February 28, 2022

Attacks continued over the weekend, but Ukrainian forces repelled a series of attacks on Kyiv and they said they have cleared the city of Russian infiltrators.

• Select Russian banks were removed from the SWIFT global payment and messaging system (more on this above), while Russia is also restricted from letting its central bank use its $630 billion in reserves. 
• As a result, Russia won’t be able to support its crashing currency (the ruble) or its economy. In essence, other countries are trying to cause a financial crisis in Russia to pressure them to stop the invasion. It appears to be working, as the ruble has moved to an all-time low.
• In an extreme move, the Russian central bank increased its key interest rate to 20% from 9.5%, in an attempt to support the ruble. This is now above the 17% last seen when Russia annexed Crimea from Ukraine in 2014. Authorities also told export-focused companies to be ready to sell foreign currency to support the ruble.
• Adding to worries, Russian President Vladimir Putin ordered Russia’s nuclear-deference forces to be put on alert. 
• Corporations are initiating restrictions as well. BP, United Parcel Services, and FedEx have all cut or limited exposure to Russia, with many more expected to follow suit.

There is some potentially good news though, as both sides were willing to come together for talks.

SWIFT Sanctions and Russia Central Bank Restrictions Will Have Bite, but Come with Risks 

• The U.S. has cut off major Russian banks from the SWIFT secure messaging system, severely limiting the banks’ ability to participate in international transactions, while advancing measures that would make it difficult for Russian’s central to outflank sanctions to support its financial system. 
• The sanctions’ bite was immediately felt, with offshore trades in the Russian ruble declining sharply, a downgrade of Russian debt by one rating agency from investment grade to junk status, and lines forming at Russian ATMs to withdraw currency.
• The economic pressure will likely push Russia toward recession and will put considerable pressure on the stability of the Russian banking system. 
• Passing the sanctions required intensive multilateral diplomacy, with Europe more economically exposed to Russia, but in the end the U.S. and its allies viewed their interests, and certainly their values, as mutually aligned. 
• The sanctions have also put pressure on dollar funding markets and central banks may need to step in to help provide liquidity. The ECB governing council is meeting on March 10 and will likely communicate a less hawkish stance as rising risks from the East could put a damper on Western Europe’s growth path. Although the US will likely feel less ripple effects from Russia, the Fed will be less likely to “shock and awe” the market with an overly aggressive hike on March 15-16.
• While a significant step in supporting Ukraine, it does little to mitigate the humanitarian crisis on the ground.

We continue to remain more cautious on European equities if the crisis plays itself out, and expect sustained pressure on commodity prices, possibly keeping inflation levels elevated into the back half of the year.          

They say it is always darkest before the dawn, and long-term investors should keep this in mind as better times are likely coming in 2022.  Please contact me if you have any questions.