Global effects from the Russo-Ukrainian war
(financial ramifications)
Abstract
First to be clear, my objective is not to talk about the non-financial aspects of this conflict/war/invasion, you can call it whatever you like.
My aim is to think about the global macroeconomic and financial ramifications of what is happening.
What we can see
The Russian Federation was amassing an army outside Ukraine for months now. Ukraine has expressed its strong willingness to join two blocs that stand opposite to Russia in the stage of global interests - the NATO and the EU.
Both these blocs have opened their arms to Ukraine and demonstrated that they would take them in.
In February 2022, Russian President Vladimir Putin announced an all out invasion into the Ukraine (which he called a “military operation”). And just like that, the war begun.
The West strongly condemned the attack in unison, writing strongly worded announcements and signalled a strong response to Putin’s Russia in the form of economic sanctions. Putin warned that any nation that would intervene into his military operation would suffer a strong and decisive backlash. Naturally, and with the western view that Putin is a “mad man” - everyone stayed away.
The Ukrainians took arms and bravely proclaimed to the world that no one would be taking their country - even more so the Russians that they hate so much.
Fierce battles were fought, and setting aside all the propaganda, I am sure both sides suffered serious losses. The result? Russia was moving closer and closer to its targets.
But where was the rest of the world?
There was a narrative being thrown around that Russia had miscalculated Ukrainian resistance and was losing bad. The storyline went on to say that the Russians expected Ukrainians to accept them with open arms and that they would take Kiev in 3 days. Cool story bro.. 🤦🏻♂️
While the war was happening, the theatrics continued about how the West (“EU” & “US”) would actually support Ukraine practically by sending arms, warplanes etc. That fell to the ground too, see below:
Countries sending military aid to Ukraine.
The simple conclusion that I draw from this is that the West pulled Ukraine into this war, and just let them fight it alone. Military aid noted in the article above may seem like a lot, but it’s too little too late. In fact, this military assistance can only do more harm as the conflict is prolonged and casualties from both sides increase exponentially.
So the West did not jump in to fight with Ukraine…
But what did the West ACTUALLY do?
The US and the EU weaponised finance (basically, capitalism) against the Russian Federation because Russia was the unprovoked aggressor in this war (more on this later).
They cut Russia from SWIFT and excluded her from the global financial system.
They froze Russian sovereign assets🤦🏻♂️ as well as the assets of Russian oligarchs and even non-oligarchs.
They sanctioned Russian banks and rendered them defunct by doing so.
They announced measures to become energetically independent from Russia.
Even once independent Switzerland jumped into the weaponising finance arena…I bet the pressure must have been huge.
On 28 February 2022, the Central Bank of Russia was blocked from accessing more than $400 billion in foreign-exchange reserves held abroad and the EU imposed sanctions on the following Russian oligarchs and politicians.
Sergei Aleksashenko, the former Russian deputy finance minister, said: "This is a kind of financial nuclear bomb that is falling on Russia." On 1 March 2022, the French finance minister Bruno Le Maire said the total amount of Russian assets being frozen by sanctions amounted to $1 trillion.
🤯 And from the US and the UK:
In a 22 February speech, US president Joe Biden announced restrictions against four Russian banks, including V.E.B., as well as on corrupt billionaires close to Putin. UK prime minister Boris Johnson announced that all major Russian banks would have their assets frozen and be excluded from the UK financial system, and that some export licences to Russia would be suspended. He also introduced a deposit limit for Russian citizens in UK bank accounts, and froze the assets of over 100 additional individuals and entities.
What does all this say to me?
That the war in Ukraine is smoke and mirrors for what is really happening. A financial/economic/trade war which was initiated by the West against the East.
Why would I say this??😱
The US knew this was going to happen:
Douglas Macgregor "We are urging Ukrainians to fight a war they can't win"
Why is Ukraine the West's Fault? Featuring John Mearsheimer
Vladimir Pozner: How the United States Created Vladimir Putin
Bill Bradley on Russia and NATO
Joe Biden predicted in 1997 that giving NATO membership to Baltic states would make Russia angry
Stephen F. Cohen: NATO expansion and Russia
(A lot of links, but you must watch them all)
Some geopolitical analysts are disregarding all this with the notion that these Baltic states wanted to join NATO by their own initiative and so we have no blame in all this.
But even if you don’t believe the US knew that Russia would invade, it doesn’t matter, please read on…
A few main points and future worries.
Russia has shown that it’s willing to go all in to protect its interests.
Russia is not afraid of sanctions, trade wars or boycotting of its exports.
The U.S has shown that they are willing to sacrifice whole countries and put them head on against Russia militarily, so they can come back and strike Russia with economic sanctions.
The EU is siding with the US and is willing to apply harsh sanctions against one of its biggest trading partners.
EU member states stand united in all this, for now.
I expect a rift between EU member states as this unfolds.
The more the globalisation, the less the willingness for armed conflict.
And so wars become increasingly economic/financial.
Russia will not sit back and take these sanctions passively. They will apply counter-sanctions, and they already have.
What are currencies under a fiat currency system worth?
WHO IS WINNING?🥇
The US (assuming this is a cold war) gets to strike Russia without cost. If the regime changes, so be it. If it doesn’t, who cares? All upside, zero risk.
The Federal Reserve gets to reverse back to its old ways of unfettered near-zero interest rates and currency debasement via money printing. (Shaded areas indicate U.S. recessions!)👇
Remember, the US, the EU and practically the whole world has a sovereign debt problem. Without central bank intervention (money printing) - it’s unsustainable. All that’s kind of great unless you have the ugly monster of inflation come back to bite you, then central bankers are forced to step off the pedal.
But what if there is a recession or a global crisis? Then they are legitimised to once more push on that pedal, both for fiscal👇 and monetary policy.
Furthermore, the US Treasury benefits from commodity-crunch runaway inflation as it gets to see its monstrous debt inflated away. The US currently has a Debt/GDP ratio of 123% - 10% shy of its all time high during Covid.
The Fed wont take the blame for this inflation because the narrative will change and people will start to put it on rising commodity prices due to the conflict with Russia👇👇 ….rather than financially repressive monetary policies from global central banks etc.
and master trader Nancy Pelosi giving us a lesson on economics 🤡
Note: The U.S are energy-rich, the EU is energy poor.
U.S. Big Tech (where does it fit in all this?)
Facebook is down 40% since its last quarterly results where Mark mentioned👇 that Tik Tok is a serious contender in the global social media fight. In other words, Facebook growth is slowing - Tik Tok is accelerating.
The first is competition. People have a lot of choices for how they want to spend their time and apps like TikTok are growing very quickly. And this is why our focus on Reels is so important over the long-term. As is our work to make sure that our apps are the best services out there for young adults, which I spoke about on our last call.
The thing that is somewhat unique here is that TikTok is so big as a competitor already and also continues to grow at quite a fast rate off of a very large base.
Tik Tok is owned by ByteDance, a Chinese company. We KNOW the US views Tik Tok as a serious threat because Donald Trump tried to ban it when he was President, and tried to force ByteDance to sell to a US company.
Donald Trump - Tik Tok Controversy
So what is the US afraid of? What is the though process? 🤔
China is getting stronger and stronger. That’s good when that capitalistic progress means we can outsource our production to China and get it cheaper, but it’s not good when China is ascending as the new global hegemon and getting closer to unseating us.
China has a billion in population - the Chinese government is flexible and can fund or subsidise any venture it feels like. We are old and stiff.
Chinese social platforms can gather data and use them for influence and conversion towards their own beliefs. We need to stop this while it’s time. The American sphere of influence cannot and will not be unseated by any other.
CONCLUSION: Globalisation is good and acceptable when you’re winning. Globalisation is bad and unacceptable when you are losing.
Everyone is talking about a reversal in globalisation and there is certainly some of that happening, but they way to see it is more of a boxing of globalisation - or a globalisation with borders.
GLOBALISED PROTECTIONISM
“I will buy commodities from you if I need to, I will buy oil from you if I need to - but in certain areas stay away.”
“People from the West will continue using Western internet!”
“I will isolate you socially, culturally, and internet-ically! No Starbucks, no McDonald’s, no Instagram for you! And in my sphere there will be no Dostoevsky, no Sberbank, no Russians whatsoever - dead or alive.”
This is why the West is not sending any arms in the conflict, they don’t want a World War - they want a Cold War with clear financial and economic implications. They have certain aims and objectives and in my opinion, they are doing really well in getting them.
Zelensky 🤜🤛
Is the Ukrainian president rational? Zelensky showed heroism and bravery since the invasion begun and told the Russians that they would not get his country. The Ukrainian future would be in the EU and in NATO. “We will fight against Russia, we will bring in Ukrainians living in foreign lands to fight you and we will win.”
That was the message. What changed?
Did Zelensky actually expect the West to jump into this war with him? It seems so..
Furious Zelensky tears into "weak" NATO for ruling out "no-fly" zone
"Is this the NATO we wanted? Is this the alliance you were building? ... You will not be able to buy us off with liters of fuel for liters of our blood, shed for our common Europe, for our common freedom, for our common future," he added, referring to supplies NATO has delivered to Ukraine.
But now Joe Biden doesn’t want to fight this war, he will just let the Ukrainians fight it👇
“The idea that we are going to send offensive equipment and have planes and tanks and trains going in with American pilots and American crews — don’t kid yourself, no matter what you all say — that’s called World War III,” he told a gathering of Democrats in Philadelphia. “Let’s get it straight here, guys.”
TIT FOR TAT
Russia invades Ukraine.
The West (US, EU etc.) weaponises capitalism and finance (sanctions etc.)
Russia defends by starting the adaptation process = closer ties to China etc.
Russia weaponises commodities (energy, food stuffs etc.)
The West defends by commencing the adaptation process to diversify away from Russian oil and gas, wheat etc.
EU launches Eurobonds to finance the now-required energy and defence investments.
US passes the $1.5 trillion bill a few days after the war.
Oil and all scarce commodities go through the roof during all this.
Companies hoard, people hoard, governments hoard.
WHO IS LOSING? 😩😩🇪🇺💶
Foremost, the union of countries formally known as the European Union. They currently have no clear direction, no leader and no leadership. This confusion has led them into a war they don’t want to fight. Does Von Der Leyen express each EU citizen? Does she even express each EU state? I doubt it.
European energy dependency to Russia should have led EU leadership to better decisions rather than rash and unplanned paths. But when you can issue Eurobonds and have the ECB directly/indirectly finance them, you can say or do whatever you like. That is, until things really get out of control.
The EU has no fiscal union but even more importantly - EU member states have different and opposing interests.
Fiat currencies are going to get trashed in this process. They were already taking a beating before this, but this is a watershed moment.
Due to many conflicts of interest, I expect a rift within the EU and possibly more countries distancing from the bloc, either formally or informally…
With Christine Lagarde at the helm of the ECB not knowing what to do other than bring out money printing bazookas, I expect the Euro to suffer materially in all this. I wrote about big problems in the Eurozone in November 2021:
With a weak ECB, a weak EU and festering geopolitical issues together with near-zero yields on euro-denominated assets I see the EUR/USD testing 1.00 and possibly breaking it to move even further.
Currencies move in large, multi-year waves so never underestimate the severity of a move.
INFLATION & STOCKS
The price of everything is going up, but your bonds have fixed future cash flows.
Bond markets will fluctuate with news of economic developments, inflation expectations etc., but I think it’s fair to say that all fiat currencies will be worth less over time - directly affecting the real return from your bond holdings.
Real assets are still the best place to go, but knowing what you are doing is as important as ever. Businesses are real assets too, and the best ones are still the best way to protect your principal from rampant inflation.
We lived through decades of increasing globalisation. We were optimising for lower cost of production and mostly ignoring all the rest. That was a strong disinflationary trend that has now halted.
The world is forced to rebuild its capitalistic foundations away from cost optimisation towards foundations of security. Where is all that money going to come from? Yes you got it, from the depositor’s pocket.
Finally, companies that rely on further globalisation are going to have a hard time going forward. If their share prices are elevated, things are going to be even harder for shareholders.
Better to stop this letter here because it’s getting escalated, just like the war in Ukraine.
Further Reading:
Philoinvestor: An autointerview