The Good, Bad, & Ugly Market Implications Of A "Crimean" War

Tyler Durden's picture

Submitted by Peter Tchir of TF Market Advisors,

The Crimean War

The Charge of the Light Brigade is from the Battle of Balaclava in 1854.  Conspicuously missing as any reference from that war was the Ukraine.  In fact, Crimea was effectively “gifted” to the Ukraine in 1954 by Khrushchev.  The Soviet Union had a strong policy of attempting to break up or at least dilute strong groups of a single, non Russian, ethnicity.

So the big problem today is that Crimea doesn’t look or feel Ukrainian, and it is home to one of Russia’s most important naval bases.  For many, this always seemed a recipe for disaster.

You lease cars, not crucial military bases.  Having said that I will admit to never fully understanding Gitmo, which is where the U.S. leases a Naval Base (or interrogation center) from Cuba where we are actually enemies.

So what does this all mean?

The “Best” Case – Independent Crimea
At this stage the “best” case seems to be a deal that creates an “independent” Crimea.  Russia can do some chest thumping and the West gives up relatively little that really they hadn’t given up before.

I don’t see this ending without an independent Crimea.  The situation went too far and there doesn’t seem any way to reconcile.  There does not appear to be much interest in the Crimea to remain part of Ukraine and Russia won’t stop agitating until it gets what it wants.

The Ukraine can get some gas concessions from Russia to save face.

I see that as the best case.  I am not sure it is the most likely case because it is difficult to determine if

1.      Will Russia be content to stop there?
2.      Will the Ukraine or NATO take steps to provoke Russia?

Let’s hope the best case occurs as it shouldn’t have a big impact on the lives of most people, even in the Ukraine, and the markets should remain pretty calm.

The Slippery Slope – Eastern Ukraine
Much of the Eastern part of Ukraine is Russian speaking.  Vitaly Fiks (the F in TF), was born in Odessa and spoke Russian not Ukrainian.  That is the norm.  Much of the heavily industrialized East has strong Russian connections.

The demonstrations have been spreading to cities in this region.

So will Russia be content with the Crimea?

This is where you have to think like a Russian.  I have seen a few articles on the subject that too many analyze Russia with a Western perspective and agree that is what leads to mistakes.  To think like a Russian is relatively easy.  Create a vodka-induced haze of pessimism where everyone seems out to get you and mix in a little anger and cruelty with a strong desire to persevere and win, and you have it.  Okay, that is a bit of an exaggeration, but do think about who are the players here:

  • A former colonel in the KGB (which I assume you don’t get to by being soft and naïve) who has managed to come out on top in a country of oligarchs.  The 0.01% in Russia do extremely well, are happy to flaunt it, and go to great lengths (legal and occasionally otherwise) to defend it. This is a hard man who is used to getting his way.
  • A constitutional lawyer who turned into a community organizer who can barely get people to agree not to default on our own debt.  He has a great ability to fundraise but seems tired of the job.
  • Then you have a woman who has been able to hold together the EU and shape it to suit her and her country.  She has done a great job of balancing internal and external pressure.  She is very smart.  She understands the mindset of the East having come from East German.  Frankly, I think she is the best hope, but she has been extremely quiet, and while cobbling together a bunch of central bankers has been difficult enough within the framework of the EU, putting together something, military or otherwise that gives Russia seems very difficult.

So the next biggest risk is a push into Eastern Ukraine and I think it is quite possible and there is a good lesson from Georgia on this one.

There Russia effectively pushed 10 miles further than they had to.  Then as part of their negotiations they conceded the territory from that last push and pulled back to the borders that they had wanted in the first place.

Why not push and see what happens?

This is our base case.  Russians will creep into Eastern Ukraine.  We expect a reasonably quick resolution that again leaves most people unaffected and can leave the markets calm.

This is where it gets a little more troublesome, at least for the markets.

Germany started with Austria and then moved into other primarily German regions of other countries prior to World War II really getting under way.  Small areas, not deemed essential I guess by the rest of the world, where many of the inhabitants seemed to welcome the change with open arms were allowed to proceed.

Belarus?  Belarus was one of the first to form part of the Soviet Union.  I have never heard a single Westerner suggest a visit to Minsk.  It is heavily Russian speaking, heavily industrialized, and struggling.  Is that next?

While Estonia and Lithuania seem to have re-emerged with strong nationalistic pride, that seems less clear to me in Latvia.  Is that another area where you could see the ethnic Russia’s try and create a situation that could be more to their liking?  It seems less likely than Belarus, but, we have moved from “likely scenarios” to where this could lead.

I don’t think the markets would respond well to Russia, which is resource rich, flexing its muscle in this format.  We don’t think this scenario plays out, but if Russia is allowed to encroach into Eastern Ukraine, expect growing fears of a Russian Anschluss to weigh on markets.

When the Cats Away, the Syria Will Play

Syria has not yet delivered all of its chemical weapons to the authorities.  From what I can tell, we are more in a lull than having seen any real resolution.

With all eyes on Russia, it could create an opportunity for Syria to cause serious problems. How could the U.S. go into Syria but leave Russia alone?  Why wouldn’t the Russians volunteer to help Syria?

This could happen in parallel with the events in the Ukraine and we don’t think the markets would be comfortable with this.

I think it is likely that we see some noise out of Syria and that will be negative.

The Enemy of my Enemy – Chinese Silence

China seems to be very quiet on the subject of Ukraine and territorial rights.  Maybe that is because China has no interest in the outcome?  Maybe it is because China isn’t aware of what is going on?  Those are both clearly not true.

Maybe China is watching the developments and deciding whether now is a good time to resolve their own territorial disputes.

It seems that China has been getting more aggressive in and around the islands that they have an ongoing dispute with Japan.

I doubt China does anything, but if they do, markets will be hit hard as that will put a question into global trade like we haven’t seen in years.

It doesn’t seem to be in Chinese interests to do anything, but then again, maybe they think there won’t be repercussions?

So we view this as unlikely, but will keep an eye out.

Other “Hot Spots”?

Are there other places, off our radar map, that might see this as an opportunity to be more aggressive?

Overall View

We remain bearish risk assets due to our view that they are overvalued.

At this stage we see very little from the Ukraine priced into the market, and with our best case that makes sense and even our base case (encroachment into Eastern Ukraine that is quickly and peacefully) resolved, the impact should be minimal.  Probably creates a little downside to the market but that is it.

As some of the other scenarios potentially come into play, whether in reality or perception, the risk to further downside in the market is significant.

Since we are already recommending being short based on the economy and the misperception of the Fed’s next steps, you effectively pick up the conflict for free.

With VIX being so low, picking up some downside protection makes a lot of sense here.

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skwid vacuous's picture

coming soon: Syrian and Iran tell Obozo and Kohn to go fuck themselves after this weekend's limp-wristed performance

greatbeard's picture

>> this weekend's limp-wristed performance

What do you think should have been done?

ParkAveFlasher's picture

Send in the Wookie!  Riding Mr. Ed...with the Choom Wagon bringing up the rear!

quintago's picture

What should have been done? Well, for starters we shouldn't have been effing around with Ukaine and encouraging revolution if we weren't prepared for what the Russian response would be. We shouldn't do anything, but now Russia just scored a safety, and they're about to recover the kickoff.

Son of Loki's picture

>>What do you think should have been done?


He could have at least banged his shoe on the table in front of the CBS cameras.  More importantly, his cheeks needed more foundation and his lips more lipstick. Tad more Gel in his toupee wouldn't hurt, either.

Independent's picture

To see why Crimea matters so much..and why the Poles in Kiev are crying



skwid vacuous's picture

Obama couldn't make it to the NSC meeting saturday morning? then 8 hours later WH tweets picture of him in jeans on the phone with Putin wow...and Kerry is just a pathetic sac of shit I guess it can't be helped at this point..."President Putin is not operating from a place of strength here." Huh?

But the bigger issue is they shouldnt have stirred up the hornets nest over there to begin with,

lakecity55's picture

Rentboy's attendance at an NSC meeting is not required. However, if a photo has to be made, the puppet will be there for pictures or a script reading from TOTUS.

Honestly after all this time, anyone who thinks Rentboy does ANYTHING other than act a part is delusional. The WH is run like the old soviet politburo. Jarrett makes the final decision, then Bath house is rung up from his reverie with Reggie and told a photo, signature, or speech is needed.

It's really that simple!

Pheonyte's picture

What should have been done was to say, "This has no bearing on US national interests." Instead we got the usual rhetorical tough-guy bullshit about how there'll be a price to pay, which will be backed up with absolutely nothing.

Greenskeeper_Carl's picture

You're right about that. All he needed to say was a Ron Paul type response of " the US condemns any aggression or incursion against the sovereign nation of the Ukraine by the Russian federation." And followed by" we will continue to watch the situation I the Ukraine, but this has no bearing on US national security, therefore we will not be responding with force" drawing a line in the sand like that and daring Putin to cross it, then doing nothing about it just looks weak. We should have just minded our own business in the first place.

Martel's picture

What do you think should have been done?

The NATO response should be a massive war games in Eastern Poland and the Baltic countries. Even the troops' entry to Poland should look like takeover of Ukraine. I'm talking about 100,000-200,000 men, heavy armor, hundreds of aircraft, including heavy bombers from the U.S. This would accomplish several goals:

1. Show of strength. Russians consider Europe and NATO weak. Respect can be gained only by doing something out of character

2. Practising joint operations and a possible Ukrainian operation. This will be a mess, but that's the reason to do it

3. Reaffirming the East European countries about NATO's commitment. Just a few years ago, Poland and the Baltics had to beg NATO to establish contingency plans for a Russian attack - something that should've been there from the very beginning of their membership


The U.S. & EU response should be to give Russia an ultimatum, a timetable of e.g. two weeks to pull out of Ukraine. If Russia does not comply, economic sanctions. Russia needs Europe buying its oil & gas more than Europe needs to buy them. Yes, a trade embargo will hit European economies hard, but it will hit Russia even harder, and collapse the ruble. Russian economy is almost completely dependent on export of hydrocarbons. The embargo (if it happens) has a negative long-term outcome of Russia looking for other markets, such as China. Yet, Europe can also do that, and natgas fracking revolution is about to enter Eastern Europe anyway. While an embargo might not hurt the oligarchs that much, it will bring Russian people on the streets and possibly even oust Putin out.

quintago's picture

So this is what we meant when we said Fuck the EU? Specifically, fuck their economy because we fomented revolution in Ukraine and now we want to punish the EU because Russia says not in my backyard? Are you delusional? The people of this country might be sheep, but they're not as stupid in other parts of the world.

The only good that might come out of this is the people might wise up to the BS that is US foreign policy. Wishful thinking, but that is the only good thing that can come out of this. If you haven't noticed, our sanctions didn't work on Iran. Somehow you have delusions of grandeur thinking they are going to work on Russia.

Martel's picture

Specifically, fuck their economy because we fomented revolution in Ukraine and now we want to punish the EU because Russia says not in my backyard? 

I don't get what you're saying, but I live in Europe, next to Russia. For me, the pattern is clear: Georgia (2008), Ukraine (2014), something else later. Putin won't stop until somebody takes a stand. I'd very much prefer that somebody to be the Chinese, but I'm afraid that's going to take more time than the Eastern Europe has. For the U.S., participation is of course optional, but since you guys like to stir things up with your colored revolutions, it would be kinda nice.

quintago's picture

The US and the same normal EU players (UK, France, Germany) back in December told Ukraine it had to decide between Russia and the West. Russia said why don't we all give them economic assistance, and the west and the ukrainian opposition rejected that.

We are to blame.

In case you forgot about US and Israeli involvement in Georgia, do some research. You can perhaps start here.

And your logic sucks, because by your definition, everybody is standing around saying Afghanistan first, then Iraq, then Syria, what's next. Or Egypt, Tunisia, Algeria, Libya, etc.

What's good for the goose is good for the gander. This isn't about Russia specifically, it's about an overhaul of thinking when it comes to "Regime change", fomenting revolution, and so on. This double standard by which we go around the world may work on weak countries, but Russia - who has the ability to destory western civilization (as do we) - is not going to take it. This is why we are playing with fire sticking a needle in their eye in Ukraine, expanding NATO to their borders, etc. Wake up. Palin lives next to Russia too.




Martel's picture

The U.S. surely has been involved in Ukraine, just as it was previously involved in the Georgian Republic. However, the uprising of the Ukrainian people was real - they ousted their kleptocrats, and people genuinely want closer ties with Europe. Remember, they're next door neighbor with Poland, and have seen Poland develop since it got out of the Soviet strangle. There is no reason why they should remain Russia's backyard forever, because Russia can't and won't contribute to Ukraine's prosperity and future.

Where the U.S. is at fault, is their willingness to stoke 'democratic' fires, but not back the people up subsequently. This is nothing new, happened already during the Bay of Pigs, also in Tibet. The U.S. trained & armed Tibetan guerrillas in '60s. Just as they got things going nicely, the U.S. does a political about turn, abandoning Tibetans. Abandoning Ukrainians now fits this historical pattern: Give people hope and empty promises, then throw them to the wolves.

What I'm saying is, the damage in Ukraine is already done. Showing Russia a bit of military might, and weakening their economy is damage control. It is also about credibility at this point:  Your country and the U.K. signed a treaty with Ukraine in 1994, promising to support their territorial integrity and inviolability of their borders. This you promised in exchange for Ukraine giving up its nuclear weapons, a promise they kept. A somewhat similar treaty was signed between NATO and Ukraine in 1997. If you have no intention to back up your commitments, don't make them in the first place.

Sabibaby's picture

Italics in the beginning screw up voting but if you put a space or something not italic first it fixes the problem.


Anyway, +1 I agree with you.

Urban Redneck's picture

The US can't mobilize 200,000 troops quickly, AT BEST 1/10 of that, divided between light rapid response regiments/brigades and units already in transit (or just about to be) that can be redirected, but if you add it to the 80,000 or so already in Europe, you could get theoretically get to 100,000 (but I don't think the catering brigade in Brussels is going to intimidate anyone).

Martel's picture

Don't tell me NATO with its 900 million population can't field 200,000 men. The population of European NATO countries alone is about 470 million people. Poland alone should be able to field 100,000 men, although I'm not suggesting they do that. Instead, every member nation commits something. The UK, France, Germany, Italy, Poland, Romania, Baltics... It is completely doable, not even a stretch. 

TBT or not TBT's picture

Before moving all those tanks and troop carriers and jets around don't you think they'd want to call Vlad to get their oil and gas tanks topped up? I read here on ZH that the pipelines run through this Ukraine place, and that Russia controls it....

stant's picture

the us sent some tanks back to germany several weeks ago. after they were removed about a yr and ahalf ago. the austrians deployed armour on thier easten border about 3 weeks ago. that should tell ya something

cossack55's picture

The Austrians? Please!  Next you will be saying the Dutch are mobilizing (if it fits within their union contract).

Don't get me wrong.  I love the Austrian folks. They figured out long ago not to waste time and money on all this military shit.  Kind of like Switzerland without any money.  Great country rather poorly placed.

gatorengineer's picture

Well kids, let me spin it a bit...  Follow the money.

CIA / Mossad Stirs up shit on Vlads door step...

Are we really stupid enough to think (I do not give Barry any credit).  that this wouldnt have been the outcome.

Ok, so now Western Europes gas supply is in Jeopardy.  Whats a brother to do, well this sure looks like it would give Barry political cover to put through Nat Gas LNG exports.  Nat gas is the only US bright spot

Plays right into Big Energy, Big Banks, and destruction of the USA.

Just Sayin....




Independent's picture

No war in Crimea its too easily defended, however ODESSA where the HOTTEST women in Europe/The World live, will be the main destination for NATO mercenaries in Ukraine uniforms.  Not only does Odessa have a PORT Kiev Need but who doesnt want to DOCK between the Hottest Female Legs in the World. Besides the USA easily has a few thousand men already on the ground already there looking for top quality wives.

Bullets always fly and men die when top quality pussy cats are up for grabs!!! See ya in Odessa ;)

Who are the gay guys giving me red arrows?

asteroids's picture

They will have to stand in line as Putin, the Europeans, and the Chinese have told him to go fuck himself. Amerikan exceptionalism at work.

DoChenRollingBearing's picture

Going short and buying puts worked out poorly for me.

Why not just buy gold instead?

lakecity55's picture

Fuck Gold.

Yes, this came from LC.

You had better be thinking of stopping a nuclear war. This is one time you forget PMs. These fools in Vichy DC need to be whipped out of office and thrown in jail! PCR is right. Do not point a gun at Ivan's face in his own backyard. You'll get one trigger pull and then you're dead dead dead. This will degenerate into a nuke exchange if it is not chilled.

Rentboy Barry is gonna kill us all. What an epithet. "USA, killed by Drug-Crazed RentBoy."

gadflew's picture

I have no business trading crude oil yet that's what I did on Friday - went short the April contract....Am I screwed?  Please advise one and all

CrashisOptimistic's picture

The way a short on crude works is if the price is so high that it destroys civilization and consequent demand.  Then the price collapses.

But because there is no remaining civilization, you can never collect.

Mr. Magoo's picture

The Rothschilds win again no matter what the outcome. They only losers are the sorry sacs who think they are doing their PATRIOTIC duty

lolmao500's picture

If London get nuked Rothschilds don't win.

Flying Wombat's picture

The biggest blackswan risk is the fact that Obama and company are neocons in liberal clothing, fumbling around like keystone cops.

"Obama’s Dumbest Plan Yet: The Coup in Ukraine"

Check out Paul Craig Roberts writings on this too. 

Poor Grogman's picture

The plan may well be going according to plan.

Here are two ways demand destruction for oil can work.

1. The price gets so high that the western fiat debt ponzi implodes.

2. Countries that are not particularly supportive to western interests suddenly find themselves engulfed in political turmoil which destroys their economy, crushes demand, and clears the decks for big changes in the way things are done including some semblance of free markets in localised areas, as well as potentially greater access for large western interests down the track.

Thus as living standards inevitably drop (in someone else's backyard) in the short term, some demand destruction results, and some benefits accrue, to those who are important.

Now how is the plan looking?

lakecity55's picture


We have to get back our country!

greatbeard's picture

>> Am I screwed?

No, screwed actually describes being long gold.  Fucked describes being long silver.



BandGap's picture

Really? Let's examine this in terms of "the markets"? Not to be overly dramatic but at some point this becomes part of a bigger play, not one where people consider angles to make or play "the markets".

And by "proced in", what does this means in terms of a war? Insanity.

Omegaman2211's picture

Agreed. The entire notion and tone of this article made my skin crawl.

TBT or not TBT's picture

I'm in equally high dudgeon, if not higher.

Sufiy's picture

Currency Wars: The Yuan's Silent Scream - Portrait Of A Derivatives Bomb Being Detonated


David Kranzler published a very interesting article confirming our discussion about the ongoing Financial War involving USA, Russia and China now. Bo Polny on the chart above presents his view about the implications of US Dollar crash below 80.00 level for the Gold market and you can find our thoughts on the links  below. Ukraine and Peter Schiff: Recovery Fantasy, Dollar Crash Below 80.00 And Gold "Wall of Worry". TNR.v MUX GDX

"Obama can have his own war finally after the few unsuccessful attempts with YouTube evidence in Syria. We do hope that it will be only Financial War and we can see the first rounds of it this week. Initially US Dollar went up on the escalation of the situation in Ukraine - as any potential military action in the world is supposed to be positive for the U.S. Military Complex, but on Friday with major headlines from Moscow about Ukraine Dollar has dived decisively below 80.00 to the 79.78 close. After these U.S. actions in Ukraine considered as an insult by the Kremlin the least you can expect is selling of the US Treasuries by Russia and, maybe, already accelerating of selling by China as well. They have been already smelling the rat about the USTs Game Of Musical Chairs for a long time. It is just too personal. None of these two countries - or it will be better say leaders - would like to be liberated next in any circumstances. Dr. Paul Craig Roberts - former US Treasury official - has made the best comments on the situation in Ukraine."

NDXTrader's picture

I don't think there will be much market turmoil because everyone knows Obama and the rest of the West will continue to be deeply disappointed and do absolutely nothing.

robertocarlos's picture

Does Putin not know about Tim Horton's? The plan is to open a store a day in Russia.

joego1's picture

What happens to the markets when the tactical nukes that went "missing" from the old soviet union come out of the woodwork?

greatbeard's picture

>> What happens to the markets

Possibly I could get out from underwater on some of my silver.  I never though "going nuke" would have an alluring ring to it.

TBT or not TBT's picture

They would be sold to the highest bidder, and go back into the woodwork, and reappear in blinding flash in one of our ports along with a load of rad waste.    No one is nuking squat over "Ukraine".

Bazza McKenzie's picture

Georgia is not a useful example.  Russia there was facing Bush, whom they knew was willing to go to war in a disciplined, organised way.  Now they're facing Obama, whom they know to be an incompetent, cowardly bully.  That difference will be part of their thinking.