Wednesday, December 7, 2022

Timothy Ash: What Russia's attack means for the world

by Timothy AshFebruary 24, 2022 1:59 pm
People are seen outside the cordoned off area around the remains of a shell in a street in Kyiv on Feb. 24, 2022 after Russia launched an all-out war on Ukraine. (AFP via Getty Images)

(Editor's note: This op-ed was first sent out to Mr. Ash's mailing list subscribers. The Kyiv Independent is republishing it with permission.)

I'm sad to say that my baseline scenario, which I have held since the US intel warnings in November, is playing out - I have warned of a defining Russo-Ukrainian war since 2015. And that war is happening.

Very, very sad. Ukrainians are the good guys here - standing up, fighting to defend our system of Western liberal market democracy.

Here is my initial assesment on what Russia's full-scale invasion means for the countries involved, and the world, at this point:

Ukraine: depends what Putin wants. Is it regime change, or a new Treaty which puts Ukraine under Russia’s geopolitical orientation? If Putin forces regime change on Ukraine then that new administration in Kyiv would be a pariah in the West. It will not be able to finance itself in international markets and Russia will have to pay the substantial price tag for funding it -- tens of billions of dollars. If it’s a new treaty that will create social and political instability in Ukraine -- but that’s likely what Putin wants. But Ukrainians will fight Russia, so let’s see how this all plays out.

Russia: It's interesting to listen to Western leaders today: there is real shock and emotion. They feel totally let down and threatened by Putin. Putin is now recognised as the most imminent threat to our system of Western Liberal Market Democracy. I think massive sanctions will follow -- making Russia a global market pariah and uninvestible.

This will increase borrowing costs, cut investment, lower growth, subdue living standards, and create social unease even unrest but likely put migration. Russians will be poorer. Eventually, they might rise up against Putin -- like in Kazakhstan recently -- but this might take years and will be met with brutal force. Russians will be paying for Putin’s adventures in Ukraine, Transdniestr, Abkhazia, South Ossetia, Syria, Libya, Mali, et al.

Remarkable the devastation wrought on Russian markets today. Equities down 50%, rouble down 10% and trading suspended, the Russia long bond down at 40 cents, it had been at 130 cents last year. This tells me that Russians did not think this was going to happen. They believed the Kremlin’s lies of "no war". They are now paying the price in their investment portfolios.

Russians seem to be panicking trying to buy foreign currency due to uncertainty where this is going. Putin is crashing Russian markets -- but he does not seem to care.

As for the oligarchs? They should come out publically against Putin or face devastating Western sanctions.

China: This can go two ways. Either Xi will see a Putin win in Ukraine as a green light on Taiwan. Alternatively they might think that, with Putin now the number one pariah in the West, they can look to improve relations with the U.S. and Europe. Where Putin hated the status quo -- time did not work for him -- Xi likes the global status quo. So maybe Xi will reach over to Biden and offer to try and contain Putin, for a price.

Global markets: This is a globally systemic hit to Western security. Putin is drawing a new Iron Curtain across Europe. Expect higher defence spending, higher energy prices which will play into the global stagflation story.
Watch for energy importing losers - India, CEE, Turkey, Asia. And winners - GCC.

Timothy Ash
Timothy Ash

Timothy Ash is a London-based senior emerging markets sovereign strategist for Bluebay Asset Management Company.

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