By Michael Every of Rabobank
There has been a hyperbolic overreaction to cancel all things Russian in some Western circles way beyond economic sanctions: Tchaikovsky, Mussorgsky, Dostoevsky – all gone-ski. Sorry, but not in my household. ‘Pictures at an Exhibition’ remains one of my favourite pieces of classical music; Gogol is preferred to Google; and in times that try one’s soul, one of my sole comforts will remain Solzhenitsyn. Indeed, one of his quotes is sadly of supreme relevance today: “We know they are lying. They know they are lying. They know we know they are lying. We know they know we know they are lying. But they still lie.” In our hyper-polarised times, wherever you are on the political spectrum you probably see the validity of the statement – even if it came from Russia.
Without getting partisan there is one key example today. The Hunter Biden laptop --with its emails detailing corruption linked to Ukraine and China and “10% for the Big Guy”-- was called fake news by The New York Times ahead of the last US presidential election; dismissed as “Russian disinformation” by 50 US intelligence officials; and the story banned by Twitter. (Remember when that kind of ban was shocking?) The New York Times belatedly now says the laptop is genuine.
Consider that, and Solzhenitsyn, when trading markets. For another example, this week has seen considerable efforts to start to partially price for peace between Russia and Ukraine. After all, some snippets of headlines on a Bloomberg screen said so! Throughout, I kept pointing out that the logic did not back that assessment. And what did we just see?
- The advisor to President Zelenskiy @Podolyak tweet: “I would like to softly recommend the “active commentators of the negotiation process” who are NOT inside: Don't spread your lies in a country that is at war. Negotiations are complicated. The positions of the parties are different. For us, fundamental issues are inviolable.”
- ‘Reports of Major Progress in Ukraine Talks ‘Wrong,’ Kremlin Says’;
- The French say Russia is only pretending to negotiate;
- Ukrainian media claiming Russia wants to ship in 40,000 Syrians to fight;
- The Financial Times say ’US pours cold water on hopes of diplomatic solution in Ukraine’; and
- ‘Russia claims Bosnia could suffer same fate as Ukraine if it decides to join NATO’ – and please recall I have been warning that the pot was being stirred in the Balkans too.
I know, I know, it’s frustrating that this isn’t over yet for those traders with ADHD or better things to be doing or better prices on their books needed. I know it’s annoying to point out that the Siege of Sarajevo lasted three years; or that the Syrian civil war is still raging after 11, and half of its population became refugees, which if transcribed across to Ukraine would mean 10 times the population flows we have seen so far. Or that there are potentially very awkward geopolitical links between Syria and Ukraine and the US, Russia, and Iran that far exceed the level of ‘whocouldanooed?!’ faux innocence related to the Hunter Biden laptop.
But it really isn’t over yet. Today, we wake in Asia to Western military intelligence underlining that the Russian invasion has slowed to a crawl, while its level of destruction has consequently increased, and as such the underlying economic equation of the war, if there ever was one, is further undermined: is Russia going to rebuild even parts of Ukraine supposing it were to win? (On which, see here.) If not, the policy is either one of deliberate ruination of a nation, or points towards escalation ahead to shift the military, political, and economic dials.
Indeed, we also see high-level US warnings of a potential Russian chemical attack or even a tactical nuclear one: ‘Putin May Play Nuclear Card if War Drags on: US’ as Bloomberg puts it, echoing geostrategic logic I have been stressing from the day it became clear he could not win conventionally as planned. Open signals intelligence yesterday showed Kremlin planes heading to parts of Siberia widely regarded as the location for underground nuclear bunkers. Of course, the transponders would not be on if this was a real escape; that they are shows Russia is warning which direction it might still head in, or wants us to think they will, if they cannot get what they want on the ground. “We know they are lying. They know they are lying. They know we know they are lying. We know they know we know they are lying. But they still lie.” But what do we do if the use of nuclear weapons is the lie now?
We already know what one bank analyst says: buy stocks, because if you are short and there is no nuclear war it’s ‘far worse’ --in market terms-- than being long and having one. There is mad logic to that view… unless this isn’t about nuclear war, but nuclear blackmail – and if it might just work. Because if it does, the global economy and markets will be reshaped even more than they already are being.
Meanwhile, financial markets are also focusing on the fact that central banks are perhaps already back-pedalling (for example, the Bank of England was less hawkish than some had expected yesterday – see here for more from Stefan Koopman) – which is bullish. They are not focusing on the fact that the LME is still in total chaos due to the war and sanctions, with nickel trading breaking down again, and we see a warning that ‘Too-Big-to-Fail Risk Looms Over Commodities’. Indeed, it’s one thing for a financialised economy to create CDOs, and then CDOs squared and CDOs cubed – but how is this supposed to work for things you actually need to *eat*, like wheat, or to *make things*, like nickel? The short answer is - it isn’t. And yet Wall Street is now piling into the markets that are literally the very bread of life.
No, broader markets are instead focusing on the fact that Russia did not default on its sovereign debt after all. On which note, allow me to quote Adam Tooze’s must-read chartbook:
“So, Russia is not defaulting after all? As of 20 minutes ago the news is that JP Morgan processed interest payments from the Russian government. Acting as Russia’s correspondent bank, JP Morgan will pass the $117 million in coupon payments to Citigroup, who as the payment agent will distribute the money to investors. The US Treasury signed off on the payment as not violating sanctions.
On the news, the price of a Russian dollar bond maturing in 2043 surged to 47 cents on the dollar, versus 20 cents a week ago. 47 cents on the dollar is hardly bad considering that we are perched on the edge of World War III. But is this time to rejoice? Surely not.
If you invest in Russia to open hamburger franchises or Ikea’s stores, or to build cars, you are hoping to profit by selling daily necessities to ordinary Russian consumers, pretty much as you would anywhere else. If you invest in Russian government debt what are you hoping to profit from? As I argue in a piece that appeared in the Guardian earlier today, you are investing in Putin’s regime, warts and all.” (And I strongly recommend the linked article.)
Of course, the same is true for *every* government bond. For all the highfalutin market talk about the wonders of ESG, we don’t get much scrutiny of the domestic or foreign policies various governments spend internationally borrowed funds on. Does war now represent a new red line if we are seeing a more moral market in action? If so, how about preparation for a war, which would surely be a better time to act – but how does one know when this is real and when it is just a bluff? What a minefield. So, far easier to ‘do a Solzhenitsyn’, pass moral judgements to those who set the bond investment benchmark, and then say “whocouldanooed?” if a country subsequently gets marked down to zero for its actions, or opts to default - which at least means everyone else in the industry following said benchmark fails conventionally with you, as Keynes put it. (And see another headline today: ‘China Credit Investors Face Billions in Losses, Shrinking Power’.)
Against this backdrop, US President Biden is holding an urgent call with China’s Xi Jinping. The US readout states it will be about Ukraine and “managing the competition” between the two economic giants. That’s a phrase that even in English alone has multiple interpretations. If it came from the mouth of an EU bureaucrat it would mean one thing; from the Russian mafia, another altogether. And this is as Bloomberg reports ‘Biden Team Hardens View of China Tilting Toward Putin on Ukraine’:
“Even as the Chinese government publicly voices some support for the Ukrainian people and calls for a peaceful solution, top American officials see signs that China is seeking ways to soften the blow of sanctions imposed on Russia by the US and its allies, according to the people, who say they have knowledge of deliberations in Beijing. The people, who asked not to be identified because of the sensitivity of the matter, did not offer details on how China might be able to offset the economic consequences of the sanctions. They also declined to elaborate on US sources of information about China’s government and its interactions with the Kremlin. Some of the people said China is also considering supplying Russia with weapons such as armed drones….
In his call with Xi, Biden is expected to try to persuade his Chinese counterpart to back away from any support for Russian President Vladimir Putin and his war. The stakes are potentially ground-shifting, after a six-hour meeting on Monday in Rome in which White House National Security Adviser Jake Sullivan warned China’s top diplomat, Politburo member Yang Jiechi, of serious consequences should Beijing support Russia through its banks or on the battlefield….
But US officials currently don’t know China’s true intentions toward Russia and Ukraine, according to diplomatic correspondence seen by Bloomberg. China could regard the war as an opportunity to exploit Russia’s growing economic dependence, such as by buying up strategic assets or making other efforts to damage the West’s leverage. Beijing’s position is ambiguous and contradictory, and recent exchanges with U.S. officials --including Yang’s Rome meeting with Sullivan-- have produced little clarity, according to the correspondence…
The relationship between the world’s two economic titans is fraught, and the Ukraine crisis has highlighted the mistrust between them. The US and China now find themselves drawn into a conflict provoked by a country, Russia, that once was so close to the Western world as to host the Group of Eight, but that has for years been drifting into Beijing’s orbit.”
So how does one trade that kind of binary? First, to recognize that if the call goes well, markets will take it as positive even if D.C. is now filled with China hawks and far more will almost certainly arrive in the 2022 and 2024 elections; second, to recognise that if the call goes badly, markets will take it as a huge negative - and rightly so; and third, to recognise that what we are told happened on the call might not be the whole story anyway.
I conclude yet again with my ‘Sol’ comfort: “We know they are lying. They know they are lying. They know we know they are lying. We know they know we know they are lying. But they still lie.” And markets happily swallow it, it seems.