Putin May Be Done

By Dr. Charles Lieberman, Co-Founder & Chief Investment Officer

We will update our thinking of the implications of the Russian invasion of Ukraine on a daily basis for the near term. Developments are unfolding fast and furious. Our latest thoughts are located below.

Putin has succeeded in waking up the sleeping German giant. Germany has changed its entire foreign policy direction by allowing military equipment to be delivered to Ukraine, agreeing to boot Russia out of Swift, and by increasing its own military budget. With Ukraine providing vastly greater military resistance than expected, the outlook has changed dramatically with a few days.

First and foremost, one way or another, Russia has already lost. Even if they commit their entire army and take over Ukraine, it is now clear they will face massive resistance from the population that will be unsustainably costly. Russia cannot win militarily any longer. Second, global sanctions are growing by the day, which will severely damage the Russian economy. The West is imposing such a high cost, Russia will be unable to sustain a military campaign for very long. This may already be clear even to Putin, which may account for his willingness to open negotiations with Zelensky. Third, Putin’s reign could possibly end soon, which will serve as a lesson to autocrats everywhere. There is sufficient opposition to this war within Russia, he may not even be able to last out his current term. (Resignation may not be a viable option, since where could he go where he would avoid trial as a war criminal?) Fourth, if Putin is ousted, will the next leader want to improve relations with the West? If that happens, it would be enormously positive for global peace (but we are quite premature in such musings). Fifth, this war serves as a significant warning to China not to use force to take over Taiwan. Sixth, with the West more united now than in many years, will Western Europe now press Iran far more firmly to give up its nuclear weapons program? Will Biden now appreciate the opportunity he has? There are surely more international political consequences and ripples that will flow from the surprising ability of Ukraine to stand up to Russian aggression. No doubt, this invasion of Ukraine is likely to prove a watershed event for global politics, but it can still play out in many ways.

In light of the daily upward trend in sanctions on Russia for invading Ukraine, I’ve reviewed the ability of Western Europe to withstand a cutoff of Russian natural gas to Western Europe, which could happen for a variety of reasons, either Europe refuses to buy or Russia refuses to sell, or Europe can’t or won’t pay for the gas. While the U.S. is already a major global exporter of LNG and increased supplies could be forthcoming from the Middle East and Australia, as well as from the U.S., existing infrastructure would be unable to bring enough gas to Europe to make up for the shortfall if there’s a full cutoff of supply from Russia. There is simply not enough liquefaction plant in countries that can supply more gas, not enough LNG ships to bring it to Europe, and not enough regasification facilities to make the gas available within Europe. If the flow of gas from Russia is halted, Europe will surely have to move swiftly to ration natural gas.

Some steps can be taken to mitigate the adverse effects. The Dutch could renew activity in the Groningen gas fields, which are under moratorium due to earthquake concerns. The Germans might be able to restart the three nuclear power plants they shut down at the end of 2021. All of Europe will surely be burning more coal. And gas imports will surge to the extent the infrastructure can handle it. Still, some steel plants might have to close, for example, and the loss in steel output could be made up by importing more steel. Even so, natural gas prices will likely remain elevated for some time, benefitting producers, processors, and transporters around the globe. European GDP will be hurt, as some plants close in response to reduced gas availability, but a recession remains unlikely at this point. People adapt during emergencies and this will be one of those episodes.

Grain shipments out of Ukraine have already been severely curtailed, if not halted. Global inventories will be tapped to make up for any shortfall, although global stocks are on the light side. Consumers will soon see some small increases in prices for products that use grains, such as breads, cereal and pasta.

Disruptions in the supply of gas to Europe and grains to international markets could become moot overnight, if Russia recognizes its perilous plight and finds a way to retreat. The prospect of negotiations could be used by Russia to find an excuse to pull out of Ukraine, even if Putin’s reputation cannot ever recover.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.