Russia’s invasion of Ukraine has been met with sanctions from the West and resistance from Ukrainians. Kim Parlee speaks with Marko Papic, Chief Strategist, Clocktower Group, about how the crisis may unfold and what it may mean for the markets.
- US President Biden has announced more sanctions against Russia as its attacks on Ukraine continue, including targeting more Russian banks, Russian families, limiting exports to Russia, and targeting Russia's largest state-owned business. Marko Papic is a partner and Chief Strategist at Clocktower Group. He joins us now with the latest.
And Marko, it's good to talk to you again. The last time we talked, you laid out a whole series of probabilities. But you had, I believe it was, a 50% probability that some sort of invasion was going to happen into Ukraine. It did. Based on what you're hearing now, how do you see this playing out?
- Well, I think that there has been an invasion, but it's a pretty haphazard one. It doesn't seem that the Ukrainians are playing by the rules. They haven't gone out to meet the Russian forces in the open plain. And of course, the question is, why did the Russians expect that they would have done that? They were drawn into the cities, which makes this extremely complicated for Russia because there is really no domestic support, Kim, for this in Russia.
I mean, we've seen the polls where most Russians were not expecting this to go to a conflict. Most expected a diplomatic solution. And most do not want to fight a war with Ukraine. And so pulling the war into the cities really makes it a problematic situation for Putin because there will be potentially much more casualties, both on the Russian side and the Ukrainian side.
So I would say that right now, we're in some sort of a situation where Putin is trying to have regime change. Kremlin is hoping for that, hoping they can have a sort of a quick strike and get someone in instead of Zelenskyy But I think that is highly an unlikely scenario to occur.
- So if you think that's highly unlikely, then how do you see it playing out?
- You know, I think the way I see it playing out is that the Russians are going to have to settle for peace but proclaim victory. I mean, if I was to speculate at this point, it's very early in the conflict so who knows what happens. But I think that fundamentally, at some point, Russians are going to basically say that they've demilitarized Ukraine successfully. And then hold talks on Ukraine's neutral status, which is a victory for Moscow, to be fair.
I mean, that is something that they've asked for. That's something that only Kyiv can really give it to them. It's not something the West can guarantee. And so a modest victory, but it will not be this broad maximalist goal of denazification, which is what the Kremlin is asking for. I mean, that's basically wholesale regime change.
And I just don't see how that happens because fundamentally, there's no real pro-Russians in Ukraine. And I think in the West, we're not really fully aware of just how little percent of Ukraine is actually pro-Russian. Even the Russian speaking parts of Ukraine are not pro-Moscow.
- As we watch this-- and a lot of people are kind of learning more about the region, again, and understanding its impact on the markets. I mean, the markets have been whipsawed. And you talked about the last time we saw that, or talked about this, that we were going to see, I think you said, a short-term meaningful correction. And short-term turned into hours in the market, and then we've seen it come right back up. How do you see this playing out? I mean, between sanctions and economic growth and what this could mean for central banks-- I mean, a lot of people are-- a lot has come up. How do you see it moving forward?
- I think the current sort of relief rally, I would be careful with that. There's still a lot of things that could go wrong. You know, I'll just give you one scenario. What if one of the Russian jets just accidentally crosses an international border into Poland and is shot down by Polish air defenses? Just imagine that scenario. Like, there is still hope, you know, evolving with events where we're traveling with events. So I would be very cautious to follow the rally.
But I think there's a couple of things that have come out of this that are really interesting for the markets. First of all, US bonds didn't rally. Not significantly, this is the premier geopolitical safe haven. And this is the first conflict that I know where the US bond yields didn't really move significantly on sort of the tensions. And I think that's really important because it tells us that we're in a profoundly bearish macro context for bonds, just like in 2014.
Despite the fact that you had both annexation of Crimea and Islamic State rampaging through Iraq, oil prices collapsed in 2014, thus signaling a profoundly bearish macro context for oil. Think of it the same way now, just for bonds. And I think that's really significant because it tells us that once this is over, we're going to continue with the market action we saw in January where the 10-year yield is going up, and it puts downside pressure on US equities.
- It's sad. Yeah, and I think it's a bit worrying in terms of growth and where we see things going and inflation on that side of things, too. What about-- and again, I know it's early to be saying these things. But what about other issues that are coming to the surface, I mean, about the United States, the fact that they've come with sanctions and not military support. Does that change-- people try to extrapolate what this could mean for the world order and China's place in this. I mean, how do you see this-- does anything change because what's been happening in the Ukraine?
- You know, I think the way to think about that is, we've been in a sort of a multi-polar world for a long time. In 2014, the world didn't really do anything when Russia annexed Crimea. And so I think that we may be making too much of, I think, of what's going on right now. Because we've been in this world for basically 10 years. I think that China, had it wanted to militarily reunify with Taiwan, it would have done that already. I don't think it's waiting for some sort of a signal that it's safe to do that now because the Western response was so weak.
In fact, if I was China, I would be watching very carefully the level of support that Russian people have for military operation, where Russian troops could potentially die, a significant number of them. So that's something to really observe because there's a lot of risks that have nothing to do with how the West responds to your military intervention. There are just inherent risks to that intervention itself.
And that's why I think this story hasn't been told yet. We don't know yet what the fate of the Russian intervention will be for Moscow and for Vladimir Putin. I mean, I'll just tell you one quick thing. You know, Khrushchev looked really, really good in the '50s. I mean, he was just he was just getting winners all throughout the '50s. And then the Cuban Missile Crisis happened, and he was out of power in two years. And that's because it was an ignominious end to that crisis for Moscow. And I think they may have miscalculated this time as well.
- Yeah, as we watch this, and we watch the pain of many people who've been involved in this-- and it's pretty horrible seeing what's happening in the Ukraine right now. What are you going to be watching next? You gave the scenario of something horrible could happen. And this is still a very fluid situation. But what are you watching?
- Definitely, any sense that there could be negotiations going on. I know today, there was a little bit of back and forth to that. That's pretty important. The fact that Kyiv floated this idea that they would be willing to be neutral, I think that's important. I think it's important, and I think it's a way to reach an equilibrium. So I think investors should watch that for sure.
The second thing that we should watch is whether the Russians double and triple down on military operations once they face the initial setback, which by the way, they're facing right now, repelled and pushed from several cities in Ukraine, according to news reports. So are they going to double and triple down on this war. Because if they do, there's going to be a lot of casualties on both sides. And that could actually descend this into a dynamic that is very difficult to forecast.
And so I would definitely be watching how much Russia commits to clearing out cities of Ukrainian resistance, which just would become a terrible mess. And then finally, I'm definitely watching how the commodity markets are reacting. And I still-- I think when I was on your show last time, I said gold and wheat are the best hedges. I continue to believe that's the case. Oil, I don't know, not necessarily. I think there's considerable downside risk to oil if this event dissipates. Whereas, I think gold and wheat could continue to have a bid even when tensions are reduced.
- Always fascinating talking to you, Marko. Thanks so much. Thank you, Kim.