Tensions along the Russia / Ukraine border ratcheted up as US Secretary of State warned that “a single additional Russian force entering Ukraine would trigger a US response” and ordered US embassy personnel to leave the country. UK Foreign Office released information about a Russian ploy to subvert Ukraine domestic politics and estimates that there are now around 1,00,000 Russian troops amassed at the border.
The geopolitical tension if left unchecked, could be the black swan for 2022 asset prices – it’s becoming clear that what Russia does next may well be the single biggest factor for energy prices over the coming year. Already, natural gas prices have ballooned to around 132% y/y 3 and oil recently hit a 7 year high of USD 85.78 /bbl and it’s arguable that the trajectory for energy prices could be the most important near-term determinant for global macro growth and inflation conditions.
It’s still unclear what Russia’s real motivations are. We can look for 2 motives: (1) on the one hand, invasion could be imminent. Russian President Vladimir Putin stated last July in an article titled On the Historical Unity of Russians and Ukrainians that “Russians and Ukrainians were one people – a single whole….true sovereignty of Ukraine is possible only in partnership with Russia. This may imply that Russia intends to deploy further military action into Ukraine, similar to its annexation of Crimea in 2014. (2) On the other hand, the buildup could be mere saber-rattling in order to wrestle concessions from the West such as a permanent block to NATO’s push further East or to ensure the operation of Russia’s Nord Stream 2 natural gas pipeline to Germany.
A more likely scenario - a diplomatic response is reached.
A full-scale invasion seems unlikely due to crippling financial sanctions from the US and EU, a cancellation of the Nord Stream 2 pipeline that travels through Ukraine and a possible permanent shift from the EU away from relying on Russian energy. To date, Russian gas feeds around 9% of Western Europe’s total energy consumption and Russian oil makes up around 10% of global oil production. There appears to be too much economically at stake for Russia to make this gamble.
The West Fell Into Putin’s Trap
Whatever else he ultimately decides to do, Russian President Vladimir Putin has succeeded at keeping the West's diplomats busy in recent months. It all started when he moved sizable contingents of his troops closer to different parts of Russia’s border with Ukraine. Russia has moved troops close to Ukraine before, and Moscow insists it has the right to do so on its own territory, which is true. But it’s impossible not to interpret these moves in light of the fact that Russia has already invaded Ukraine twice in the past decade—in Crimea and in the Donbass—and has remained at war there since 2014.
It is therefore not surprising that the United States and its allies in Europe have reacted loudly to Russia’s latest moves, warning Moscow that an invasion of Ukraine would cost Russia dearly in the form of sanctions. U.S. President Joe Biden has stepped in and, in highly visible bilateral meetings, warned his Russian counterpart not to invade Ukraine.
But what if this diplomatic show was exactly what Putin wanted out of his move? What if the West played into his hands by trying to deter him? What if the West actually fell into his carefully laid trap?