Putin’s Russia: An Overlooked Risk?

As the Telegram group of the private military contractor Wagner fired into action on June 23rd, the rallying cry from its leader, Yvgheny Prigozhin, encapsulated the technology era we find ourselves in. Mercenaries launching the basis of what Russian President Vladimir Putin described a ‘civil armed rebellion’ over social networks seems like a very contemporary concept. Nevertheless, the themes behind this Russian story conger memories of the Soviet Union, tales of failed uprisings, civil war and challenged leadership. Although this assault on the regime was short-lived, the 24 hours that engulfed the Kremlin and Moscow threw many questions into the ring about what’s next for Putin and at what cost does his position of power still stand.

When we reflect on the events from the beginning of this conflict, as far back as February 24th 2022, the atrocities and warfare rocked the normality we were all once used to. The coverage of innocent civilians fleeing across Europe seeking safe haven cemented the two Baltic countries as no-go zones for the outside world looking in.

A similar story was told in the markets, with investors flocking to find security and refuge in assets that would protect their exposure from violent market moves. Gold and the dollar were at the top of everyone’s list, as investors sought solace from this conflict and risk off environment. The initial ramifications were felt most within the food and energy sectors. With both countries being significant exporters of each commodity, the inflationary impacts are still being felt today across the west. Looking at the interest rate environment, we have pushed further into hawkish territory as central bankers struggle to fight elevated inflation, the subject of pauses being far more prevalent and the talk of cuts slowly becoming distant.

The Russian market has seen an exodus of its own kind as western corporates closed their doors, handing the keys over to pro-kremlin supporters. McDonalds and Starbucks rebranded under a new guise, but the logos still mimic the companies once there. As Russia rebrands without the western influence, the closer its ‘no limits’ friendship with China becomes. The country’s limited mobility through sanctions places it as the junior in the relationship – reliant on its last major partner to buy its discount oil and broker its trading relationships with the rest of the BRICS.

The tale of the tape now appears to manifest a different story. Reflecting on the actions of Wagner over the course of that June weekend, and the reaction is muted and unrecognisable in the market picture we currently see. The VIX index sits near lows last seen back in January 2021 – a drastic comparison to the highs of 30 when the invasion initially broke across our screens. The dollar is still the steady reserve currency the market has always known. Crude oil prices have stabilised with support around $70 after their foray up to $130. We have just seen the gauntlet laid down to Putin in the most serious manner seen in his 23-year tenure, yet the market remains calm. The S&P 500 is up 16% in the first quarter of 2023, gaining five of the previous six months. Inflation, albeit slowing its decline, is tracking lower, to the relief of central banks. The war’s rippling effects seem to have lost its impact. The most recent Fed minutes even had a higher word count for COVID than it did Russia or Ukraine.

The question therefore is whether much has changed since Wagner staged their ‘march for justice’? In essence, very little, as the current state of affairs appears to be business as usual. We still see Russia tied down with sanctions, the conflict within Ukraine is ongoing, and the two neighbours continue their fight to own what they believe is theirs. With little having changed, the market remains disinterested in the story, as it has been for the last several months. The risk off rhetoric, as it pertains to the conflict, is in most investors’ rearview mirror for now.

But are investors too relaxed? With Putin there are always tail risks – the ultimate tail risk, nuclear instability, has begun to be discussed in the last week. What seems clear is that any positive development from here will be met with a shrug from markets, but a worsening could send risk assets spiralling once again. It is ultimately too early or unpredictable to pick a side or timescale of when this could be resolved, but as always with markets and tail risk, it’s the tail that wags the dog.