Russian Aggression Risks Global Recession
By Mitchell Anthony
February 14, 2022
Russia is seeking concessions from the Western world that will enable them to expand their socialistic culture onto previous members of the Soviet Alliance. Russia has not been successful in the democratic world that many members of the Soviet Union embraced after the 1991 breakup of the USSR. As a result they have returned to a more authoritative form of socialism. As such they have aggressively tried to re-annex former USSR Members including Georgia and the Crimea. Their next target is the Ukraine who has resisted and has sought refuge from NATO and the Western World. The Ukraine was promised entrance into NATO in 2014 after the takeover/annexation of Crimea by Russia. This promise has not been delivered as it seems that it would lead to an invasion of the Ukraine by Russia. There is a tug-of-war going on between Russia and the western world. Russia would like to see socialism return similar to the Cold War era that existed in the 80s. America and the West conversely want to see these former Soviet republics become stable productive economies with democracies running their governments.
Putin is a bit of a desperado willing to take tremendous risks to achieve his goals. His comments over the last few weeks even included the nuke word when he talked about defending the rights of these former socialist regimes to embrace annexation with Russia.
The West has stated they will not tolerate any aggression toward these democracies and will use extreme economic measures to punish Russia in the event they invade the Ukraine. Politicians have talked about prohibiting Russia from selling their oil and gas to the world and denying them access to the world banking system. Russia is the second largest producer of oil in the world and if their exports were shut off oil would undoubtedly be subject to a capacity problem leading to substantially higher prices that might push the world into recession. While this is possible it seems highly unlikely as this would be too painful on European countries like Germany who rely heavily upon Russian oil and could not replace it in any economical manner. In 2014 we were faced with a similar threat from Russia when it threatened to invade/annex Crimea. The West countered with threats similar to today regarding shutting off Russia’s ability to export oil and gas. Ultimately Obama folded and issued more targeted less impactful sanctions. Biden will likely do this as well if an invasion takes place.
Thus far it would appear that Putin is really just posturing for concessions but his behavior has the markets rattled as they have one more obstacle in the way of a soft landing for the US economy. Putin seems to seek a retreat by the US/NATO from entering his the Sphere of Influence and stop pushing troops and financial help on what he believes are his Russian Regions. While Russia may well invade the Ukraine in an effort to get concessions it is unlikely that the US response will include shutting off their ability to export oil. As such the risk of a recession from this geopolitical event is small.
US politicians and central bankers are also dealing with an inflationary cycle that has been difficult to break without pushing the economy into recession. Investors are also well aware of this problem and have paused their push into equities as they await better visibility on a soft landing.
We remain optimistic but again we will move our qualified accounts to a significant cash position if the environment darkens significantly. We still believe there is a soft landing on the horizon.