Daily Comment (April 21, 2022)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EDT] | PDF

Good morning! Today’s report opens with a discussion of the growing division within Russia over its invasion of Ukraine and what it could mean for emerging markets. Next, we briefly discuss other international news stories and close with our pandemic coverage.

Russian President Vladimir Putin declared victory in Mariupol. Russian troops have trapped the remaining Ukrainian soldiers in an industrial complex. Putin has stopped troops from entering the area to protect Russian soldiers from further harm, preferring to starve the holdouts. Ukraine has not officially surrendered the city, although it does seem to be a formality at this point. A win in Mariupol could help boost country morale after Russian soldiers failed to achieve their original objective to seize Kyiv. This could potentially buy Putin more time as he seeks to rebut growing criticism regarding his handling of the Ukraine conflict.

Putin’s decision to invade Ukraine appears to be driving divisions within Russia. A report from Bloomberg suggests Russian elites are becoming more alarmed by the growing toll the war is taking on the economy. The report states that elites not only believe Russian President Vladimir Putin’s plan is failing, but they suspect he could resort to using targeted nuclear weapons if the mission doesn’t soon prove to be successful. Putin’s increased isolation has also been a cause for concern. It appears he has surrounded himself by hardliners who either accept his view that he had no choice but to invade or are reluctant to challenge him. However, that does not mean Putin doesn’t have any support. Russian troops riding through Ukraine have been photographed waving the Russian flag. Although these instances are isolated, it suggests lower-level officials hope the war in Ukraine will lead Russia to reassert itself as a regional power.

The division within Russia should not be surprising. During times of war, the capitalist class’s interest does not always line up perfectly with the government. In the book The Predictioneer’s Game by Bruce Bueno de Mesquita, the author argues that the reluctance of the elites in Greece to offer their best horses for the war efforts was a key reason the Spartans were defeated by the much smaller and less sophisticated Thebes. A modern-day version of this happening in Russia can be seen in the withdrawal of foreign currency from Russian banks following the Ukraine invasion. Thus, the perceived lack of loyalty could explain why Putin may be suspicious of wealthy individuals who criticize his decision to go to war.  Another reason for the division could be related to differing experiences. While capital holders have been forced to back the war effort at a great financial cost, workers have been able to stay on their employers’ payrolls, even when the company has pulled out of the country. The divide between upper and lower classes is likely a signal that the low morale among Russians caused by the war may be higher than we have anticipated in recent weeks. If true, we suspect Putin will probably do more to promote his military capabilities to silence his critics and build public support.

That being said, it is becoming increasingly difficult for Putin to hide the fact that his country is becoming a pariah nation. More countries are deciding to distance themselves from Russia as they seek to remain in the U.S.’s good graces. Israel, a country with strong ties to Moscow, is now providing military equipment to Ukrainian soldiers. Additionally, Putin complained to the WTO that his country has been unable to secure key materials because of sanctions. A boycott of Russian petroleum has forced Russia to reduce its output from 11.06 mbpd in March to 10.11 mbpd as of April 19.  As the country slowly accepts its pariah status, we notice increased saber-rattling. In a show of strength, Russia launched an ICBM on Wednesday. The launch signals that as the country moves away from global integration, it will look to use its military as a propaganda tool.

In our assessment, the Russian invasion could give insights into how other authoritarian governments could respond if they are forced to distance themselves from the West. Putin’s insistence that capital holders absorb all costs of the war in the name of patriotism is a strong narrative, especially in a country with great inequality. Furthermore, we also expect more displays of his country’s military capabilities. If other countries move in this direction, it suggests market conditions are becoming increasingly less favorable to equities in emerging markets, particularly in Europe.

  • Russia may be forced to default on its debt after an industry body overseeing credit default swaps ruled the Kremlin failed to meet its debt obligation when it decided to repay its loans using rubles instead of dollars.
  • The Russian defense ministry has taken steps to make it difficult to discern the number of wartime casualties. The department has proposed having families of soldiers who have died during the war apply for compensation directly with the military. This additional step is designed to make soldiers’ deaths a secret in order to maintain support for the war.
  • At the G-20 meeting, Western officials walked out when the Russian foreign minister spoke. The walkout is another example of the West isolating Russia following the Kremlin’s decision to invade Ukraine. It is further evidence that economic ties between the West and Russia will likely not be restored any time soon.

International news

  • The European Central Bank is expected to raise rates in the second half of the year. The central bank aims to start rate hikes following the end of its bond purchasing program in June.
  • United States Defense Secretary Lloyd Austin is set to have a phone call with his Chinese counterpart on Thursday. The two are expected to discuss China’s support for Russia as well as other issues.
  • Last night, French President Emmanuel Macron and challenger Marine Le Pen debated each other on national television. Polls suggest viewers were more persuaded by Macron. At this time, we suspect Macron is going to win Sunday’s run-off election. However, if Le Pen pulls off an upset, her victory will likely not be taken well by equities. She has advocated for France’s withdrawal from NATO and has built her reputation on being Eurosceptic.

COVID-19: The number of reported cases is 506,793,550 with 6,207,183 fatalities.  In the U.S., there are 80,801,505 confirmed cases with 990,206 deaths. For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics. The CDC reports that 719,789,345 doses of the vaccine have been distributed, with 570,485,199 doses injected. The number receiving at least one dose is 256,935,026, while the number of second doses is 219,047,079, and the number of the third dose, granting the highest level of immunity, is 99,663,805 The FT has a page on global vaccine distribution.

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