War in Europe
We know that there’s been sporadic combat between Russian separatists and Ukrainian forces around the Donbas region since Putin’s annexation of Crimea in 2014. Now, however, Russian forces - numbering almost 200,000 - have launched a full-blown offensive against Ukraine itself. It seems U.S. predictions were spot on.
Putin delivered the news in a televised address.
“I have decided to conduct a special military operation. It aims to protect people who have been bullied and subjected to genocide by the Kyiv regime for eight years.”
“For that, we will strive for de-militarisation and de-nazification of Ukraine and will bring to justice those who committed multiple bloody crimes against civilians, including Russian citizens.”
- Vladimir Putin, Russian President
What?! This pretext is obviously absurd.
But what are Putin’s true intentions? Will he conquer the entirety of Ukraine and install a puppet government? Is this an attempt to force the Ukrainians to the table and officially cede the Donbas region? Who knows?!
It is certain, however, that the situation is looking rather dire from the Ukrainian perspective. Russian troops have closed in on the capital, Kyiv, and their attack is multi-pronged. It looks to me that the Ukrainians will have to cede Kyiv sooner or later (hopefully the latter) and fall back to a new defensive line in the east, as painful as this will be.
Putin knows that NATO is watching: failure would be an unfathomable embarrassment, but a rapid triumph would put the spotlight on Russia’s military capabilities. He’s also short on time. As the days pass, Ukraine’s stockpiles swell with NATO’s weapons, but Russia’s economy suffers from sanctions.
It’s also clear that there must be a disparity in morale. Ukrainians fight for their freedom. In contrast, Russian soldiers serve a 69-year old autocrat who - chronically aware of his own mortality - intends to shake up Eastern Europe. Going out with a bang?
I respect that Volodymyr Zelensky - Ukraine’s President - continues to urge resistance. He’s rumoured to still be in Kyiv, despite being marked on a Russian ‘kill list’.
As to markets, they reacted in a volatile fashion. It helps to view the moves through a handful of economic realities.
Economies have not fully recovered from COVID, and supply-chain issues remain.
Severe sanctions imposed on Russia by the EU, U.S., and others will be of detriment to both parties’ economies.
Inflation may be exacerbated by the restricted supply of certain goods.
Keep in mind that…
Russia supplies around 40% of Europe’s gas, holds third place in global oil production, and accounts for 14% of mineral extraction (aluminium, nickel, iron ore, etc.).
Ukraine and Russia together account for roughly 25% of global wheat production.
International stock market indices all plunged at news of the invasion, with the MOEX performing worst of all (initial drop of circa 45%), although there was a recovery towards the end of the week.
Gold spot (XAU) and wheat (W1) prices increased.
Natural gas (NG1) and oil (CL1) also climbed.
The Russian Ruble and Ukrainian Hryvnia lost value against the USD.
I assume that the war in Ukraine will exacerbate volatility this year, and I’ll be looking for a spillover of fear into Western markets that could depress the valuations of stocks on my watchlist.
It feels odd to write about finance when Ukrainians are at war… I hope the humanitarian cost will be minimal, and take comfort in the fact that Putin appears willing to negotiate. But the terms will be brutal nonetheless.
Potential Porsche IPO
The German automobile manufacturer, Volkswagen AG, could launch an IPO of Porsche AG as soon as Q4 of this year. In consideration of the complex cross-holdings of German automobile firms, let me give some context.
Porsche AG, the actual manufacturer of sports cars, is a wholly-owned subsidiary of Volkswagen AG. In contrast, Porsche Automobil Holding SE is an investment vehicle that holds 53% of common shares in Volkswagen AG.
So, the offering of Porsche AG would permit investors to establish direct ownership of the real deal. Porsche AG could hit a valuation of about €85 billion, and proceeds from the offering would likely be used to finance VW’s electric vehicle ambitions (no surprise there).
There are further details:
Porsche’s share capital would be split 50-50 between preferred shares and common stock. Around 25% of the preferred shares will be openly traded.
Half of the IPO proceeds will be distributed by Volkswagen AG in the form of a special dividend. This, in turn, will allow Porsche Holding to purchase a direct stake in Porsche AG, which should come in at around 25% plus one, giving the former a blocking minority vote on strategic decisions.
Yeah… quite confusing. Note that the offering will only happen if market conditions normalise before Q4. But with investors on the edge, this seems unlikely.