Last weekend changed everything Last weekend changed everything http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\flag-Kyiv-small.jpg March 10 2022 March 2 2022

Last weekend changed everything

Germany's vow to ramp up military spending is a long-term game-changer

Published March 2 2022
My Content

With so many innocent people dying and the likelihood of worse ahead, it seems almost unseemly to speculate what the Russia-Ukraine conflict may ultimately mean for the markets. But it’s fair to say Russian President Vladmir Putin badly miscalculated on three fronts (more below), leaving him backed in a corner with, from a market risk perspective, two options—retreat and cut his losses, or double down and level cities. Risk markets almost certainly would welcome the former (but that seems unlikely given Putin’s ego) and further sell off on the latter. And Putin? His days may be numbered either way. It’s difficult seeing the Russian military standing by a man who imposed such carnage on the interrelated citizens of two founding countries of the former Soviet Union with little to show for it. There is a third option, a protracted occupation. But that could prove even more costly and unpopular. Remember that a disastrous, decade-long war in Afghanistan only served to accelerate the Soviet Union’s breakup.

So, what were Putin’s three miscalculations:

  1. He thought the war would end quickly, initially with small unit, tactical efforts (and massive, heavily armed troops waiting in the wings) overwhelming Ukraine. Instead, having developed strong economic and cultural ties with the West over the past few decades, and rallied by neophyte politician Volodymyr Zelenskyy—a former actor, comedian and satirist who played the role of Ukraine’s president in his last TV series—Ukrainians have put up stiff resistance, making a quick in-and-out impossible. “Give ’em Zel” has become a global rallying cry for Ukraine and its resistance.
  2. He thought with China’s potential designs on Taiwan, President Xi would quietly acquiesce to Russia’s excursion, Britain would remain distracted over partying Prime Minister Johnson’s fate and a highly divided America would continue to fight among itself. All this would serve to distract much of the West from Russia’s incursion. Instead, President Xi said China respects the sovereignty of all nations, Britain’s attention went full bore on the conflict and the United States … well, it’s far from Kumbaya but many conservative critics of President Biden have denounced Putin and called for even tougher actions against Russia.
  3. He thought Germany and the European Union (EU), Russia’s largest trading partner that gets 40% of its natural gas from Russia, might protest loudly but essentially put up with his move on a non-NATO country. It looked as if that would be the case after the initial sanctions, which did little to disrupt trade between the two sides. But over the weekend, the EU and Germany grew a spine, moving to isolate Russian banks and the country’s global financial payments system and, in the case of Germany, agreeing to send weapons to Ukraine and hike defense spending above 2% of its GDP—heretofore unheard in a country that has long sought to distance itself from its militaristic Nazi past. Germany and other European countries also pledged to ramp up spending on liquified natural gas terminals and take other steps to slash their ties, and dependence, on Russia. That will take years, of course, but the die has been cast.

It’s too soon to say how this conflict plays out. The images from Ukraine have been simultaneously heartbreaking and stirring. For investors, expect more volatility and uncertainty in the days and weeks ahead. But longer term, Putin and his miscalculations have set in motion forces that could isolate Russia from much of the global economy and strengthen an EU partnership that arguably had been fraying. Of course, new Russian leadership could come in and reopen doors that Putin, by his actions, are closing. But this past weekend’s actions by the EU and Germany have forever changed the way the EU will operate, and the rest of the pro-democracy world should be stronger for it.

Tags Ukraine Crisis . Markets/Economy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Federated Investment Management Company