RUSSIA-UKRAINE CONFLICT: WHERE THINGS STAND

MILITARY PICTURE

• Russia continued assaults on Ukraine’s Kharkiv and Kherson overnight; reports suggested the southern city of Kherson is now under full Russian control.


• Russian forces are said to be around 20 miles northwest of Kyiv, with a 40-mile convoy bearing down on the capital city, according to Sky News.


• Ukrainian Defence Intelligence said there are roughly 300 Belarusian tanks near the Belarusian-Ukrainian border and that Russia is preparing a deliberate provocation to justify the entry of Belarusian troops into the conflict.


• The Ukrainian army also said that Russian airborne troops landed in Kharkiv, according to AFP.


• The Black Sea has emerged as a major frontline and potential flashpoint between Russia and the West.


• Russia's air force still does not enjoy total superiority in the Ukrainian skies, according to Ukraine.


• The US has ruled out enforcing a “no-fly zone” on Russian aircraft over Ukraine after the Ukranian President urged the West to consider such measures.

UKRAINIAN ASCENSION

• Participants should also remain cognizant of Ukraine's ascension to Western bodies such as the EU or NATO via an accelerated process. This would give the West jurisdiction in Ukraine.


• The European Parliament has accepted Ukraine's application to join the European Union. A special admission procedure has begun, according to NEXTA


• European Parliament recommends giving Ukraine EU candidate status and membership prospects to be discussed in Paris on March 10th/11th.


• The move is unlikely to sit well with Russian President Putin who has continuously warned against Western influence. This could turn out to be a key factor behind an escalation.

NUCLEAR DETERRENCE:

• Russian President Putin has decided to put Russia's nuclear deterrence forces on high alert, according to Interfax.


• Officials have dismissed this as a distraction, according to Sky News; “British and US officials have played down the significance of the announcement as it is unclear how Putin's order changes Russia's nuclear posture.”


• Nonetheless, the threat of nuclear action cannot be completely discounted.

RUSSIAN COUNTER-SANCTIONS:

• Russian counter-sanctions are yet to be announced.


• Russian Senate President Matviyenko confirmed Russia has "reciprocal sanctions" ready to respond to the EU and US, suggesting they are well aware of the EU’s weak spots.


• More recently, the Kremlin has suggested it would not “shoot itself in the foot” when it comes to its sanction response.


• For context, Russia holds over 30% market share in Europe for both natural gas and oil, alongside a large market share of total exports in nickel (~49%), palladium (~42%), aluminium (~26%), and platinum (~13%), whilst it also exports steel (~7%) and copper (~4%).


• China estimates that Russia holds around USD 1.1tln of liquid wealth, with a large share in USD even after selling all its US Treasury holdings in 2018, according to SGH Macro Advisors

WESTERN SANCTIONS

ECONOMY

• US President Biden added that they are choking off Russia's access to technology that will sap its economic strength and weaken its military for years to come.


• The EU, US, UK and Canada are cutting a range of Russian banks out of the SWIFT international payments system.


• The EU, US, UK and Canada have agreed to prevent the Russian central bank from deploying its international reserves.


• The EU has banned all transactions with the institution. The US has added the Russian finance ministry and national wealth fund to its banned list.


• The EU Council voted to ban the broadcasting of Sputnik and RT in the EU.


• The US has placed sanctions on Russia’s top 10 financial institutions (accounting for around 80% of the Russian banking sector).


• Germany halted certification of the Nord Stream 2 pipeline.


• Several companies have unwound or halted operations in Russia, including Apple (AAPL)/Meta (FB)/Twitter (TWTR)/ Google (GOOGL), Nike (NKE)/Adidas (ADS GY), American Express (AXP)/Mastercard (M)/Visa (V), Boeing (BA), Shell (SHEL LN)/BP (BP/LN), alongside several more.

TRAVEL

• Russian aircraft and private jets are banned from UK and EU airspace, with the US set to join.


• Several airlines have said they will avoid Russian/Ukrainian airspace.


• The UK ordered its ports to block all Russian-linked ships.

INDIVIDUALS

• Foreign assets of Russian President Putin, Foreign Minister Lavrov, and Defence Minister Shoigu have been frozen in the EU, US and UK.


• US DoJ is assembling a task force to go after the crimes of Russian oligarchs and the US is joining European allies to find and seize assets.


• The EU has imposed sanctions on all members (351) of Russia’s Duma (parliament). UK, US, Australia, Japan and New Zealand are taking a targeted approach.


• Over a dozen billionaire oligarchs with ties to President Putin will see their assets frozen: including officials from Rosneft, Promsvyazbank, United Aircraft, VTB Bank.


• UK has imposed a GBP 50k limit on bank accounts held by Russian nationals in Britain; the EU imposed a limit of EUR 100k in EU banks.

CENTRAL BANKS

• In a bid to stem effects from Western sanctions, the CBR hiked rates to 20% from 9.5%, and introduced capital controls. The Bank left the door open for more monetary tightening if necessary.


• Western rhetoric has been less hawkish since the invasion of Ukraine, namely in Europe. In terms of the three major central banks, Nomura argues that due to the lower trade link, the Fed would be least affected by Russia/Ukraine in policy discussions. The ECB will likely be the most cautious, followed by the BoE.


• Aggressive hawkish money market bets have also unwound since the escalation. Below is a list of recent commentary since the Russian invasion on Feb 24th.

ECB (Meeting on March 10th)

• ECB President Lagarde said the ECB is closely monitoring the evolving situation regarding Russia and Ukraine


• ECB's Rehn said ECB should not exit stimulus before assessing the impact of the Ukraine war.


• ECB's Centeno said stagflation cannot be ruled out, the Russia-Ukraine conflict will delay second-round effects within the EZ.


• ECB's Lane said there would be a significant increase to the 2022 inflation forecast amid the Ukraine crisis but hinted at inflation below target at the end of its horizon according to Reuters sources.


• ECB's Kazaks said that energy and food prices will likely be higher amid the Russia-Ukraine conflict.

BOE (Meeting on March 17th)

• BoE's Saunders said it is not clear if recent developments in Ukraine have any effect on inflation 2-3 years out. Saunders said a vote for a 50bps hike in February does not necessarily imply that he believes that the level of rates one or two years ahead will be higher than the yield curve used for the February MPR.


• BoE's Mann said oil prices today are accentuated by financial market bets and may not be what is paid; need to prevent high energy prices from becoming embedded in inflation expectations.

FED (Meeting on March 16th)

• Fed's Waller (voter) said it is too soon to judge how Ukraine conflict will impact world or US economy and need concerted action to rein in inflation, rates should be raised by 100bps by mid-year


• Fed's Bullard (2022 voter, hawk) said direct links of Ukraine-Russia to the US economy is minimal; reiterates he wants to see 100bps of hikes by July 1st and wants to start the balance sheet reduction by July 1st


• Fed's Mester (2022, 2024 voter) said the Ukraine situation adds upside risk to inflation but downside risk on growth forecast. Mester reiterated she does not think a 50bp move in March is compelling


• Fed's Bostic (2024 voter) says if data persist at elevated levels he is going to have a look at a 50bps move for March; every meeting is live. Bostic added inflation is elevated well above Fed's 2% baseline and US 'hard pressed' to get inflation below 3% for all of 2022

Analysis details (09:45)

BACKGROUND IN BRIEF:

• Ukraine became independent in 1991 when the Soviet Union (USSR) dissolved with the end of the Cold War. Ukraine has been tilting to the West since, as it sought to distance itself from Russia, with a NATO (North Atlantic Treaty Organization) membership also floated.


• Russian President Putin is seeking to regain influence over the former Soviet state. Ukraine insists that Russia cannot prevent it from building closer ties with NATO if it chooses. The US and some other NATO players have shown Ukraine support whilst simultaneously attempting to deter Russia. Moscow blames NATO for undermining the region’s security.


• In 2014, Russia illegally annexed Crimea – an area presented as a gift to Ukraine under the USSR. Meanwhile, the Donbas region (the eastern Ukrainian provinces of Donetsk and Luhansk – near the Russian border) has seen conflict since 2014 after Russia sent troops to support Russian separatists. An agreement was made in 2015 which helped ease the major conflicts but failed to politically unite the sides – with small flare-ups continuing since.


• The Donbas region is seen as a proxy for the tensions. Early last year there have been instances where the 2015 ceasefire was broken. The EU and US have imposed a string of restrictive measures in response to Russia's actions in Crimea and eastern Ukraine.

DONETSK AND LUHANSK INDEPENDENCE

• Russian President Putin recognised the independence of two separatist-held regions of Donetsk and Luhansk (part of Donbas) in eastern Ukraine.


• Russian President Putin ordered Russian troops to Ukraine after recognising breakaway regions; troops were sent as peacekeepers.


• The recognition of the republics' independence paved the way to give the Russian-backed separatists military support and provides a pretext for Russian troops to cross the border.


• Russian President Putin said Ukraine is an integral part of Russian history and they are ready to show Ukraine what genuine de-communisation looks like, while he accused Ukraine of stealing Russian gas in the past and using energy to blackmail Russia.


• Under the new agreement with separatist leaders, Russia has the right to build and establish military bases in eastern Ukrainian regions.


• The West condemned President Putin's move but some official stopped short of calling it a full invasion.

FUTURE RISKS: 

• The Russia-Ukraine developments will be closely watched as a proxy for the China-Taiwan tensions. China will likely calibrate any move depending on the fallout from the Russian situation.

02 Mar 2022 - 09:45- EnergyGeopolitical- Source: Newsquawk