Market insights and outlook

ILL-EQUIPPED RUSSIAN TROOPS, their morale shattered, flee the front lines in Ukraine, as speculation begins about a possible truce in the war. It’s probably premature, but as we’ve been saying since late February, there’s no way Moscow can win this war.

REPORTS THIS WEEKEND HAVE BEEN AMAZING: Russians fled, some speeding on stolen bicycles, others disguised as Ukrainians. They left behind huge reserves of weapons, which will be put to good use by Ukrainian troops. The rout is so dramatic that Ukraine’s greatest concern is that its troops are far beyond supply lines.

MOSCOW IS STUNNED: Pro-war bloggers have turned their rage on Vladimir Putin, Russian military and intelligence officials, who have been caught off guard by Ukraine’s blitzkrieg. What will Putin do? That’s the only question that matters, and it seems Russia has four options:

1. Double down: Putin hears hawks wanting to escalate the war, with more missile strikes and possibly the use of tactical nukes. This is a real threat, even if the beleaguered Russian generals oppose it.

2. Seek a truce: Is there a face-saving exit ramp? Yes, the Russians could kiss
a ceasefire and a retreat to the pre-war borders, claiming their goals were
satisfied. But Volodymyr Zelensky wants more, including Crimea, and he could have the upper hand in negotiations with the humiliated Russians.

3. Ousting Putin: Over a dozen Russian generals were killed during the war, and surely there must be someone in the military hierarchy who wants to eliminate Putin. He could be targeted or there could be a mass uprising. It would electrify the West, but there is always a threat that Putin will be replaced by someone even worse.

4. Freeze the West: A highly plausible scenario is that Putin hangs on and imposes a Russian embargo on natural gas and oil shipments to Western Europe. Putin may believe this will erode Western resolve, but a major surprise in recent weeks has been the aggressive stockpiling of supplies in the West.

ALL OF THESE FOUR SCENARIOS, OR COMBINATIONS, ARE POSSIBLE: It’s a very fluid situation, with new developments every hour, but the bottom line is that Russia is losing the war, a debacle that the whole world can see. Putin will have to ask for peace; the only problem is when — next month or next year?

INVESTMENT IMPLICATIONS: If the war ends in a de facto defeat for Russia, what would that mean for markets? First and foremost, the prospects of a European recession and a US slowdown would diminish. Energy prices would drop, along with inflation fears. Central bank tightening, particularly in the United States, may end early next year.

A GLOBAL PERCEPTION that Russia has lost the war would have huge implications. Putin’s gross miscalculations would make China and India a little less likely to side with Moscow, and it would be a huge win for Joe Biden, who unified NATO countries in favor of huge arms deliveries to Zelensky.

IT IS ALWAYS POSSIBLE that Russia could retaliate viciously, but when soldiers flee on bicycles, leaving their weapons behind, there is a message: just like in 1918, poorly trained Russian troops want nothing to do with this disastrous war.

The views expressed in this blog are those of the author and do not necessarily represent the views of AGF, its subsidiaries or any of its affiliates, funds or investment strategies.

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