Put out, or Putin?

  • The situation in Russia/Ukraine/Nato/Western Europe is now the hot topic (no pun intended) for financial markets.
  • In a bizarre rant that was almost Hitleresk in its delivery, Putin recognized the 2 breakaway regions in Ukraine as independent states, arguably laying the groundwork for a full scale military invasion of the Ukraine.
  • The complexity of this geopolitical situation has ramifications in all sorts of areas, obviously including financial markets.
  • No one really wants a war, and it seems that Putin is banking on this fact. Pushing the envelope ever closer to Kiev, and watching the rest of the world’s response. However, there comes a point in any situation whereby the boundaries are stretched so far that the point of no return is breached. We may perhaps be very close to that point.
  • What began in 1917 as an ideological battle, exacerbated in 1945 with the end of WW2, and seemingly ended in 1989 with the collapse of the Soviet Union, has once again been reignited, albeit in a different guise.
  • There can be no doubt that Putin has aspirations of regaining the former influence of the old Soviet Union, and its Warsaw pact “allies”.
  • And all of the potential belligerents have nuclear arsenals. For anyone that did not live through the worst years of the cold war….Billy Joels “Leningrad” lyrics may serve as a window to that world.

I was born in '49

A cold war kid in the McCarthy times

Stop 'em at the 38th parallel

Blast those yellow reds to hell

Cold war kids were hard to kill

Under their desks in an air raid drill

Haven't they heard we won the war

What do they keep on fighting for?

  • Putin is also basing some of his actions on the fact that most of Europe relies on Russia for much of its energy supply. He clearly has a tremendous amount of leverage, and he intends to use it. As they say in the classics, Interesting times indeed.
  • So what does this all mean for the Rand?
  • In the short term any shock to the system is never good for emerging markets, so one would expect the Rand to trade cautiously. What is interesting is that the reaction so far has been fairly constrained. Perhaps a full blown invasion would change that dynamic.
  • As I have stated, our large trade surplus now acts as a natural buffer against excessive ZAR weakness.
  • But there are longer term implications for the global economy.
  • Firstly, any potential conflict means that global demand immediately declines, meaning that rate hikes take a slower trajectory.
  • Secondly, energy prices are expected to remain elevated.
  • Geographically SA is about as far away from the conflict zone as one can be…..perversely this could be good for SA yielding assets. Any flow out of Eastern Europe could eventually find a home in our local bond market. Time will tell.
  • Politically however it must be noted that our elegances have moved firmly into the Russian sphere of influence. It will be interesting to watch South Africa’s response.
  • For the immediate future it’s all “risk off”  as investors try to come to grips with what the future looks like. Does this escalate into a full blown global crisis whereby nations are pulled into the fray, or does it remain contained?
  • So many questions, so few immediate answers.