Ukraine

With the world still on edge over developments in the Ukraine, overnight newsflow was far less dramatic than yesterday, with no "bombshell" uttered at today's Putin press conferences in which he said nothing new and simply reiterated the party line and yet the market saw it as a full abdication, he did have some soundbites saying Russia should keep economic issues separate from politics, and that Russia should cooperate with all partners on Ukraine. Elsewhere Gazprom kept the heat on, or rather off, saying Ukraine recently paid $10 million of its nat gas debt, but that for February alone Ukraine owes $440 million for gas, which Ukraine has informed Gazprom it can't pay in full. Adding the overdue amounts for prior months, means Ukraine's current payable on gas is nearly $2 billion. Which is why almost concurrently Barosso announced that Europe would offer €1.6 billion in loans as part of EU package, which however is condition on striking a deal with the IMF (thank you US taxpayers), and that total aid could be as large as $15 billion, once again offloading the bulk of the obligations to the IMF. And so one more country joins the Troika bailout routine, and this one isn't even in the Eurozone, or the EU.

While most attention has been focused on Nat Gas, BofA notes that Russia is unlikely to unilaterally curtail its oil exports. However, Russian oil does indeed flow in large quantities through the Black Sea, making the Russian Navy station of Sevastopol as well as the whole Crimean peninsula crucial strongholds to control commerce flows. While BofA remains confident that oil-related sanctions are unlikely (as Europe cannot really afford to relapse into a third recession in six years), Brent prices could easily jump $10 on any disruption increasing the risk of recession for a number of weak economies.

Scrape away the media sensationalism and geopolitical posturing and it boils down to a simple dynamic: follow the energy.

As newswires reported the comments from Putin’s senior aide Glazyev, the USD Index fell marginally to session lows and broke below 80.00 before recovering. If diplomacy does not prevail, then trade wars and currency wars will ensue with attendant consequences for the already vulnerable financial system and global economy.

Dispassionate analysis of Russia/Crimea and the threat of Russia dumping its dollar holdings.  Much posturing.  Many point to US bluster have tough time identifying Russia's bluster.  Let me help.  

Truth, propaganda, or outright lies? Nobody knows anymore, but if an ICBM launch, which apparently the US had been aware of yet which came at the worst possible time even though Putin could have easily delayed, can barely dent the stock surge, who cares anymore.

This one should be intuitive: with Ukraine scrambling to load up on natgas ahead of the price surge once Gazprom ends its discount pricing, and unclear what if any access it will have to Russian gas in the future and at what cost, it was only a matter of time before the Ukraine stepped up the protection of its only true energy asset: its 15 nuclear power plant, which supply nearly half of the country's energy needs. Ukraine told as much to the U.N. atomic watchdog on Tuesday, although it framed it as a result of the "grave threat to the security" of the country posed by the Russian military. "Illegal actions of the Russian armed forces on Ukrainian territory and the threat of use of force amount to a grave threat to security of Ukraine with its potential consequences for its nuclear power infrastructure."

What Hagel proposes is not cuts, but instead a shift in spending away from personnel and toward new high-tech weapons which are favored by and profitable to the military-industrial complex. Welfare spending is bankrupting the country. But military spending is also welfare: it is welfare for the well-connected military-industrial complex, which enriches itself manufacturing useless boondoggles like the F-35 fighter. A proper foreign policy would mean a strong national defense, but a huge reduction in interventions and commitments overseas. Why are we stirring up trouble in Ukraine? In Syria? In Africa? Why are we defending South Korea and Japan when they are wealthy enough to defend themselves? A proper sized foreign policy would defend the United States instead of provoking the rest of the world.

UPDATE: EU is suggesting it will help Ukraine pay its $2bn Russian gas bill (to keep its spice flowing)

The question many are asking this morning is what is the iron-first of Putin thinking? With his "military exercise" over, does he believe it enough to have shown the world his potential for disruption? We suspect another reason may have been weighing on his mind. As we noted previously, Europe accounts for around a third of Gazprom's total gas sales, and around half of Russia's total budget revenue comes from oil and gas... and whatever Putin's geo-political ambitions, we suspect he did not want to jeopardize that source of revenue - no matter how much sabre-rattling and Gazprom-fear-mongering. As the following chart shows, Europe should be sighing a huge relief this morning - but remain cognizant that this, we suspect, is far from over.

Because BTFWWIII is so yesterday, we present BTFICBMD:

RUSSIA TEST FIRES INTERCONTINENTAL BALLISTIC MISSILE: INTERFAX
RUSSIA TEST FIRED MISSILE FROM RANGE IN ASTRAKHAN REGION: IFX
RUSSIA MISSILE LAUNCHED AT 10:10PM IN SOUTHERN RUSSIA: INTERFAX
INTERFAX CITES RUSSIAN DEFENSE MINISTRY ON MISSILE TEST

But, the talking heads said Ukraine was fixed and Putin had folded?

It appears, given comments from Foreign Minister Lukashevich, that things are about to get ugly again...

"we will have to respond...if provoked by rash and irresponsible actions by Washington... and not necessarily symmetrically."

Having "condemned Russia's incredible act of aggression" which markets now appear to have forgotten about, we wonder just what Secretary of State John Kerry will have to say in this speech. Markets appear to think it's all over and east and west Ukraine can all sing Kumbayah with Putin leading the melody but other leaders continue to call for "crushing" sanctions against Europe's largest gas supplier. We are sure Kerry will clear it all up and explain where the line that was not crossed is... and for goodness' sake don't mention the Russian boots on the ground in Crimea...

It took just a few short hours after Putin's Cold War 2.0 "detente" overtures for Russia to show that there is a difference between actions and words. In this case, and as always, the former continue to outperform the latter, and Reuters reports that Russian navy ships have blocked off the Kerch Strait which separates Ukraine's Crimea region and Russia.

What? Us worry? Thanks to the magic of the 102.00 USDJPY tractor beam, the S&P 500 has decided that Ukraine is fixed, the worst macro data in 6 years, and a rapidly tumbling expectation of US GDP is just enough "news" to warrant BTFATH.  Thanks to an epic squeeze of the shorts, once again, stocks are at all-time highs... rinse, repeat...

While the comments by Russian presidential advisor, Sergei Glazyev, came before Putin's detente press conference early this morning, they did flash a red light of warning as to what Russian response may be should the west indeed proceed with "crippling" sanctions as Kerry is demanding.  As RIA reports, his advice is that "authorities should dump US government bonds in the event of Russian companies and individuals being targeted by sanctions over events in Ukraine." Glazyev said the United States would be the first to suffer in the event of any sanctions regime. “The Americans are threatening Russia with sanctions and pulling the EU into a trade and economic war with Russia,” Glazyev said. “Most of the sanctions against Russia will bring harm to the United States itself, because as far as trade relations with the United States go, we don’t depend on them in any way.”