Some notes on the Russian coup that wasn’t

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Instead of offering our own perspective on how events in Russia over the weekend affect the financial universe, we figured we’d group together some of the expert analysis that’s filling our inboxes this morning.

First up, for the geopolitical take, here’s a taster of today’s note from the always-excellent Fordham Global Insight:

After much triangulation and deliberation, I think the most important conclusion for global business leaders is this: regardless of what precisely transpired on the road to Rostov, the Russian state, and Putin himself, have been exposed as being weaker than many realised, and the Russian war effort in Ukraine is going more poorly than outsiders appreciated. This is a classic example of short-term risks increasing, even as the potential for resolution may be drawing nearer—call it the paradox of change.

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In the short term, we should expect Russia’s war effort in Ukraine to continue more or less as it was; after all, the troop positions that had been dug in over recent months to prepare for the Ukrainian offensive remain in place. Here I diverge from other observers who expect the confiict to continue more or less BAU; I suspect that the failed mutiny will be another blow to troop morale, across both regular Russian troops and private forces, and that willingness to take orders up the chain of command may start to break down. As often happens during prolonged conflicts, there may be more “informal” agreements, deserters etc.

All of this is an opportunity for Ukraine, and this is not lost upon Kyiv, which has been making slow progress with the much-anticipated spring offensive to date. Expect calls for more weapons and support, with heightened urgency that recent events present an opportunity to take advantage as Russia falters.

As for the impact upon financial markets and the business environment, although the failed mutiny commanded headlines, I’m not expecting a major dislocation from markets Monday. Few investors remain exposed to Russia, and there is no reason to expect disruption to Russian energy supplies in the short-term.

The biggest risk is the unknowable question of whether Putin doubles down on the confiict, escalates with unconventional weapons (which I have long flagged as a material risk), or finds new enthusiasm for cutting his losses and reaching a settlement. After all, if he could negotiate an agreement with an armed “traitor” who was marching on the capital, what’s to stop him from inventing a rationale for withdrawal from Ukraine and claiming victory? Perhaps less than the conventional wisdom would have it: in the dictators’ world, he alone sets the terms and creates the conditions for reality.

Believe it or not, I think there is a chance that this episode may give rise to some grounds for optimism for the Kremlin to seek a resolution. It won’t involve compromise, nor territorial surrender, making it unlikely to be acceptable to Ukraine, but it may for the first time signal its willingness to consider diplomacy. The upcoming NATO summit in Vilnius in 2 weeks’ time will be lively.

Wars end when one side realises it is losing and the price of incurring further losses becomes unacceptably high. That scenario has become a bit more likely than it was a week ago. Yale Historian Timothy Snyder puts it slightly differently, but in a similar spirit:

“All I can say about Russia is what I have been saying for a year: wars end when the domestic political system is under pressure.”

We have certainly reached that point in Russia.

“There are two scenarios: a status quo scenario and a scenario where the war is moving closer to a resolution,” says JPMorgan’s CEEMEA strategy desk. If people believe the latter scenario then stocks in Czech Republic, Hungary and Poland (collectively known as CE3) were likely to react positively:

An end to the war would likely trigger a big EU-funded rebuilding program where we assume a lot of business will go through Poland. Moreover Hungary’s OTP is more likely to realise more value more quickly from its Ukrainian assets. Other European sectors – building materials, engineering & construction, etc – that would benefit from a big rebuilding programme could also rally. Last week at a donor conference in London, the EU Commissioner for Trade and Economy told Bloomberg that the EU would back a €50bn financing package for Ukraine (link). A status quo scenario leaves these valuations undisturbed.

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Overall, global tail risks are higher now. The status quo – the last 12 months of the Russia-Ukraine war did not significantly move global markets with the frontlines mostly stalemated and the political goals of each side unchanged – was priced into markets on Friday. If investors believe this weekend’s events have increased political uncertainty in Russia, one of the world’s biggest energy producers, then energy prices could rise. Oil & gas production have not changed in the last 48 hours, but investors may worry about what comes next. If investors believe that this weekend’s events have increased political uncertainty in Russia, the world’s largest nuclear power, global risk aversion could rise – and the VIX is right around its YTD post-COVID low at 13.44 on Friday’s close. However, if investors believe the status quo will fast reassert itself then energy prices and global risk aversion will normalise back to Friday’s levels.

For another take on the oil markets, RBC Capital Markets’ Helima Croft says “the risk of further civil unrest in Russia now must be factored into our oil analysis for the back half of the year.” here’s a taster:

It is our understanding that the White House was actively engaged yesterday in reaching out to key domestic and foreign producers about contingency planning to keep the market well supplied if the crisis impacted Russian output. A significant concern was that President Putin would declare martial law, preventing workers from showing up to major loading ports and energy facilities, potentially halting millions of barrels of exports. Key administration officials, most notably Amos Hochstein, had served in the Obama administration when unrest in Libya closed down the Sirte Basin export facilities, leading to a spike in crude prices during the Arab Spring. The experience of being caught off guard by the Libyan export disruption seemingly guided the preemptive outreach and planning on Saturday. There was a concurrent concern that critical pipelines could either be directly targeted or inadvertently damaged if the insurrection turned into a full-scale war. 

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[S]everal market commentators on Saturday were speculating that the end of the Putin regime could mean the roll back of Russian energy sanctions and a return of Russian exports to Europe. We continue to contend that sanctions will remain in place while Putin remains in power. Nonetheless, a figure like Prigozhin would not be a welcomed replacement, given the human rights violations and criminality associated with Wagner Group activities. Indeed, the idea of a Prigozhin figure with nuclear weapons would likely be viewed as a terrifying prospect by many of Ukraine’s key Western backers.

Over at Goldman Sachs, Daan Struyven and team have a Q&A that includes some useful stuff around the possibility of an oil market supply shock:

History suggests that the probability of a significant and persistent decline in Russia oil supply is closely related to the probability of a major domestic civil conflict (e.g. involving other domestic opponents to the war) or a major military conflict (e.g. with Ukraine), leading to the destruction of oil infrastructure. The fact that Putin invoked what happened during the Russian Revolution of 1917 in his address yesterday suggests that the perceived probability of significant domestic upheaval at some point has likely risen.

Russia exports its seaborne oil from three main hubs (2023 YTD volumes, mb/d): the Baltic Sea (3.15), the Black Sea (1.65, excluding the Caspian Pipeline Consortium), and the East (1.3). Russia’s main oil producing regions are concentrated in Central/Eastern Russia.

There is no disruption to oil flows at present, and we do not expect any domestic disruption to oil flows.

Since the rebellion was initiated around Rostov-on-Don in the South, by the Sea of Azov, which filters into the Black Sea, oil infrastructure in the region may face a relatively higher risk of disruption or blockade. The two main Black Sea export ports of Novorossiysk and Tuapse are 200-250 miles to the South of Rostov, and are fed by pipelines that are closer to Rostov. We will continue to monitor Russian production via our Russian oil production nowcast.

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Markets may price a moderately higher probability that domestic volatility in Russia [but o]il markets are often focused on spot fundamentals, which have not changed, and three other effects may provide an offset.

First, markets may discount the increased risk of Russia supply disruptions because its OPEC+ partners/Saudi Arabia might dial down some of the voluntary cuts in response to any large supply drop. Second, increased uncertainty may weigh on oil demand in Russia (and possibly also outside of Russia), and on sentiment in asset markets. Three, the increased uncertainty about the political situation in Russia may increase the perceived probability of a tail scenario, where escalating tensions between Russia and Saudi Arabia lead to sharply higher core OPEC output.

What Russian exposure that remains among Europe corporates is mostly among the banks. JPMorgan has a handy guide for where to look:

Within European banks, the most exposed to Russia is RBI [Raiffeisen Bank International] with ~230bp CET1 sensitivity to a hypothetical full write off of Russian exposures. OTP and UCG would also be sensitive with ~60-70bp CET1 worst case impact, whilst other banks with Russian exposures would have lower impact (sub 25bp).

In terms of spillover effects, some regions could see indirect impacts, in particular CEE (Erste, KBC, UCG, SG and OTP mainly) and Baltics (Swedbank, SEB). With respect to commodity trading related revenue exposure, amongst Global IBs, GS should benefit the most from any increase in volatility, followed by MS (assuming no material short inventory risk in books).

Any final thoughts? Here’s JPMorgan again:

Anecdotally, Dubai real estate has been a beneficiary of the Russia-Ukraine war. We think that trend could accelerate should the war approach a conclusion with the Emaar complex as the easiest way to trade the theme, in our view. Turkish real estate could rally as well. However, a status quo scenario leaves the Dubai real estate market rallying strongly anyway.

Downside risks to agriculture/fertiliser prices: a quicker resolution to the war would speed the normalization of Ukrainian production and Black Sea exports. The status quo scenario would leave that situation unchanged.

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We are drawing few conclusions from this weekends events, but we expect to work more weekends before the year end. On the surface, Wagner troops being brought under the control of the Ministry of Defense and Prigozhin moving to Belarus could be seen as nonevents and no reason to expect a change in the status quo. However, the events could also be seen as the biggest increase in political uncertainty in Russia since Putin was named Prime Minister by President Yeltsin in 1999.

If you’ve not yet added the “Russian politics” alert to your MyFT profile, it’s probably a good idea to do so now.