What Happens Next in Russia? With Marko Papic

what happens next in Russia hi everyone Welcome to the Real Vision Daily Briefing with me today is Marco Papik Chief strategist at Clock Tower Group hi Marco it's great to see you so great to be with you Maggie uh and we we've been looking forward to talking to you all day because I think all of us I mean what happens in Russia next it's the million dollar question uh but that the weekend developments were surprising they were bizarre they were confusing I mean everyone's just starting to really sort out what this means and we saw the market action pretty muted today because I think it's such a hard one to unravel so you know just broadly give us your sense of the events that occurred over the weekend what do you make of this just a million dollar question it's like you haven't been here for the inflation yeah billion trillion you know you don't you don't know I mean look um I think I'm not surprised by market reaction because ultimately the coup failed for the time being uh there's a lot of focus on uh Evgeni plagozin and Wagner group and the particularities are where he is his whereabouts um you know where does Wagner go from here I think largely those are important questions for the Tactical Traders for the short-term investors uh longer term questions are unanswered but the market can't process those you know so the market is focusing on issues that are much more relevant in the short term the FED Chinese stimulus which is a big one if you want to take a position in Commodities uh to me the short-term questions are not interesting you know because we just don't know I mean I can't really add any value to you by trying to tell you where we go in the next weeks or even months to me the bigger issue is that Russia's been in a state of political crisis for probably six months it outsourced law enforcement and strategic military operations to private companies uh including some Regional Warlords I mean it's time that we start using the term Warlords such as uh chesh and president khadiro and that's not normal you know it's not normal for a large great power to Outsource parts of its military chain of command uh to non-governments entities and officials and so this Mutiny is simply a symptom of a chronic illness it's not in acute event it's a chronic illness that will continue to ail Russia that's a really important Point Marco I think for a couple of reasons because I think because of the unusual nature and the character that is for goes in that former Chef now he's running this sort of army there there is a lot of attention on that but but what you're saying even if something happened to him tomorrow nothing changes you see this as the unraveling of of Putin's grip on power of Russian stability how are you seeing this you know I mean Putin could stay in power for a very long time um but in power of what uh the Russian State could very well be shrinking before our own eyes with other actors filling in the void filling in the vacuum for example Chechen leader khadira refused to allow his um you know citizens of chechnya to be mobilized the argument being that he has special forces you know in theater of war and it's a fair argument but there you go um it's little pockets of resistance to the writ of Moscow and so I think that fundamentally the conflict in Ukraine has been a serious strain on Russia um depending on Whose propaganda you accept you know Russia has lost somewhere between 50 and 200 000 troops it's a pretty wide margin of error but let's take the 50. you know um during the conflicts in Afghanistan and over a decade in chechnya so basically two and a half decades worth of War Russia lost somewhere between 25 000 and 75 000 men in both conflicts over 25 years of conflict in just 18 months of War even Russian commentators basically argue they've lost the same amount now you know you created an American Media sources Elevate that to 200 000. I don't want to get into the numbers the point is this is an extraordinary amount of material losses to a country like Russia that clearly did not expect this to happen now in the initial wave of the invasion I did not forecast correctly that Russia would undertake as broad of an invasion as it did you know I was in the camp of folks who thought that they were bluffing like they did in April 2021 um or that it would be a limited incursion into donbas so you know your viewers are very right to ask why is this guy on TV then you know appropriate question but one of the reasons that some analysts such as myself had doubts about Putin's commitment to a broad invasion was that you know there's consequences for doing that and we're now seeing those confidence consequences so I'm not surprised at all uh that there are these breaks in the regime and I think that destabilization of Russia may very well be the biggest geopolitical issue we're dealing with for the rest of this decade I mean it could be that relevant more than China U.S tensions more than any other issue that is out there this could really Drive markets and asset returns over the next five to ten years that's a big statement why do you think that so first of all let's let's think about the context Maggie that we're in everyone's decided and by everyone I mean the policy makers in almost every country have decided that they need to redesign Supply chains away from China so that's like a priority number one there's this National Security prerogative to redesign Supply chains I mean China itself is doing it as well so that's priority number one priority number two is apparently to sink a lot of capital into the green energy Revolution these two policy priorities are combining to create a very capex driven cycle okay what does this have to do with Russia well what do you need to do if you want to redesign Supply chains and do a green energy transition what do you need what is the fundamental need you need what is the fundamental asset you need Commodities a lot of them and Not Just Energy you need metals so we're basically redoing the 2001 to 2007 cycle for policy and political reasons and ideological reasons as well you know basically the West is the side of China's evil now and that everyone's going to be cooked Alive by climate change those are two priorities so if you suddenly have political risk in Russia and it doesn't have to be something extreme it doesn't have to be like Mel Gibson roaming the highways of Russia in a Mad Max scenario it doesn't have to be apocalypse or warlordism it could simply be a reversion to sort of the instability of the 1990s it's highly unlikely that Russia will receive the sufficient Capital uh sorry sufficient financial and human capital to extract the supply of Commodities that we're going to need for these priorities we all decided are really critical and so that's why I think that you know if you have a view of demand for commodities for energy over the next five years and you suddenly have to change the map on how much Russia can contribute to that demand you know we're clearly going to be in a very um very volatile and quite bullish environment for commodities so this is hugely important because if you listen to the rhetoric and this was obviously all over the news all over every talk show every Market show you know through the weekend into this morning the the conversation is will this speed up the end to the war in Ukraine um what did and will this is this the beginning of the end for Putin but you get the sense that both of those scenarios um I don't want to say they're positives but they're you know people are looking for a positive outcome to what has been a very uh dislocating event this war ground war in the middle of Europe and there's some I think hope attached to that um that that we're going to be able to resolve this you're painting a very different picture of that outcome and I think a very important one that well this is the beginning of an even bigger source of instability as if the war in Ukraine wasn't enough of a problem this kind of like pulls the whole question of Russia for the next decade into it yeah I mean and I you know being that I'm a geopolitical strategist with a sole intention of predicting the markets I didn't mention the obvious concern that should have been number one which is that you are talking about the country it has the largest arsenal of nuclear warheads in the world exactly that was my next question you know I'm talking about like oh well you can make money on oil you're like okay if you live to tell the town yeah there are other bigger there are bigger issues at hand one thing I will say to you Maggie is this I actually have a pretty sanguine view a word of war in Ukraine goes I think that it is in a stalemate and I don't think the Ukrainian offensive will be successful now the Wagner Rebellion creates this um sort of probability and offshoot a branch in your decision tree where the Wagner Rebellion could have such an impactful um you know in like such a great impact on Russian Esprit de corps it's morale of its troops that you could have a non-linear event where the Ukrainian offensive is suddenly extraordinarily successful because the Russians turn around and just flee I don't I'm not in that camp so I don't think that happens I think that there's a reason the war has ossified and it's been basically nostalemate for the past six to eight months now what's important about that is that the market agrees with me 100 percent I mean a hundred percent every single piece of geopolitical risk premium has dissipated there is no longer any geopolitical Alpha to harvest in Ukraine bonds sold off honestly the beginning of the war the bond market ignored all the silly nuclear weapon threatening that people obsessed about oil sold off in the summer of 2022 because there was no impact on Supply and finally Europe rallied hard when everyone was worrying about Europe the industrializing which is probably one of the most idiotic Market narratives of the past 20 years Europe rallied because that risk also dissipated now I'm very happy about this because those were the three forecasts I got right in other words I faded geopolitical risk every time it increased with this war the problem is that we are now at a point where that's done so the risks are skewed to the downside in other words there's two scenarios that I can see happening which again I wouldn't assign over 50 probability to but I do worry about them one is that there is an impact in Russian morale ukrainians do have a non-linear success story which surprises everyone and they start to threaten Crimea now from a sort of a political objective Viewpoint most viewers who are in the west will probably cheer that outcome but the problem for the markets is that I do think that if Crimea is actually threatened Russians May deploy tactical nuclear weapons at that point they feel that is their territory that is Russia that is part of core Russia It's Not Conquered Russia it is Russia so that is an outcome where the Ukrainian successful offenses becomes negative for the markets and then there's another uh scenario where as you pointed out you know the dissolution of the Putin regime happens much faster than anyone including myself who 12 months ago said this would be the inevitable like end result of this conflict but it just happens much faster that also then brings into question a lot of things so the market is not prepared for those tail risks even though I don't think it happened even though I don't think they happen and I think Market reaction this Monday was appropriate I do worry about those scale risks so it's interesting that the the the the second point about them it falling quicker than anyone thought or or in a in a really disorderly way when you were looking at this and looking at history and saying okay this Invasion such a blunder it's gonna cost Putin and it's going to lead to his demise he's it's just sort of not winnable it's gonna call it's going to come at too much of a cost what kind of transition power transition did you think was most probable did you think another hardliner would take over he would be overthrown by someone in the military by that he would have a chosen successor and he'd be allowed to leave with his hidden bajillion someplace and go into how did you see it playing out because this weekend those tanks rolling toward Moscow created a very different very you know a scenario no one had envisioned you know that this sort of mercenary was suddenly in in the and who else would that Inspire if he has been contracting out to or all these War Warlords so what was the most problem what do you think is still the most probable in terms of Putin being out of power I mean I don't think it matters what I thought 18 months ago you know like yeah let's talk about now uh first of all uh there's this uh cute narrative out there um on some social media and some some people talking about this was staged you know this what might have been this works in favor of President Putin I think that's silly anyone who's you don't have to be uh an expert of Russian history just please tell me you watch Game of Thrones or at least The Sopranos you know I mean you don't let somebody rise up and then don't kill them and their troops in an orgy of violence and live to survive Russia weak czars don't last in Russia and you know even Putin apologists that I've been talking to for the past 18 months Russians or people from Eastern Europe who support Russia have basically been sort of aghast about what just happened because it shows real weakness in that region in the in the context of Eastern Europe and Russia um you know I had a chance um to talk to Chinese policymakers people onshore in China they all are shaking their head and saying like wow this was a this was a mistake by Vladimir Putin because Chinese history of course is replete with examples of warlordism and Regional Warlords you know taking a swing at the emperor the emperor not swinging back hard enough and then that incentivizing other potential attempts at taking out the king so again you don't have to know anything about you know you don't have to know anything about Russian history so to answer your question I have no idea what it looks like but I think the Khrushchev outcome the sort of nice negotiated exit by the way Putin himself was such an exit for the Yeltsin and Yeltsin family that was a coup I would argue it was a palace coup where Yeltsin and his family were given guarantees to step aside aside peacefully I think that that outcome is becoming less and less likely the longer the conflict goes on and so while pregosin did not feel confident that he could pursue this to its end I think somebody else might one thing I do want to say is that there is no doubt that this is a significant event you know if you if you are a geopolitical strategist and you spent the weekend not following this I don't know what business you're in this is a nuclear power and they were using excavators to dig up highways on the approach to Moscow let me say that again the Russian leadership sent construction Crews to dig holes into the highway so that Wagner's 25 000 troops couldn't come to Moscow imagine if like I-5 or whatever Highway she know was being dug out by American troops so that some horde of murderous mercenary doesn't show up in Washington DC this is a significant event and there's no way to really spin this as positive for the leadership so the commodity story that you see playing out are we in a holding pattern now and you know the Market's not really reacting when does that start to sink in that this is going to be we're going to see disruptions in the commodity flow coming from Russia and is that a given is there any any scenario where someone steps in given the economy is in shambles um so many people have fled I mean we know there's been a huge Exodus of young people of workers um any anybody on the scene at all I know most of the oppositions are jailed or dead uh or silenced um any anybody but a hardliner who would come in and maybe try to turn this around somehow well obviously the West would hope that some NGO leader who steps in because the president of Russia that's not going to happen in Russia it's going to be a siloviki a man of of force and almost certainly a man almost certainly a tough ex-intelligence person so I wouldn't like that's that's just obvious but I don't think that's a problem for the West I mean regime change in Russia usually is accompanied with 180 degree eternity foreign policy and someone were like pragosan although he won't be you know favored on social media he is someone who will basically go to the Embassy to Chinese Embassy and then the American Embassy and say Hey I want your highest bid so this will create an opportunity obviously for the West we all understand that um but going back to your question about commodity disruption look the market was very muted on Monday because time frames are so uncertain Maggie you know we we could have an outcome here in the next three weeks unlikely I'm thinking more on multi-year time Horizons and so that's why the markets are muted because it's it's very unclear I think that what matters more for oil prices as I said earlier is how significant is that Chinese stimulus that's something to really watch right now that's probably going to move the markets more than anything going on in Russia and then also to what extent have the forecasts of the recession in the U.S been extremely wrong in fact the one call on oil markets here was to shorten as I said in May and June of last year in June in particular oil prices collapsed because investors had bid up too much and too fast expectations of Supply loss out of Russia which didn't happen in fact we got the same amount of oil at decreased prices which was shocking to many investors I think going forward this stabilization of Russia is a longer term story and it fits into the pillars of a commodity super cycle that themselves are a longer story a story which will have ups and downs cyclically and tactical which is important so so plug China into the into this puzzle they're looking at this um and they've sort of you know given tacit approval to Putin you know it's been a kind of weird relationship what happens now with that and and how is this factoring into China's own decision about what they're doing with their economy and and their focus on making sure they have access to commodities so you know I think uh first of all we have clocked our group we we have an office in Shanghai because we believe that getting China right is really important for investors and not because you need to invest in China but if you're going to make a call in Europe or Japan or copper or oil you have to know what's going on in China and so over the weekend as I said earlier you know we've had conversations with a lot of people in China whether they're geopolitical uh strategists themselves policy makers onshore investors and there is a universal reaction that this is not good for Putin's regime um the official statements were very interesting they didn't mention Putin by name China just reiterated its support for stability in Russia which is you know sounds like a hedge to me in case somebody else is in charge um and so I think the Chinese policy makers are definitely concerned but they're also preparing themselves for their horse to lose I think they have to start thinking about that over the over the short term their calculus though is going to be focused on their own domestic problems and their number one problem is leverage in the system I keep telling our clients look China is where America was in 2011 2012. and they're going to go through a sequence of events in the next six to 12 months where they use interest rate cuts Poe and then fiscal they're going to do that sequence that we did in our secular stagnation story um I think that they're so concerned about that domestic issue that they're not going to do anything with Russia but one thing that I do think is the odds of invading Taiwan have been sinking since since February 24 2022. there is absolutely nothing that's happened in the last 18 months that would incentivize I think any country right now to contemplate uh something that Russia has done do you think that that China can manage this uh this economic challenge because if they are trying to support their economy isn't the worry that they reinflate that property bubble that they've been trying so hard to orderly deflate yeah absolutely I mean uh I don't think they really have any other options uh what's happening in China right now is real interest rates have increased uh the pboc is behind a curve I mean first of all CPI is like inflation is non-existent producer price inflation is outright in a deflation so producers prices are deflating when you have deflation real interest rates go up and that's extremely pernicious because the country is over leveraged so they need to step in the central government has to take that private sector leverage on its own balance sheet through fiscal expenditures and you know like that's where they're going to be pushed into is it going to reflate the real estate bubble I'm not sure um I'm not sure to what extent the households even if they get relief are willing to buy their fourth and fifth condo you know so I think that that train May has very well passed but this is a very serious problem for for China and I think it completely dominates their policy maker bandwidth if you will um you know these kind of adventures with Russia or or Taiwan they are really more of a luxury right now avoiding secular stagnation and balance sheet recession the kind of things that the U.S had to deal with in 2011 to 2020 that's where China is right now and so I think I don't think you're going to see them triple down in Russia or in any in any significant way um in fact I think that there could be an interesting entry point into Chinese assets over the next six months as they get pushed ever further into more and more stimulus yeah which is which people have been waiting for but it kind of hasn't been coming in the way they expected any strength in the reopening was disappointing so there's been some disappointment on that front hasn't there but think about Maggie how long it took the U.S to actually do stimulus or the West think about it for a second you might say well Marco no no QE happened right away ah but what did we find out about QE and interest rate cuts that we were pushing on a string why because private sector was still leveraging and what happened in the west let's not forget what happened in the west we had austerity fetish in the US and Europe which hurt the leveraging because of the denominator effect so basically you the public sector didn't step up and take on some of that leverage from the private sector it took us until 2017 in the U.S to actually have stimulus um a little bit later even for Europe and the two catalysts for breaking that were the election of President Trump and brexit you know the two kind of populist moments that actually finally shut the door on austerity I don't think you're gonna have to wait six years in China and so when people say well their their stimulus efforts have been delayed I tell them well yeah but like it's not six years it's been months and I think that China doesn't have the political luxury to wait around for their version of a trump or a brexit they're gonna have to be pushed into this uh you know fiscal Avenue much faster than we did they don't want to wait around presumably for their populist moment that I cannot be part of the plan of sheet so soon a quick question on China and then I and I and then I want to end on Europe so uh any do you given the economic focus and challenges um any sign of easing tensions between China and the U.S every time they try to set that up somebody opens their mouth and it seems like uh that doesn't happen well I think it's um it's not up to China you know that's what I would say so if you're an investor waiting for that you know you have to watch American domestic politics and it's just not like middle U.S election is coming around the corner I don't see any benefit for President Biden to appear to want to do the taunt with China so I'm scared for any candidate for that reason oh absolutely and I'm I'm pointing him out Bobby but you know what the irony of this is that if the Republicans win including Trump I think the odds of the taunt actually arise because domestically Trump is far less constrained in talking to China that's the irony you know there's used to be that adage only Nixon could go to China yeah and then Trump updated that adage with only Trump could call Kim Jong-un a very smart young man you know so this is this is where a republican leadership in in the U.S ironically and paradoxically could actually negotiate with China uh much easier because of domestic pressures uh but I wouldn't expect that anytime soon yeah until until after you know the uh and a lot can happen between now and that election um so if we go back to Europe we're facing a maybe a sort of status quo with Ukraine or you know it's sort of stuck even if it doesn't get any worse maybe they make a little bit more progress but potentially any good news on that offset by a further destabilization destabilization in Russia what does that mean for Europe what does it mean for the UK we see the central banks hiking you know we're head soon Summer's going to be over and we're going to be facing winter again what's the outlook for for that region I have no idea what it means for the UK and honestly we could have 30 minutes just on them oh I know the mortgage reset yeah we talked about that a bit and that surprised Boe hike that was kind of extraordinary uh yeah I mean look the irony in the Paradox here is that the better Ukrainian offensive goes the more likely a Russian reaction is pretty severe and there's more destabilization in Russia which I'm not I'm not sure is good for European equities and so again that's where if you look at the geopolitical risk premium the plane 2022 was to fade it was to ignore all the twitterati and fade nuclear war European disaster scenarios and so to go long Europe the problem right now is that even if I'm sanguine that trade is gone and so there's only downside risk to Europe from here and so that's why it's very difficult for me to give you a view of how to play this in in by going along something whereas it may be prudent to kind of put on some shorts on European assets given that the downside risk scenario even though I don't think probability is greater than 10 or 15 percent that's where the juice is because the market has moved too far into the sanguine line so what I worry about if I want to hold European assets what if what if Ukraine surprises right and it does extremely well and it's offensive everyone's going to be happy and cheer and it's going to be a great moment objectively speaking for Ukraine but if Russian retaliation then is severe that could rattle European markets and so I think that would be a downside a lot of people are not considering and and one quick question from Ralph uh any opinion on the direction of wheat we're talking about Commodities potential super cycle for Commodities I'm assuming that a lot of that was centered on energy are do you include food in that market when you look at this the the disruptions and could we see because we've seen wheat it's been up a lot this month yeah no I think wheat is uh is basically sensing that there could be a geopolitical break on the deal uh and I I think that's that's a very appropriate way of that geopolitical risk premium kind of creeping up into some of the old markets now remember oil was another one that rallied in February obviously in April ended up being a great short but I do think the macro setup is starting to look better for oil I was never in the recession camp in the U.S for 2023. I didn't have to change my forecast like every other Investment Bank but you know um and I am positive Chinese policy makers will get pushed on stimulus so if you have a no recession view in the U.S Chinese policy makers reach their breaking point and stimulate and on top of that you have you know situation in Russia and Ukraine um looking more complicated that's all you need I think that could be an interesting setup for energy as well assaults Marco we could not have had a better person on today to help us sort of understand what's happening but importantly focus on on the sort of bigger themes that are likely to drive things and and sort of you know understand what we need to about the shorter headlines that are catching everyone's attention you really helped us focus on the important elements so we thank you for that well thank you for the time it's a real pleasure Maggie I love it take good care of yourself thanks so much thanks to all of you we'll be back same time tomorrow as always take care and good luck out there foreign [Music]

Channel: Real Vision Finance

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Keywords: real vision finance, real vision tv, chinese, stocks, bitcoin, equity, equities, nasdaq, consumer sentiment, consumer prices, inflation, chinese tech, chinese tech stocks, china's tech crackdown, fed, federal reserve, the fed, taper, fed tapering, fed hikes, rate hikes, interest rates, bonds, treasuries, investing in bonds, raoul pal, 2023 markets, 2023 recession, 2023 inflation, realvision, ral pal, raoulpal, portfolio management, AMa Raoul Pal, Raoul Pal 2023, raul paul, raoul paul

Id: 0HW3s6cBmXA

Length: 31min 55sec (1915 seconds)

Published: Mon Jun 26 2023