What's Behind 'Putin's Folly'?
Summary
- As a result of Putin’s folly, we will see energy price inflation from Russian supplies being cut off and food inflation from Ukraine’s “Breadbasket of Europe” being mired in a defensive war with Russia.
- Economic sanctions will be increased, but Russia also has tremendous leverage, due to the fact that Russia supplies natural gas to Europe and up to a million barrels of crude oil per day to the United States.
- Central banks around the world are going to increasingly hit the “pause” button on rate increases.
ffikretow/iStock via Getty Images
Russia is basically a huge, poor land with a weak economy, except for its energy resources, while Ukraine is rich in agriculture. According to the U.S. Department of Agriculture, Ukraine ranks #2 in barley exports, #3 in wheat exports, #4 in corn exports and #1 with 50% of sunflower oil exports.
Ukraine's Projected Share Of World Exports 2021-22 (@kannbwx)
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
As a result of Putin’s folly, we will see energy price inflation from Russian supplies being cut off and food inflation from Ukraine’s “Breadbasket of Europe” being mired in a defensive war with Russia.
What is motivating Putin? Is it simply the agricultural riches of Ukraine? More access to the Black Sea? (He already has that via Crimea.) Pure pride and arrogance? That’s possible. It could be the oil and natural gas fields within Ukraine and offshore in the Black Sea near Crimea. It will be interesting to see how the West responds, especially Europe, which is very dependent on energy supplies from Russia.
Obviously, economic sanctions will be increased, but Russia also has tremendous leverage, due to the fact that Russia supplies natural gas to Europe and up to a million barrels of crude oil per day to the United States. (Here is a link to a chart from the Energy Information Administration on U.S. crude oil imports from Russia. As you can see, the U.S. imported a record monthly total of 26,171,000 barrels of crude oil and other petroleum products from Russia in May 2021 - almost one million barrels per day.) This puts the Biden Administration in a conundrum, since $5 per gallon gasoline is already common in California.
I should add that my Russian friends that frequently travel to Ukraine were shocked by Russia’s invasion. They are questioning what is wrong with Putin. His forces will become increasingly isolated as Ukraine’s army and civilians resist Russian forces. If Ukraine can keep Kiev from falling, it will be inspirational to the entire world, as Ukrainian President Volodymyr Zelensky is rallying his citizens to fight the invaders.
To Germany’s credit, they halted the approval of the Nord Stream 2 pipeline last Tuesday. That marked the first potentially serious economic sanction against Russia after German Chancellor Olaf Scholz bravely said, “We must re-evaluate this situation” due to Putin’s “grave breach of international law.”
Ironically, Russia’s seizure of Crimea in 2014 did not rattle the stock market much, so I expect the market to recover once Ukraine mounts a long-term resistance to any Russian occupation. (This may depend on whether Russia tries to install a puppet government in Ukraine or just calls the country a part of Russia.)
Initially, the Biden Administration imposed economic sanctions against Russia that were similar to the kinds of sanctions we imposed on Crimea and Russia in 2014. Putin was reported to have “snickered” when told that the sanctions against one financial institution were identical to the 2014 Crimea sanctions that are still in place! Bloomberg described these Biden Administration’s sanctions as “underwhelming.”
Putin has also tried to “sanction-proof” the Russian economy, so it will be interesting to see how the U.S., Britain, France and Germany respond. I am sure the West will try to show a united front, but Putin is apparently not afraid of economic sanctions as he maintains tremendous economic leverage over Europe.
For instance, on Thursday, the morning after Putin’s invasion, President Biden announced new economic sanctions against more Russian banks and oligarchs close to Putin. However, Biden did not cut Russia off from the SWIFT (Society for Worldwide Interbank Financial System) international banking system that Prime Minister Boris Johnson wanted to impose. That was apparently nixed by German Chancellor Olaf Scholz. At the end of his Thursday press conference, President Biden said that he wanted to give the initial sanctions a month to work before imposing even stricter financial sanctions. A month is a long time in war, so the debate with Britain, Germany and the U.S. over excluding Russia from the SWIFT banking system is the first sign of a potential rift between Western allies on just how hard to sanction Putin.
Meanwhile, the United Nations is toothless, since both Russia and China are permanent members of the Security Council. UN Ambassador Linda Thomas-Greenfield said that Putin “wants to demonstrate that through force he can make a farce of the UN,” but any hope for action by the UN will likely prove futile.
The U.S. Economy Is Supercharged (Partly by Inflation)
Fortunately, the economic news last week was largely positive. Let me start with one piece of lackluster news. The Commerce Department announced that new home sales declined 4.5% in January to an annual pace of 801,000, slightly below the economists’ consensus estimate of 806,000. The good news was that December new home sales were revised up to an annual pace of 839,000, up from a pace of 811,000 previously reported. The West was the only region that posted a January sales increase, while the Midwest, East and South all reported sales declines. Compared to January 2021, new home sales declined 19.3%, so higher mortgage rates and high median prices are apparently now curtailing new home sales.
On Tuesday, the S&P CoreLogic Case-Shiller National Home Price Index was announced as being up 18.8% for all of 2021. This is the largest annual increase in home prices in any year since 1987. Phoenix was the fastest-rising urban home market for the 31st straight month, with an annual gain of 32.5%.
Reflecting all the new worries out there, the Conference Board announced last Tuesday that its consumer confidence index declined to 110.5 in February, down from 111.1 in January. Even though the “present situations” component improved to 145.1 in February, up from 144.5 in January, the “expectations component” declined to 87.5 in February, down from 88.8 in January. Inflation concerns are weighing on the expectations component and are expected to influence consumer spending in the upcoming months.
On Thursday, the Labor Department announced that the new weekly unemployment claims declined to 232,000 vs. a revised 249,000 the previous week. Continuing unemployment claims declined to 1.476 million in the latest week, compared to a revised 1.588 million in the previous week. The unemployment claims are now running at their lowest level in 52 years! Obviously, these trends are very positive.
Another piece of positive economic news on Thursday was that fourth-quarter 2021 GDP was revised up to a 7% annual pace. The Atlanta Fed is currently estimating much lower (1.3%) annualized growth for the first quarter, but the economic “tea leaves” for this quarter are changing fast. Specifically, crude oil prices have briefly risen above $100 per barrel, which often causes worldwide economic growth to slow.
On Friday, the Commerce Department announced that durable goods orders rose 1.6% in January, double the economists’ consensus expectation of a 0.8% increase. Even more dramatic, the December durable goods rate was revised up to a 1.2% increase from a previously reported 0.7% decline. Transportation orders rose 1.7% in December and 3.4% in January. Orders for commercial aircraft surged 15.6% in January. Excluding transportation, durable goods orders rose 0.7% in January and 0.9% in December. There is also a large backlog of orders that should keep durable goods orders strong in upcoming months.
In addition, in light of last week’s developments, central banks around the world are going to increasingly hit the “pause” button on rate increases. Ukraine is the breadbasket for Europe, so much of the food and energy inflation is going to be blamed on Putin that are beyond the central banks’ control. The silver lining in last week’s tragic development is that interest rates will not be rising as fast a previously feared.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
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