Strategy Note /

Russia's end game: Autarky if no de-escalation

  • Russia narrative has turned from the repercussions of a swift, successful invasion to those of a long drawn-out failure 

  • Without a rapid victory, the greater Russia’s ambitions the less achievable they are; it risks pushing itself to autarky

  • Autarky may not dethrone President Putin quickly, but puts paid to any foreign investment case in Russian assets

Russia's end game: Autarky if no de-escalation
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
28 February 2022
Published byTellimer Research

Very quickly the narrative on Russia has turned from what are the repercussions of a swift, successful invasion to what are those of a longer, drawn-out failure. 

Sanctions on Russia’s central bank could substantially reduce access to its cUS$500bn of cash foreign reserves, trigger a collapse in the Ruble, very high Russian inflation, and a 1990s-style banking crisis (a run on deposits).

Divestments of Russian assets announced by Norges and BP could set the ball rolling on ethics-based, mass capital flight by institutional and corporate investors.

For foreign portfolio investors, the interest rate hike to 20% implies a positive real rate of about 12% on the last inflation reading, which is not going to persuade anyone to stay put, let alone put more capital in. Very soon, an inflationary spike could turn the real rate negative.

For foreign investors in public equities, Russia's ban on selling will store up the rush for the exits for a later day (and potentially severe mark-to-market writedowns for portfolio net asset value before then).

If reports of Ukrainian resistance and Russian military mis-execution are also accurate — and perhaps all reports should be treated sceptically in the fog of war — then Ukraine starts to look, not like the start of the reconstruction of the Soviet empire, or even another in the line of Russian-backed soft coups, separatist movements, and client states (like Transnistria, Abkhazia, South Ossetia, Crimea, Belarus, and Kazakhstan), but instead a 1980s Afghanistan-type quagmire to bleed Russia’s power.

The range of outcomes varies widely:

  • De-escalation, evidenced by indications of mediation talks held in Belarus and ongoing gas sales to Europe, including via Ukraine; 

  • Further escalation, evidenced by the higher state of alert for Russia’s nuclear forces;

  • Desperation, should Russia restrict fuel exports (triggering a 1970s-style global oil and gas crisis), or expand its conventional military activity to other areas such as the Baltics, or, heaven forbid, push the nuclear button. 

The scope of outcomes is also wide, eg does: 

  • China provide a way to circumvent sanctions, risking its own sanctions, and accelerating the separation of the global economy into different financial and trading blocs?

  • Germany’s announced increase of military expenditure initiate a new re-armament race across Europe and, with the financial costs more equitably met, help keep the US more committed to the continent than would otherwise have been the case?

  • Restriction on Russia’s access to international payments drive it to adopt cryptocurrency routes for financial exchange and, in turn, prompt greater regulatory scrutiny of the crypto universe by the US and EU? 

Amid such fast-moving events, one guiding thought persists: without an overwhelming, rapid victory — which is looking increasingly unlikely — the more expansive Russia’s ambitions, the less achievable they are, and the more it pushes itself into autarky (the Cuba, Iran, North Korea, Syria, Venezuela corner).

Autarky may not, for a while, dethrone President Putin and the interests he represents, both because Russia’s foes will attempt to sanction as severely as possible without impacting Russian fuel exports and because sanctions often reinforce the power of the elite in authoritarian regimes. But it will certainly put paid to any foreign investment case in Russian assets for some time.