What Happens Next in Russia? w/ Marko Papic

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1:24And now to the top analysis of today's markets.

1:35What happens next in Russia? Hi, everyone. Welcome to the Real Vision Daily Briefing. With me today is Marco Popik, Chief Strategist at Clock Tower Group. Hi, Marco. It's great to see you. So great to be with you, Maggie. And 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. But the weekend developments were surprising. They were bizarre. They were confusing. I mean, everyone's just trying 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.

2:08So 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? I mean, Maggie, like - A billion, multi-billion. It's like you haven't been here for inflation. Yeah, a billion, trillion. You don't know. No, I mean, look, I think I'm not surprised by market reaction because ultimately the coup failed for the time being. There's a lot of focus on Yevgeny Pligozin and Wagner Group and the particularities of where he is, his whereabouts. You know, where does Wagner go from here? I think largely those are important questions for the tactical traders, for the short-term investors.

2:49Longer-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. 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 has been in a state of political crisis for probably six months. It outsourced law enforcement and strategic military operations to private companies, including some regional warlords.

3:28I mean, it's time that we start using the term warlords, such as Chechen President Kadyrov. 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 to non-government entities and officials. And so this mutiny is simply a symptom of a chronic illness. It's not an 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 Prigozhin, that former chef, now he's running this sort of army, there is a lot of attention on that.

4:13But what you're saying, even if something happened to him tomorrow, nothing changes. You see this as the unraveling 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. But in power of what? 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 Kadyrov refused to allow his citizens of Chechnya to be mobilized, the argument being that he has special forces in theater of war. It's a fair argument, but there you go.

4:56It'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. 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 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 argued they've lost the same amount.

5:45Now, you know, Ukrainian and 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, or that it would be a limited incursion into Donbass. So, you know, your viewers are very right to ask, why is this guy on TV then?

6:26You 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 in doing that. And we're now seeing those consequences. consequences. So I'm not surprised at all 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 10 years.

7:08That's a big statement. Why do you think that? So first of all, let's think about the context, Maggie, that we're in. Everyone's decided, and by everyone, I mean the policymakers 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.

7:48Okay, 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 has decided 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.

8:28It 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, 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 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, we're clearly going to be in a very volatile and quite bullish environment for commodities.

9:19So 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, through the weekend into this morning, the conversation is, will this speed up the end to the war in Ukraine? And is this the beginning of the end for Putin? But you get the sense that both of those scenarios, I don't want to say they're positives, but people are looking for a positive outcome to what has been a very dislocating event, this war, ground war in the middle of Europe. And there's some, I think, hope attached to that, that we're going to be able to resolve this.

10:06You're painting a very different picture of that outcome, and I think a very important one. That 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 pulls the whole question of Russia for the next decade into it. Yeah, I mean, being that I'm a geopolitical strategist with a sole intention of predicting markets, I didn't mention the obvious concern. that should have been number one, which is that you are talking about a country that has the largest arsenal of nuclear warheads in the world. Exactly. That was my next question.

10:46You know, I'm talking about like, oh, well, you can make money on oil. You're like, okay. If you live to tell the tale. Yeah, there are bigger issues at hand. One thing I will say to you, Maggie, is this. I actually have a pretty sanguine view of where the 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 sort of probability, an offshoot, a branch in your decision tree, where the Wagner Rebellion could have such an impactful, you know, like such a great impact on Russian esprit de corps, its morale of its troops.

11:30that you could have a non-linear event where the Ukrainian offensive is suddenly extraordinarily successful because the Russians turn around and just flee. 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 in a stalemate for the past six to eight months. Now, what's important about that is that the market agrees with me 100%. I mean, 100%. Every single piece of geopolitical risk premium has dissipated. There is no longer any geopolitical alpha to harvest in Ukraine. Bonds sold off, honestly, at the beginning of the war.

12:11The 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 deindustrializing, 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.

12:51So 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 on Russian morale. Ukrainians do have a nonlinear 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 up. 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.

13:34That 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 offensive becomes negative for the markets. And then there's another scenario where, as you pointed out, the dissolution of the Putin regime happens much faster than anyone, including myself, who 12 months ago said this would be the inevitable 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.

14:12And I think market reaction this Monday was appropriate. I do worry about those tail risks. Hey, everyone, we're going to take a quick break right now to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

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15:30So it's interesting, the second point about them, it falling quicker than anyone thought or 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 going to cost Putin and it's going to lead to his demise. It's just sort of not winnable. It's going to come at too much of a cost. What kind of 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, that he would have a chosen successor and he'd be allowed to leave with his hidden bajillion someplace and go into...

16:15How 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 the... And who else would that inspire if he has been contracting out to all these warlords. So what was the most probable and 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. Let's talk about now. First of all, there's this cute narrative out there on some social media and some people talking about This was staged.

16:57You know, this might have been, this works in favor of President Putin. I think that's silly. Anyone who's, you don't have to be 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.

17:42Because it shows real weakness in that region, in the context of Eastern Europe and Russia. I had a chance to talk to Chinese policymakers people on shore in China they all are shaking their head and saying wow, this was a mistake by Vladimir Putin because Chinese history of course is replete with examples of warlordism and regional warlords 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 Russia. 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.

18:32By 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 peacefully. I think that that outcome is becoming less and less likely the longer the conflict goes on. And so while Krigozin 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 are a geopolitical strategist and you spent the weekend not following this, I don't know what business you're in.

19:10This 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 I-5 or whatever highway was being dug up by American troops so that some horde of murderous mercenary doesn't show up in Washington, D.C. 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 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?

20:12And is that a given? Is there any scenario where someone steps in given the economy is in shambles? So many people have fled. We know there's been a huge exodus of young people, of workers. anybody on the scene at all? I know most of the opposition are jailed or dead or silenced. 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 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 force, and almost certainly a man, almost certainly a tough ex-intelligence person.

20:59So I wouldn't, like, 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 a 180-degree turn in foreign policy. And someone like Prigozhin, although he won't be 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. But going back to your question about commodity disruption, look, the market was very muted on Monday because timeframes are so uncertain, Maggie.

21:39You know, 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 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. them. 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.

22:28In fact, we got the same amount of oil at decreased prices, which was shocking to many investors. I think going forward, this civilization 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 tactically. We're going to take another quick break to hear a word from our partners. We'll be right back with more of the day's top analysis on the Real Vision Daily Briefing.

23:02Which is important. So plug China into this puzzle. They're looking at this and they've sort of given tacit approval to Putin. It's been a kind of weird relationship. What happens now with that and how is this factoring into China's own decision about what they're doing with their economy and their focus on making sure they have access to commodities? So, you know, I think, first of all, we at Clocktower Group, 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.

23:47And so over the weekend, as I said earlier, we've had conversations with a lot of people in China, whether they're geopolitical strategists themselves, policymakers, onshore investors. And there is a universal reaction that this is not good for Putin's regime. The official statements were very interesting. They didn't mention Putin by name. China just reiterated its support for stability in Russia, which sounds like a hedge to me in case somebody else is in charge. And so I think the Chinese policymakers are definitely concerned, but they're also preparing themselves for their horse to lose. I think they have to start thinking about that.

24:29Over 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 6 to 12 months where they use interest rate cuts, QE, and then fiscal. They're going to do that sequence that we did in our secular stagnation story. 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 February 24, 2022.

25:12to do. There is absolutely nothing that's happened in the last 18 months that would incentivize, I think, any country right now to contemplate something that Russia has done. Do you think that China can manage 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, I don't think they really have any other options. What's happening in China right now is real interest rates have increased. The PBOC is behind the curve. I mean, first of all, CPI is like inflation is non-existent.

25:58Producer 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 that's where they're going to be pushed into. Is it going to reflate the real estate bubble? I'm not sure. I'm not sure to what extent the households, even if they get relief, are willing to buy their fourth and fifth condo. So I think that that train may have very well passed.

26:39But this is a very serious problem for China, and I think it completely dominates their policymaker bandwidth, if you will. So, you know, these kind of adventures with Russia 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. 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.