by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Today’s Comment opens with a rather lengthy discussion of the Russia-Ukraine crisis and what it may mean for the geopolitical trends of the last several decades.  We show that the crisis has the potential (though not the certainty) of rolling back some of NATO’s weakening and some of the U.S.’s moves away from its role as global hegemon.  We next discuss potentially market-moving developments in the U.S. and worldwide.  We close with an update on the coronavirus pandemic.

Russia-Ukraine:  President Biden, NATO Secretary Stoltenberg, European Commission President von der Leyen, European Council President Michel, French President Macron, German Chancellor Scholz, Italian Prime Minister Draghi, Polish President Duda, and British Prime Minister Johnson held a video meeting yesterday afternoon regarding Russia’s military buildup on its border with Ukraine.  Although the leaders agreed that their priority would be to try diffusing the crisis through diplomacy, they also pledged to do whatever is necessary to protect the country’s sovereignty and prevent Russia from changing Europe’s borders by force.

• In the U.S., the Department of Defense ordered 8,500 troops to prepare for deployment to Europe, where they would probably first be sent to Western European bases to avoid giving Russia a pretext for war. They could then be sent to NATO’s eastern frontiers if necessary.  Other NATO members also continue deploying troops, aircraft, ships, and other military assets eastward, with the U.K. being especially assertive.
• After the Russian military said it would launch a series of naval drills in various places around the globe, NATO late Friday announced an unscheduled, 12-day naval exercise in the Mediterranean, including the aircraft carrier USS Harry S. Truman. U.S. Defense Secretary Austin said the unscheduled drills intended to provide “reassurance” to the Europeans.
• To support Ukraine’s economy, Von der Leyen said the EC would make a loan package equivalent to $1.36 billion available, of which half would be distributed quickly, while the other half would be disbursed over time.
  • Brussels will also double the grants given to Ukraine this year, providing an additional $140 million or so to Kyiv.
  • Von der Leyen said EU officials would soon start work on a second, larger loan package to help Ukraine meet its future funding needs.
• Although this crisis is still in its early days, it is already clear that it could have major implications for post-Cold War geopolitics. Ever since the Cold War ended with the dissolution of the Soviet Union in 1991, many people have believed Russia was tamed and defanged, NATO had lost its purpose, and the U.S. had tired of the costs of its traditional role as global hegemon, especially since it no longer had a common threat to rally the Western democracies around and expended so much blood and treasure in its War on Terrorism.  Putin’s gambit to wring concessions from the West by threatening Ukraine has the potential to backfire on him and reverse all those trends.
  • Putin’s menacing military buildup, following up on his smaller-scale aggressions against Georgia in 2008 and Crimea in 2014, has clarified for many Europeans and Americans that authoritarian Russia is again a major global threat. Western acquiescence and appeasement following those earlier transgressions probably only served to embolden the Russian leadership.  If Russia now successfully takes over all or part of Ukraine, it would gain additional manpower, industrial capacity, and natural resources to make it even more powerful and dangerous.
  • The Russian threat to Ukraine and the rest of Eastern Europe is spookily reminiscent of the Soviet threat that NATO was first designed to counter. Indeed, NATO’s organizational structure, operational habits, culture, and methods remain supremely well designed to counter today’s Russian threat, i.e., the threat of masses of heavy armor rolling westward across the plains of Europe.  It is easy to imagine that Putin’s threatening buildup has already given NATO a new lease on life.  Putin’s stance has renewed debate in Sweden and Finland about joining NATO in order to protect themselves from Russia.
  • Just as important, it appears so far that U.S. leaders have stepped comfortably into the shoes of global leadership that so many of their predecessors broke in during the long years of the Cold War and U.S. global hegemony. Today’s U.S. foreign policy leaders have generally been schooled in the great-power competition of the last century.  Not only do they know what to do in this situation, but the U.S. and NATO foreign policy establishments have a lot of “muscle memory” on how to respond to a great-power, authoritarian threat.  Moreover, it’s notable that the domestic U.S. political class is relatively unified in its support of a firm stance against Russia’s aggression. There is still plenty of time for U.S. officials to miss this opportunity.  For now, however, they seem to have a chance to rebuild the symbiotic relationship between a strong, dominant, unified U.S. and its coterie of willing allies who recognize the need to defer to their protector.
  • The high volatility in global financial markets in recent weeks still probably owes much more to impending interest-rate hikes by major central banks than to the Russia-Ukraine crisis (see below). However, increased geopolitical tensions always create the risk of accident, miscalculation, and war, which would clearly have an overwhelming impact on the markets if it occurred.  If the crisis reversed some of the geopolitical trends and domestic political fracturing that have been so prevalent in recent years, it would have major longer-term ramifications for the economy and financial markets as well, but at this point, it’s still not clear whether that will be the case.

Global Energy Markets:  According to the latest data from the International Energy Agency, the OPEC+ group of major crude oil exporters is currently producing some 790,000 barrels per day less than its stated target.  The output shortfall is softening the impact of the group’s steadily rising production goals and helping keep oil prices high.

• More broadly, we continue to believe that shortfalls in new exploration and oil field development will keep a lid on new supply and help buoy prices over the longer term.
• Since Russia is a major oil producer, any further escalation of tensions over Ukraine could also give a shorter-term jolt to crude prices.

U.S. Monetary Policy:  Fed officials today begin a two-day policy meeting, after which Chair Powell is expected to confirm that the central bank’s asset purchase program will end by March and set the stage for a new round of interest-rate hikes.  As if that isn’t unsettling enough for the financial markets, some policymakers’ statements have recently sounded almost panicky about inflation, creating uncertainty about how fast or how far they will hike rates.

• We suspect the growing concerns about a panicked Fed were the key reason for yesterday’s extreme volatility across financial markets. The huge swing in risk-asset prices—including the 1,200-point swing in the Dow—is evidence of just how hard it’s proving for investors to figure out how to make this transition out of the pandemic world.
• Despite the positive tenor for risk assets by the end of the day yesterday, we expect volatility could remain in the markets for some time, at least until there is greater clarity on just how far the Fed will go in terms of monetary tightening.

U.S. Environmental Regulation:  In an interview with the Wall Street Journal, EPA Administrator Regan said he would propose tougher environmental regulations on electric utilities in the coming months, including tighter limits on greenhouse gas and mercury emissions, as well as new restrictions on wastewater releases.

United Kingdom:  London police have launched an investigation into multiple parties held at Downing Street over the last two years in violation of pandemic social-distancing rules.

• Prime Minister Johnson was already facing a civil-service investigation into reports he attended a “bring your own booze” party in violation of the rules early in the pandemic.
• The civil-service investigation had the potential to unseat Johnson, given that it made his administration look like they didn’t have to follow the rules that everyone else had to. The new police investigation will now postpone the findings of that report, but when its findings are published, it could be an even bigger blow to the prime minister because it could show actual lawbreaking.

Turkey:  Faced with a cold snap that increased heating demand and technical disruptions in natural gas imports, the government has imposed power cuts for major industrial users.  The power cuts have already shut down some major manufacturing plants and threaten to exacerbate Turkey’s soaring inflation.

China:  In another sign that President Xi is continuing to crack down on private technology businesses, the Cyberspace Administration of China has ordered internet providers to “purify” online content in preparation for the Lunar New Year.  The directive instructs officials to sweep away “illegal content and information” and target celebrity fan groups, online abuse, money worship, child influencers, and the homepages of media sites.

North Korea:  The South Korean military said North Korea launched what were apparently two land-based cruise missiles today, marking the country’s fifth weapons test of the month as it agitates for attention and new sanctions relief.

Colombia:  Ingrid Betancourt, the former congresswoman and senator famously kidnapped by FARC rebels during her 2002 run for the presidency and held for six years, announced she will run in this year’s presidential election.  She will compete in a center-left coalition’s primary in March and, if successful, will go on to the presidential vote in May.

Burkina Faso:  The president of Burkina Faso has been overthrown by a group of soldiers in the third military coup in west Africa in eight months.

COVID-19:  Official data show confirmed cases  355,407,404 worldwide, with 5,606,771 deaths.  In the U.S., confirmed cases rose to 71,709,939, with 868,514 deaths.  (For an interactive chart that allows you to compare cases and deaths among countries, scaled by population, click here.)  Meanwhile, in data on the U.S. vaccination program, the number of people who have received at least their first shot totals 250,964,433.  The data show that 75.6% of the U.S. population has now received at least one dose of a vaccine, and 63.4% of the population is fully vaccinated.

 The seven-day average of people in U.S. hospitals with confirmed or suspected coronavirus declined for the fourth consecutive day to 156,042 on Monday.  The continuing declines confirm the spike caused by the highly transmissible Omicron mutation is now in retreat, providing welcome relief to the over-stressed healthcare system.

• Pfizer (PFE, $51.54) and partner BioNTech (BNTX, $150.98) said they launched clinical trials of a vaccine specifically targeted at the Omicron mutation.  The move signals a potential shift in which vaccine makers focus on targeted shots rather than general ones.
• According to an official with the COVAX vaccine initiative, which was set up to ensure COVID-19 shots reach the world’s poorest people, the organization is unable to accept new dose donations because it has nearly exhausted the funds needed to buy crucial accessories, including syringes.
• If you thought the post-pandemic labor shortage was limited to the U.S., think again.  Even in Europe, with its long history of high unemployment, the shortage of workers has gotten so bad that some employers are offering cash bonuses just to interview for a job.

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