Eight weeks into the Russia-Ukraine crisis, the fighting continues despite mounting sanctions against Russia. Will the conflict continue to be a market relevant event? Kim Parlee speaks with Marko Papic, Chief Strategist, Clocktower Group, on how the crisis may unfold and what it could mean for the markets.
Marko, it's good to have you back with us. Appreciate your time. I know you're busy right now. Can you just maybe tell us where you think we're at right now? Eight weeks in, in terms of the conflict, what are you seeing? Where is this going? What's the duration look like right now?
- Well, I think this conflict is slowly but surely, inexorably, becoming less of a market-relevant conflict. And I know that's something that a lot of people don't want to hear. It's in the headlines. It certainly continues to be a human tragedy.
But with the Russian Defense Ministry basically saying two weeks ago that they had won the first stage of the conflict, which they haven't, but proclaiming victory, raising the victory, mission accomplished banner, and focusing on east, Donbas in particular, the oblasts of Kharkiv, Donetsk, and Luhansk-- with that focus now shifting there, conflict is moving away from NATO's borders. So the probability of an accident is falling.
And also, it is moving into the region of Ukraine where-- let's just be frank-- there has been a war for eight years already. I mean, Donetsk and Luhansk have been in a stalemate, but basically a low-level conflict for a while. It also illustrates to investors that Russia is rational, that it can sense its material constraints. And it can respond to them in a way that does not leave us concerned about the sanity of their moves going forward.
And so what that means is that, while the phase of the conflict will still be vicious-- especially as negotiations near, usually right before the 11th hour of negotiations, conflicts tend to be extremely volatile as two sides start to acquire territory to use as bargaining chips in the eventual negotiations. So while there will still be volatility in headlines, the overall march of the relevance for markets is probably down. It's less relevance.
- It's interesting when you say that, because I think-- I mean, it's been horrific to watch some of the things that have been happening. And again, we're talking about market impact, not human costs, which you can't-- it's something they're going to be dealing with for decades, to try and rebuild the Ukraine. But when you were talking, it made me think that-- could we see things get back to a place where Russia is more integrated, wants into the world economy again? Or is that set? Has that happened, and that's going to be the way things operate for the next little while?
- No, I think that's set. Russia is now in the pariah state status-- not for everyone. Obviously, India is still buying oil from Russia at discounted prices. China is still a nominal ally. But, for the most part, the West cannot really pivot in Russia other than on buying commodities, which it never really went away anyways. So I think it's going to be very difficult to find any value in Russian assets for investors going forward.
At the same time, I think that we have to understand that Russia may become a pariah. But one thing that hasn't happened is it hasn't threatened to retaliate to the sanctions by curtailing commodity exports.
I was extremely worried about that as a potential source of volatility. It would have significantly increased CPI prints in Europe and the US. But over the past eight weeks, Moscow has just been very hesitant to use oil exports or natural gas exports as a bargaining chip, which is different from what OPEC did in 1973 following the Yom Kippur War. And that takes another risk off the table if Russia really is hesitant to use commodity exports as a bargaining chip against the West.
- You don't shy away from making calls. I know you've made many on this program. And you've recently said that you give Vladimir Putin 12 months or less. Could you elaborate on that in terms of what you mean?
- It's very interesting, Kim. Are you trying to get me killed here? It was funny. That was tweeted by Bloomberg, by the way, when I made that call. And there was a nice response below it where somebody, very smart, said "I give Marko Papic 12 months or less, says Vladimir Putin," so--
- That is not why I'm asking.
- Yeah, but what I will say about that is Russian history is full of glorious military victories. And in the West, we celebrate those because Russia has fought on the right side of history many, many times. But when Russia has been an aggressor, it has much less glorious military history. And in fact, what Russian adventurism tends to produce is regime change at home.
Now, 12 months is a little bit aggressive. If I was running a casino, I would have probably set the line at, like, 18 or 24 months, which is, I think, more reasonable. And so yes, I do think that domestic political problems will rise. Right now, that's not happening. Just to be clear, all the polls illustrate that the Kremlin has the support of the public, Vladimir Putin himself as well.
But as the nationalist fervor dies down as the conflict dies down, the consequences of this intervention are going to be very stark for the population of Russia. And I think that over the next 12 to 18, 24 months, I think the elites around the current leadership might want a change.
So this isn't some sort of a coup or revolution. I think that's highly unlikely. That's not what the forecast is. But Khrushchev was retired two years after the Cuban Missile Crisis. And something like that could occur this time around.
- I've only got about a minute, Marko. And I do apologize for this. But putting Russia and Ukraine aside for just a moment, if you were to rank order what you're watching in terms of materiality in the markets geopolitically, what are you watching over the next 12 months?
- I think the biggest issue is the zero COVID policy in China, which will have an impact on global macro, and could be quite disinflationary for the rest of the world, which is interesting. Right now, Kim, everybody in the macro community is long commodities, short bonds, if you own equities and long emerging markets, non-US assets.
The problem with that is that if China introduces a disinflationary wave, we're going to have all of those trades basically go the wrong way over the next six months. And so investors have to watch very carefully what happens on the ground in China, whether Beijing complements zero COVID policy with some effective stimulus, which they haven't done thus far.
- Yeah, it is something we're watching. Always a pleasure, Marko. Thank you so much.
- Absolutely. Thank you, Kim.