camp as North Korea, Venezuela, and Iran.
BP is walking away from its 20% stake in Rosneft, taking a write-down of $25bn in doing so, and Norway’s sovereign wealth fund is dropping Russian assets.
China, whose public has been pro-Putin on social media, is complying with sanctions so far.
The $620bn-plus in FX reserves held by the Central Bank of Russia (CBR) are sanctioned too – meaning that apart from the gold and only partially-convertible CNY it holds, the vast majority are now unavailable. Even the gold is not liquid if nobody can use FX in exchange for it. There will be a complete collapse in the rouble today, with a 20% drop at the open and nothing to support it from that point onwards.
The expectation is runs on Russian banks and perhaps the worst economic and financial collapse since 1991, when the USSR was dissolved.
The CBR has already declared that it will not allow foreigners to sell Russian assets, so we effectively have frozen markets/capital controls, as we feared would be the case.
Belarus will also be sanctioned by the EU.
Even neutral Switzerland will sanction Russia.

So, we have the likelihood of a protracted war in Ukraine, including across the key grain ports of the south; massive economic and financial damage in Russia; spillovers into the real economy globally; a remaining risk that Russia turns off the energy taps; and finding out what being forced out of the US/global financial system really looks like – for the world’s largest nuclear power. A key tail risk is that a paranoid Putin will see this as the foreign interference he already stated would entail terrible consequences. Indeed, Russia’s nuclear deterrent was just raised, suggesting the nuclear blackmail flagged as a worst-case scenario on Friday – though Russian experts flag this only meant an increase from 1 to 2 in a 4-stage alert system so far. Yet Belarus has also announced it is rejecting its former non-nuclear status and will hence host Russian nukes, changing the regional strategic balance.

Even if one wants to look at just macro indicators, the German defense/fiscal policy shift is likely to have an important economic and monetary policy impact in line with the analysis we put forward in ‘Ich Bin Ein Berliner’(?) That is on top of the rising risks of the ‘Scenario B’ portrayed in our recent report on Ukraine (‘How we Would Pay for the War’): far higher inflation for far longer, and far lower growth – and against a backdrop where wage pressures are already rising and we are moving closer to ‘war economies’ -at least in rhetoric, though Covid spending hit the equivalent levels. Central banks were already stuck on the horns of a damned-if-you-do-damned-if-you-don’t policy dilemma: the probability of either biting deflation or choking stagflation just increased – and that is not the primary concern for our leaders for obvious reasons.

Moreover, as the West gets back into the frame of mind for defense, decoupling, sacrifice, and self-reliance for its values, will it really end with Russia, or will it begin to *peacefully* extend to other potentially irredentist and revanchist powers to prevent any such future crises now? Markets really won’t like that.

The initial market reaction at the start of the Asian open has been relatively moderate all things considered: Brent oil up 6%, Aussie 10-year bond yields down 10bp, and 10-year US 10s down 6bp, while S&P Futures are down 2.5%, the US dollar up, and EUR the under-performer among the G-10. However, there is a long, long way to go.

The fight is here: the West needed ammo, and it won’t give markets an easy ride.


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