Blain’s Morning Porridge, 23 Feb 2022: All Eyes are on Ukraine, but perhaps the market should look elsewhere – to Turkey?
“Ra-Ra Rasputin Lover of the Russian Queen… oh those Russians”
Today: Ukraine has kicked off and its risk-off for markets as the reality there being no effective Western response kicks in. The implications for markets are huge – especially from the global geo-political perspective as nations decide how to play this. Turkey is caught in a classic currency-debt crisis which is now an opportunity for Erdogan and threat for the West and China.
Apologies for absence of Porridge yesterday, but following Putin’s de-facto annexation of the Eastern regions of Ukraine – we wait and see if that entails invasion of ground held by the legitimate Ukrainian Government – I decided to watch and listen instead.
The role of the Morning Porridge is not to tell you what you can read in the papers or hear on the media, but to make you think about what it might mean for markets – so bear with my thought for a moment, and I will get to it. The effect on markets is going to be critical – and hugely destabilising in terms of Geopolitical Debt. Its moving towards a buy Treasuries and Gold moment.
So, yesterday instead of rushing out a comment, I read through multiple email chains, watched way too much news, and spoke to people smarter than I about what this means.
Most folk told me what the West should do, including:
- Impose harsh sanctions,
- Emphasise NATO unity,
- Immediately declare the Russian kleptocracy of oligarchs as persona-non-grata across the West,
- Close Nordstream 2 (effectively done)
- Build European energy security
- Spend more on defence
- And, the one I really like… Give everyone going to a Chelsea match a large Ukrainian flag to wave.
But the reality is what can the West do is all that matters ..
The brutal single reality is the West has no intention, and critically, no ability, to actually put “boots on the ground” to defend Ukraine.
That’s what Putin knows and acted upon. Russians understand reality. It’s a frank assessement of the reality that gave Putin the nerve to announce the re-establishment of his old, new Russian empire. The border, in his mind runs down the Eastern edge of Germany. Not in Ukraine. Not in Poland. Not in the Baltics.
Russians are patient.
- 31 years ago the West was able to project power and put overwhelming strength into defending the Gulf. Iraq was crushed in a war seen as necessary in the West.
- 40 years ago Britain demonstrated power projection, tactical and strategic guile, and a gallus can-do-it attitude by decisively and calmly humiliating Argentina’s land grab for the Falklands. It saved Margaret Thatcher and elevated her to her current semi-divine status (not where I come from!)
- 45 years ago, the wargamers established Western Europe could defeat the Warsaw pact – if they were willing to use Nukes on the battlefields of Germany. They would have done so.
There is limited military capability and even less political ambition to project power into or out of Europe. The tanks might be the same ones that wheeled round Kuwait in 1991, but the American armies are shrunk. The Germans won’t fight. The British Army of the Rhine is effectively gone. The French – maybe? There is limited popular support – kids might fight imaginary nuclear battles in the metaverse, but no chance they’ll fight, die, bleed and suffer to hold muddy fields in Eastern Europe. The West is comfortable and flabby. Wake up Europe… a cry from the 1930s.
Whatever the West does in terms of making economic threats to counter tanks and real military assaults, none of it will deterr Putin. He’s focused on Asian markets for future Russian commodity and energy exports. Let’s not forget the Rodina is now much stronger financially after 12 years of Western easy money has restored its wealth and reserves.
And he’s picked his moment perfectly. Europe is in a post-Merkel dither. France in election mode. Biden looking a lame duck from November. Many European nations don’t see the threat. Yesterday, former President Trump called Putin’s timing “Savvy” and suggested that’s the kind of show of force the USA should be using on its Mexican border.
Whatever you believe about possible Russian interference on elections, or the Kompromat they may hold on western politicians of all hues, European politicians believe the USA is an unreliable partner. They expect Biden to lose. Should Trump, or a Republican beholden to Trump’s patronage, win in 2024 then Europe expects the USA to turn inwards, ignore Europe, and open the door to Putin’s further expansion into Eastern Europe. Poland, the Baltics, the Balkans… are all on his list.
What can we do about it?
The West could announce a massive rearmament programme – building tanks, guns, drones and planes, and training new armies… Let’s hope it happens, but in a time of post pandemic austerity spending, and with Green parties demanding a focus on climate change and defence cuts, agreement will be impossible. Europe can’t agree on much. While France’s heart will ultimately be found in the right place, it’s difficult to imagine the German traffic-light government agreeing to a more aggressive defence stance while its dependent on the Greens.
New defence spending may already be too late. The recent surge of Russian submarines into the Atlantic and Irish Sea highlighted the numerical inadequacy of the Royal Navies once excellent anti-submarine capabilities. After a Russian Sub deliberately snagged the towed-array sonar gear of an ageing British warship – which had run out of sonobuoys – the shipping lanes to Europe’s major ports were effectively undefended, making an American “reforger” reinforcement of Europe practically impossible.
Where does that leave us?
The West is compromised. Putin is on a roll. If we don’t spend on defence, it’s only a matter of time before the next state on his target list is under pressure. Ukraine was easy to let fall – not a Nato member. The next target will be – perhaps exacerbating cracks in NATO if there is no ambition/ability to resist. It could happen sometime after the Nov US elections when Biden is quashed. Putin may secure Ukraine and wait for 2024. Russia has time and patience.
What are the Market Implications?
The world is not just Europe. The rest of the World is watching and will pick sides. Last night I was chatting to a chum who suggested the place to watch is Turkey.
Turkey’s faces a classic currency and foreign debt crisis. It threatens to unravel President Erdogan’s “grip”. It will require a massive debt restructuring.. Which is where it gets interesting. Erdogan was quite willing to fall out with Trump over his purchase of Russian missile systems to make a point about its value. What price might he ask the West for “economic assistance” to allow Turkey remain a critical NATO member? It controls the Bosporus and the Southern Flank? Debt forgiveness? Better than an IMF negotiation any time.
Or maybe Turkey goes to China for assistance?
Many folk expect China to use the distraction of Ukraine to seize Taiwan. Maybe they’ll just watch and wait to see how it unfolds and look for opportunities.
The risk to China is not limited. China’s debt diplomacy on “Belt and Road” trade chains has been expensive. They are very aware that if Turkey is seen to get debt forgiveness from the west, that will encourage a dozen African nations to consider default on their crippling China debts, raising the prospect of a belligerent China seeking recovery – or losing “face”. So maybe it’s in President Xi’s interest to assist Turkey?
Ukraine is about Ukraine, but it’s also a potential trigger for further instability and crisis in Europe, and with wider implications around global debt and wider geopolitics. In times of rising uncertainty then it’s the Treasury market and Gold as the prime choices…
This is just a snap reaction to where this might play out. I’d be interested in reader views.
Five Things to panic about this morning:
Washington Post – “Genius”, “Savvy” – Trump reacts to Putin exactly as you’d expect
BBerg – Baillie-Gifford Woes Expose UK Pension Funds (Don’t say I didn’t warn you – over a year ago I commented that Baillie Gifford building a grandiose corporate HQ in Edinburgh was key signal to dump their funds!)
Out of time and back to the day job
Strategist – Shard Capital