Markets tumble as U.S.-Russia talks drag on

Nothing in the whole of last week — including a Friday meeting between U.S. Secretary of State Antony Blinken and Russian Foreign Minister Sergei Lavrov in Geneva — shed any meaningful light on a possible outcome of the confrontation between Russia and the West over Ukraine. But tensions are so high that the Russian stock markets saw big losses.

Lavrov’s meeting with Blinken was short by recent standards — just 90 minutes. And, judging from the statements issued by both sides, nothing new was said.

The first to sum up the talks was Lavrov. He said:

• It was an intermediate meeting, and Blinken was satisfied with the outcome.
• The U.S. has promised to submit a written response to Russia by the end of next weekend, after which there will be a further ministerial-level meeting.
• Russia has no plans to attack Ukraine. A deployment of Russian weapons in Cuba and Venezuela was not discussed.

A little later, Blinken commented that:

• The talks were frank and substantive.
• Any incursion over the Ukrainian border by the Russian military will be seen as an invasion and meet a swift response. A non-military attack will also elicit a response.
• The U.S. and its NATO allies are ready to respond to some of Russia’s ‘concerns’, but will not shift from their core principles, including NATO’s open door policy.
• The diplomatic path is still open.

The meeting came at the end of a second successive week of bloodletting on Russian stock markets. The issue is not just that the markets have yielded to geopolitics, but that investors are finding it hard to understand what’s going on. Gossip seemed to be in the driving seat.

• The Russian stock market fell 6.5 percent Tuesday. This was short of 2018’s record drop when the U.S. imposed sanctions on a series of Russian billionaires. But recent declines (the market was down a total of 4.5 percent this week) are unusual because they come amid high oil prices. Analysts expect oil to soon hit $100 a barrel.
• The collapse happened despite little real news, and mixed messages from the Kremlin. Russia’s main ‘hawk’, Lavrov, unexpectedly said that, in place of a guarantee not to expand NATO, the Kremlin would be happy with a U.S. commitment not to support Ukraine’s admission to the alliance. At the same time, Russia announced it was joining Belarus in military exercises close to the Ukrainian border.
• When not watching the stock markets, experts in Moscow have been discussing every snippet of news about how a possibile military conflict might play out. For example, the Communist Party published Wednesday a draft appeal to President Vladimir Putin, urging him to formally recognize the Russian-backed rebel statelets in Eastern Ukraine as fully-fledged countries. However, most experts came to the conclusion it was not worth reading too much into this – if this was Putin’s secret plan, it would hardly be entrusted to the Communists.
• Similarly, there was much debate Thursday about the Putin Accountability Act proposed by Jim Banks, the Republican congressman for Indiana. In it, Banks called for personal sanctions against the Russian president, his family, the entire Russian government, plus billionaires, security chiefs and propagandists. Clearly, this act has no chance of being enacted — and everyone in Moscow who understands the U.S. political system knows that. However, it gave the likes of editor-in-chief of television channel RT Margarita Simonyan the chance to boast of being included on the list.

What’s the prognosis for Russian markets

Russian investment bank Renaissance Capital recently attempted to evaluate what might happen in the event of a military escalation and Western sanctions. According to its predictions, the ruble would immediately fall 20 percent, and this would be accompanied by an outflow of funds from the debt and stock markets, a tightening of Central Bank policy, capital controls, foreign exchange interventions and a tax on the sale of Russian government bonds. In short, it would be a nightmare for emerging market investors.

For the moment, the Kremlin can afford stock market turbulence. Despite a private investment boom in Russia, which has attracted many column inches, in reality only about 2.6 million people are actively trading (that means making at least one trade each month) —  less than 2.5 percent of the Russian electorate.

Why the world should care: The risk of a military conflict in Europe seems not to have significantly receded, or increased, this week. Back in November Putin instructed the Foreign Ministry to “keep the West on its toes” and this appears to be exactly what Russian diplomats are doing. But the longer this goes on, the greater the risk of an error that could be enormously costly to all sides.