By Michael Every of Rabobank
In recent weeks myself and my Rabo colleagues have leaned on the blackest of comedy in Dr. Strangelove (and its “Gentlemen! You can't fight in here. This is the War Room!") to describe Western-Russian tensions and their dangerous high stakes for us all. Well, now we enter ‘Dr. Strangelove in the Multiverse of Madness’. There are clashing, mind-bending parallel realities and possible futures all running alongside each other.
Yesterday saw Russian President Putin call a special session of his national security council at the Kremlin, which was televised live. Except it wasn’t: an observant journalist spotted Defence Minister Shoigu’s watch was set five hours earlier, so it was all recorded at a time when the market was still clinging to the forlorn hopes that President Macron’s latest “Peace in our time” proposal for another Biden-Putin summit might work. Imagine if PM BYO Johnson had recorded Prime Minister’s questions in the morning and was already back in No.10 drinking champagne with a group of friends while the nation was ostensibly watching him being grilled live over Partygate. What we saw broadcasted with a delay from Russia was Putin looking bored behind his desk in a vast white room that looked like the final ‘2001’ Kubrick set, while uniformed Kremlin creatures played the world’s worst ever game of musical chairs before reporting to him solemnly one by one. And we entered the multiverse of madness.
In one reality, supported by masses of OSINT evidence, Russia has 150,000 troops on the Ukrainian border. In another reality in the Kremlin, two Ukrainian APCs had just charged into Russia THROUGH Russian-separatist held territory and towards all those Russian soldiers, before being killed; Ukraine has a mass army assembled on the border of the Donbas; and Ukraine “has significantly more nuclear weapons capabilities than Iran and North Korea”. I thought only the West did terrible propaganda. As @EliotHiggins of Bellingcat tweeted: “These are genuinely some of the most idiotic efforts at disinformation I've seen. I expected to be lied to, but I didn't expect all those lies to be so blatantly dumb. I'm actually offended at the poor quality of this propaganda and feel bad for Russia for having produced it.”
Then Putin went off to think and came back to give a speech full of insults about “Russophobic” Ukraine and the US puppet regime it has become in his reality (vs. the European democracy in another) and bewailing the end of the USSR. This included the threat that “We know every name of the people who have done it. We will find and punish them,” which speaks to one of the lurid claims the West had made about what Russia plans to do if it invaded. Putin concluded by officially recognising the breakaway pro-Russian republics of Luhansk and Donetsk – and Russian military peacekeepers are reportedly already on the ground to protect them.
Which appears to be madness. Russian troops moving into what the world still regards as Ukraine is going to be taken as a further invasion. Recognising the two Donbas republics, while not incorporating them into Russia, achieves nothing. The two are poor and will remain that way. They offer little strategic value. Moreover, the Minsk accords Russia has been pushing, which would have kept Ukraine intact but Finlandized it from the inside, are now finished. There is now no way he can win Kyiv back to Russian influence peacefully. So, while Putin may pause for a moment and try to get a Biden summit, and while market analysts will no doubt retreat to their next line of strategic denial --that this is not a proper invasion of Ukraine proper-- the geostrategic logic says worse is to come.
Indeed, it suggests Putin may press on towards the Dnieper and Black Sea, etc. to try to force Kyiv to buckle and to build a future defensive perimeter if he cannot. Yes, there are limits to what Russia can seize and hold – but seize and hold some parts they can. At time of writing, reports were already coming in of Russia preparing amphibious attacks on the south of Ukraine. Ukraine can respond militarily in any reality; other countries could be sucked in if they provide support.
Ukrainian President Zelenskiy has called an urgent US Security Council meeting - where Russia and China can block any action. He also noted “We will see who our partners are, and who will continue to try to influence Russia only with words.” Indeed, the risk, even with a delay, is biting sanctions from the US and UK, while we will soon find out what the EU is capable of. We have covered the potential impact of these three times in recent weeks (here, here, and here) as we tried to emphasize that this outcome was far more likely than markets had wanted to believe.
Of course, this is not a given - anything could still happen. But once you move borders unilaterally by force you truly enter the multiverse of madness. ‘Reality’ can be upended in places that you thought it couldn’t be. For one example, the US is now moving its embassy not just to Lviv, but to Poland. How many will follow?
Also allow me to share a thought from Dr. Pippa Malmgren, who, like ourselves, has been arguing that a global stand-off has been looming as we rush towards a multipolar world. She wants to speak directly to markets on what she also sees as an unfolding metacrisis for them too:
The question, therefore, is not just “what is the correct position in the market”? The question is “Will there be a market?” Remember, we have the antithesis of decentralization. Most financial exchanges have been compressed onto a single computer chip. I know from being in The White House during 911 that the exchanges all say they have a backup plan but when the power goes out, the capacity to transact will be limited for all or for some. But, if it isn’t there or it’s disrupted in a way that gives some advantages over others, policymakers will simply close the markets to avoid unfairness and uncertainty.
The good news is that this lets everybody off the hook. Market makers will take a much-needed break and gossip about how long it will take to turn the exchanges back on. The bad news is that if this happens persistently enough, the Russians and Chinese - driven by their non-truly capitalist ideologies – may kill the underlying belief system of capitalism itself, the idea that you can price credit and deals and that you can always transact. All options become worthless if they cannot be exercised. The new nuclear option is to kill the idea that the future can be discounted. This is how you slowly murder the faith and belief in the concept of credit. The internet ate everybody’s lunch and gave us Uber Eats. In this scenario, there is no more Uber Eats. No more SatNav, GPS, or online anything. No more internet. No more metaverse. No more market.
This isn’t a forecast, but it’s a warning from someone with far greater national security knowledge than almost anyone reading this Daily (or writing it!) And here is one more example: Bloomberg reports ‘China Is Said to Plan State-Backed Platform to Buy Iron Ore’. Specifically, “Beijing wants all purchases of the steelmaking material conducted through a single state-backed platform that’s under preparation, according to people familiar with the matter. At the moment, Chinese businesses including steel mills can negotiate spot purchases independently. The plan aims to stabilize the steelmaking ingredient over the long-term, and is part of a broader focus on boosting China’s influence over the price of commodities, the people said. Iron ore’s spot market is relatively small, but prices there determine how much steel mills pay in long-term contracts.” And do you think this stops with iron ore? Why, exactly? “Because iron ore”?
As Dr. Malmgren asks, “will there be a market” in a world of “non-truly capitalist ideologies”? Yes -but it won’t be like the free, global, Western-centric, dollar-denominated, English-language legal contracts we take for granted today. At least not without serious pushback from said architecture, even at the cost of splintering it.
What the reality we will emerge into when this is all finally over will look like remains to be seen: but it’s likely to be very, very Dr. Strange and Dr. Strangelove while we get there.