Daily Comment (March 31, 2022)
by Patrick Fearon-Hernandez, CFA, and Thomas Wash
[Posted: 9:30 AM EDT] | PDF
Good morning! Today, we will begin our report with the latest updates on Russia’s invasion of Ukraine. The focus of the discussion will be on possible miscalculations from both Russia and the West. Next, we will give a brief roundup of the latest U.S. economic and policy news, followed by international news, and conclude with our daily COVID-19 coverage.
On Wednesday, Russia intensified its bombing of Ukrainian cities. The renewed assault comes a day after Moscow vowed to scale back attacks as the two sides continue ceasefire talks. Following the new series of attacks near Kyiv, Ukrainian forces are also preparing for a Russian offensive from the east. That being said, peace talks are still expected to resume on Friday, and there are expectations that one-on-one negotiations between Ukrainian President Volodymyr Zelensky and Russian President Vladimir Putin could take place as soon as next week.
The increased bombardment from Russia is likely a negotiation tactic. By ratcheting up the scale of its attack, Moscow is building up leverage. As a result, we do not interpret Russia’s decision to ramp up its attack on Ukraine as a sign that talks are falling apart; in fact, it may be the contrary. If a ceasefire is agreed upon, we are not optimistic that Russia will end its pursuit of Ukraine. We suspect Russia will use the break in fighting to reevaluate its tactics and resupply its inventory to prepare for another offensive. Our suspicion has been heightened by Putin’s decision to sign an order for 135,000 conscripts for the Russian Army.
As Russia prepares for another round of discussions, the West has started to remind Moscow of its failures. Officials in the EU, the U.K., and the U.S. have all individually alluded to Putin not being given accurate information from his security advisors about the situation in Ukraine. The comments may be an attempt by the West to undermine Putin’s trust in his own intelligence, so he thinks twice about mounting another invasion. However, we are not confident that this tactic will be effective. Based on our research, we believe that the reason Putin was given bad information about the feasibility of the invasion is due to his own willful disillusionment. In other words, Putin was not receiving information challenging his view that an invasion was easy because intelligence officers knew he would never hear anything different. As Kenneth Galbraith so aptly put it, when faced with the choice of changing his mind and proving he doesn’t have to, Putin gets busy on the proof. As a result, we suspect Putin may still believe his instincts are correct and will attempt to wait out his enemies.
He may not be completely wrong. As the war in Ukraine rages on, Russian energy is becoming more of a divisive issue around the world. Reports on Wednesday suggest Europe is preparing for another energy crunch. German officials have warned households and companies to begin conserving energy as it prepares for the possibility that Russia will cut off its natural gas. In Poland, the government has announced steps to end the import of Russian oil by year’s end. These moves come as Russia tries to prop up its currency by demanding payment for natural gas in rubles instead of euros. Meanwhile, in the Indo-Pacific, Japanese Prime Minister Fumio Kishida stated that his country is not prepared to abandon its stake in the Sakhalin-2 liquefied natural gas (LNG) project in Russia. Additionally, India is currently entertaining an offer to buy Ural Crude from Russia for as low as $35 a barrel.
Although it is true that Putin was wrong about his country’s military capabilities, his view that the U.S.-led coalition of developed countries is weaker than it appears on paper may prove to be right in the long run. In light of sanctions, Russia has maintained its daily shipments of LNG since the start of the conflict with Ukraine. One report suggested that deliveries are up 10% from a year ago. As a result, we still think it is too early to assume that rivalry between the West and Russia is on the verge of ending, even if peace talks to end the Ukraine invasion are successful. Therefore, we expect market uncertainty to persist over the coming months.
U.S. Economic and policy news
- President Biden is expected to invoke the 1950 Defense Production Act to encourage the production of critical minerals needed for electric vehicles and other types of batteries. The move comes as the Biden administration looks to diversify its energy resources.
- The U.S. is taking bold steps to help push down the price of crude oil. The U.S. is considering easing a ban on talks with senior officials in the Maduro government as it looks to restart talks between the government and its political opposition. The ease in restrictions will allow Chevron (CVX, $165.48), which has four joint ventures with state-backed PDVSA, potentially to act as a mediator. Additionally, the U.S. is considering releasing a million barrels a day from reserves.
China and the EU are scheduled to hold a video summit on Friday. The EU is expected to tell China that it will face sanctions if it aids Russia in its war efforts.
COVID-19: The number of reported cases is 486,287,186, with 6,137,546 fatalities. In the U.S., there are 80,057,308 confirmed cases with 979,851 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 702,181,465 doses of the vaccine have been distributed, with 560,419,082 doses injected. The number receiving at least one dose is 255,428,475, while the number of second doses is 217,556,439, and the number of the third dose, granting the highest level of immunity, is 97,495,673. The FT has a page on global vaccine distribution.
- The Center for Disease Control and Prevention plans to end the use of Title 42 in May. The order was implemented to control the flow of immigrants entering the country.
- There are concerns that there will not be enough supply of the second booster shot.
- Outbreaks of COVID in Shanghai have forced Tesla (TSLA, $1,093.99) to suspend production by at least a day. The move comes as the city faces a phased lockdown due to a rise in COVID-19 cases.