From one nation of yellow flowers to another: we are with you

By Welshcake

It is Saint David's Day, the biggest day in the Welsh calendar, yet I've never felt less like celebrating. Instead, today's main sentiment is a call to action. 

The sight of an outgunned but determined nation putting up spirited resistance in a deeply unfair contest against a bullying larger neighbour has shredded my emotions. And no, I'm not talking about the Wales/England rugby match on the weekend.

When I wrote my latest column for the Creditflux newsletter (which you can read later this week), Russia had not yet done the unthinkable and attacked Ukraine. A big part of me still held onto the hope this was brinkmanship, out of which new approaches could even be formed - that the UK and US governments had been over-eager in ramping up the prospects of war while ridiculing the likes of France for pursuing diplomacy.  

But all that feels an age ago now, and we must move fast to keep pace with events. Unassailable evidence mounts of the Russian forces' violence against ordinary Ukrainian people, while a 40 mile armoured convoy heads towards Kyiv. The likely horror of the coming days must stand as context for all we ourselves do to help bring this outrage to an end.

Things look bleak for Ukraine, but Russia is the country Putin has landed on the rocks. His people are devastated and his miscalculation of Ukrainian character reverberates throughout financial markets.

Wales's patron saint David is associated with corpse candles, after he prayed for his people to have some warning of their death so they could prepare themselves. Today it is a corpse candle for Russia's economy - a darling of emerging markets at the start of 2022 - that burns.

While Russia attempts to encircle the Ukrainian capital on the ground, it has also taken steps to trap fleeing capital. Blocking westerners from selling out of Russian investments and stopping its own citizens from making FX transfers abroad is not just a tit-for-tat reaction to sanctions. It has become essential for the Russian government's short-term survival, but at the likely cost of triggering a sovereign debt default and throttling the country's prospects in perpetuity.

Russia's actions in Ukraine and at home are those of a desperate, wounded beast. The lock-up acknowledges that many of Russia's citizens want out of the nightmare Putin has created, while asset freezes confirm the growing reality that outside sentiment has irrevocably turned.

Companies of all stripes had woken up both to heightened risk but also the opportunity to cast a vote for change with what they held in their portfolios. Maybe some still believe personal sentiments and politics should not trump fiduciary responsibility. But it is not politics at stake, it is millions of people's lives and freedom.

Pulling what one can from the bonfire is understandable. But try telling your investors you're ESG while continuing to provide Russia liquidity to douse the flames.  

As painful as it may be, acting decisively and taking pain up front on Russia is also the only hope Europe now has to stage anything resembling a V-shaped recovery. The slower Russian support gets pulled, the longer the turmoil will drag out and damage economies across the continent for many years to come.

I know I'm preaching to the choir here with CLO investors, most of whom have had very little direct exposure. But the actions necessary next from European and US governments could hurt a range of sectors.

When even Switzerland is no longer neutral, you know the heat is on. Commentators love to claim sanctions didn't work well when Russia annexed Crimea. But Europe's lamentable lack of resolve left huge gaps through which banks were able to keep driving deals.

The slowdown caused some banks to exit debt financing for Russian businesses, and it cost various EM loan bankers their jobs. But those determined enough soon forged a pipeline of Russian deals that didn't fall foul of sanctions language.

This even extended to mega-business with US-sanctioned entities, such as one in 2016 in which Italian bank Intesa Sanpaolo provided €5.2 billion of financing for a Singapore vehicle to buy a 19.5% stake in Russian energy giant Rosneft worth €10.2 billion. Given the ultimate beneficial owner of much of that stake was an unknown Cayman Islands based company, it made a mockery of the sanctions project.

This time Europe's step-up has been more coordinated and aggressive, but still leaves much on the table. Implementing a bar on Russian banks accessing Swift sounds powerful, but it will be implemented case by case. Sanctions on the Central Bank of Russia's FX reserves are not as clear as they should be.

Europe gets 40% of its natural gas and 25% of oil from Russia, but its care not to disrupt commodity exports has become a problem. Hydrocarbon exports must be on the table and quickly, whatever the cost to Europe. The 'full-Iran' approach is not something to hold so Russia behaves better later. For it and Ukraine these are pivotal hours right now.

Some opine Russian oligarchs have no affect on things, so why bother targeting them? Yet some of the biggest names are already starting to complain. Trapping them in Russia admittedly leaves their assets open to seizure by the Kremlin, but for Putin to wreck the Faustian pact he signed with them in the early 2000s - make money but keep out of politics - would be a rash move indeed.

Adding sanctions against the several thousand members of Russia's Duma, Senate and presidential council could build a powerful chorus of disenchantment.

But sanctions will only work if our governments go beyond the prism of how things work in the west. Ask a Russian and they'll tell you all restrictions that hit people outside the Kremlin run the risk of backfiring. The most effective will be those that block the Kremlin's access to finances and technology, and hence its already limited funds for militarisation and propaganda. All supply of vehicles, machines, and spare parts should be banned - not just those used for aviation. Add in chemical products, agricultural equipment, seed stock, whatever it takes.

Ukrainians have earned the respect of the whole world in their fight for basic rights. One way or another they will win - Russian ascendency is on borrowed time. We must also earn their respect by demanding our governments do all they can to help this happen quickly and decisively.

This result would not just be a Ukrainian gain. Putin has long outlived his usefulness to Russian people and Russian businesses. They would be much more investible prospects if failure in Ukraine precipitates a change of control in the uppermost boardroom.

Here in Wales, the sun shone brightly today for this country of daffodils. A bitterly cold long night lies ahead for the people of Kyiv.

Saint David's best known miracle is that he caused the ground he was standing on in Llandewi Brefi (the only saint in the village) to rise up into a hill, whereupon a white dove settled on his shoulder. Some people have pointed out a new hill doesn't really add much to the party in Wales. But hey, it was probably impressive if you were there.

Reportedly his holiness was preaching against Pelagianism at the time. I know not, nor care, whether he was denying free will or just denouncing heresy in a more general sense. All I can do is appropriate the symbol of peace and say it is for all of us to make the tough decisions we need to make at this crucial time.

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