- The current Ukrainian crisis could lead to a black swan event where Russia breaks from the West, damaging the global economy.
- The black swan trigger of Russia invading Ukraine is unlikely, however, because there are other ways for Putin to win.
- Putin could wait out the Ukrainian government as winter approaches or the rebels could win.
- Ultimately the crisis has not reached the point of no return, and things can revert back.
Black swans don't occur very often. When they do occur, they change everything.
The last major black swan event was in 2008 when Lehman Brothers declared bankruptcy. That event nearly took down the global financial system and sent the S&P 500 racing below 1,000. Many venerable companies such as GM (NYSE:GM) had to declare bankruptcy as a consequence and the U.S. government had to bail out whole swaths of American industry.
So far the market has been very lucky in that there hasn't been any meaningful crashes since the financial crisis (except for possibly the Flash crash and European Union crisis). But just because black swans haven't occurred doesn't mean they won't occur in the future.
Out of the current black swan scenarios of Russia breaking from the West, the Chinese economy crashing, and Japan hyper-inflating, Russia breaking from the West due to the Ukrainian crisis stands out.
With the situation escalating, just how likely is the Russian black swan?
Other ways for Putin to win without setting off the black swan
Personally, I don't think that the current Ukrainian crisis will lead to a black swan event. Many experts say the only way for a Russian black swan event to be triggered is if Putin invades Ukraine and Putin doesn't need to invade Ukraine to win.
For Putin, there are at least two other ways to achieve his objective:
First, he could support the Ukrainian rebels, who would ideally take over and act as Russian proxies. Putin has done exactly this, and although the current Ukrainian rebels are losing, it is not end game yet and the tide can turn.
Second, as winter approaches, Ukraine will need Russia's natural gas, which Russia is no longer supplying. As the temperature gets colder and more people go without heat, Russia will have more leverage over Ukraine. Russia could play the waiting game and wait for the Ukrainian government to possibly fall on its own.
Under these two plausible scenarios, the Russian black swan could be avoided.
That being said, nationalism is a strong force, and unexpected things do happen. The Ukrainian government could hold together after winter and the Ukrainian rebels could lose.
Russia could indeed invade Ukraine and this action could lead to equally destructive financial actions from the West, and possibly force Russia to leave the international trade system all at once, causing significant systemic consequences and sending energy prices higher.
Given that the black swan of Russia leaving the international trade system is systematically dangerous, there is vested interest on both sides to find a peaceful resolution.
While the Ukrainian crisis has gone beyond saber rattling, it has not gone past the point of no return. There are multiple ways for Putin to win without escalating the conflict. There are also multiple ways in which both Russia and the West can find some middle ground.
The chance of a Russian black swan causing the S&P 500 to take a cliff dive is still unlikely.