Daily Comment (March 11, 2022)
by Patrick Fearon-Hernandez, CFA, and Thomas Wash
[Posted: 9:30 AM EST] | PDF
Good morning! Today’s report begins with the latest developments in the Ukraine war, including an update on the economic fallout from the Russian invasion. We next discuss several news stories not related to the Ukraine crisis and conclude with our pandemic coverage.
The war in Ukraine continues unabated, but talks between Russia and Ukraine are progressing. Discussions between Russian and Ukrainian officials in Turkey did not end with a solution, but Russian President Vladimir Putin stated that there has been a positive shift in talks. On Wednesday, Ukraine President Volodymyr Zelensky stated he was open to making his country a neutral state. However, Russian officials appear to want additional concessions. In Europe, EU leaders rebuffed calls from Ukraine for fast-track membership but did pledge closer ties with the country. The move comes as Ukraine seeks reassurances from the West to have support after the Ukraine crisis ends. Although the EU sympathizes with Ukraine, it will likely struggle to find universal support for its admission, especially with Hungary, a Russian ally, as a member. In the U.S., the White House warned Russia could use chemical or biological weapons on Ukraine, perhaps as justification to use chemical weapons itself. On Thursday, a Russian official, without evidence, stated the U.S. funded research into bat coronaviruses. The U.S. quickly dismissed the allegation, but the narrative has garnered traction in Chinese and Russian media outlets. That being said, the accusation may explain why Russian officials have targeted nuclear facilities in its attacks. We suspect the Russians may be using these areas to establish the narrative that Ukraine was developing nuclear weapons, making the invasion necessary. As the war wages on, the likelihood of escalation remains elevated, and we continue to believe that as bad as things are now in Ukraine, there is considerably more room for things to get worse. That said, we are hopeful that the talks will continue to move in a positive direction.
- Despite reassurances from Beijing that it will help Moscow cope with U.S. sanctions, Chinese firms have been reluctant to work with Russian firms. On Thursday, Russian officials stated the country’s airlines have struggled to secure parts from China. The lack of cooperation may be related to firms fearing the violation of trade sanctions. Last week, the Asian Infrastructure Investment Bank, a Chinese entity, suspended lending to Russia and Belarus for a similar reason. Another reason for Chinese firms’ reluctance to sell to Russian firms could be related to the ruble’s depreciation against the yuan. The ruble is sitting near a record low against the yuan, and Chinese firms may prefer to hold off from doing business with Russia until its currency stabilizes at a normal level.
- President Biden has called on the U.S. to officially end trade relations with Russia. The announcement could lead to Russia losing its most favored nation trade status, opening up the country to tariffs. However, a U.S. President cannot unilaterally remove a country’s trade status as the powers lay with Congress. Nonetheless, if Russia loses its status, it will join the club of pariah countries that include Cuba and North Korea. Other G-7 countries are also considering revoking Russia’s most favored nation trade status.
- Japan has joined the U.S. and EU in its ban of technology exports to Russia. The ban includes semiconductors; Japan holds a 50% market share in many of the categories of materials needed to produce the good.
- In light of sanctions, Russia has still honored its commitment to supply Europe with energy. Its ability to send oil could reflect a willingness to maintain trade ties with the EU. Moscow has also stated it is prepared to repay creditors on the condition that their assets are unfrozen. Since the sanctions have been in place, Russian firms have struggled to find the dollars needed to repay creditors. As a result, there is a growing concern that some of these companies may default.
- Moscow appears poised to start reappropriating the assets of companies that are leaving Russia. German automaker Mercedes-Benz has warned that over $2.2 billion of its assets are at risk if Moscow follows through on its threat.
- As gasoline prices start to rise, there are growing calls to suspend gas taxes as a way to bring down pump prices. Six Democratic governors have recently come out in support of the measure. Michigan and Florida have already created legislation to suspend taxes. The move comes as politicians are concerned with bringing down gasoline prices before mid-term elections.
- Treasury Secretary Janet Yellen warned high inflation would likely persist due to the war in Ukraine. Food and energy prices are probably the most vulnerable to the war as Russia is one of the top exporters of oil and wheat.
- The Iran nuclear deal has been put on hold. Last-minute demands by Russian officials have caused Iran to rethink whether it is ready to rejoin the agreement. One of the major sticking points is a guarantee that a new U.S. president cannot overturn the agreement in the future. Unless the U.S. can pass the treaty through Congress, this is a pretty tall ask, as politicians have already expressed uneasiness with the Biden administration’s willingness to court authoritarians to replace Russian oil.
COVID-19: The number of reported cases is 453,009,597, with 6,028,678 fatalities. In the U.S., there are 79,454,930 confirmed cases with 965,466 deaths. For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics. The CDC reports that 694,725,135 doses of the vaccine have been distributed, with 556,252,766 doses injected. The number receiving at least one dose is 254,404,423, while the number of second doses is 216,449,810, and the number of the third dose, granting the highest level of immunity, is 95,632,936. The FT has a page on global vaccine distribution.
- The Transportation Security Administration is extending the mask mandates on airplanes until April 18. The rules show that even as restrictions are becoming more lax, there are still concerns about a new outbreak.