Fullerton’s views on the Wagner Group insurrection in Russia

Executive summary

  • Over 24 to 25 June, Russia witnessed an astounding yet, short-lived challenge to President Putin’s authority.
  • Initial market reactions have been muted. Even so, we think these developments bear watching, as events may not be totally “resolved”.
  • In the short term, we think Putin may remain in power and Russia is unlikely to descend into chaos.
  • This could be a turning point in the Russia-Ukraine war, with wide-ranging implications for commodity prices, and global growth prospects – following possible policy shifts by countries with close Russian economic ties.
  • There may be increased appetite for downside protection strategies in the short-term. Any rise in bond yields would be seen as an opportunity to add to long-term US Treasuries and Bunds.

What happened?

Over the weekend from 24 to 25 June, Russia experienced an astounding and yet, short-lived challenge to President Putin’s authority. The initial market reactions to this attempted coup have been quite muted. Even so, we think that these developments bear watching, and recent events may not be completely “resolved”. We offer some of our investment thoughts below.

Key takeaways

Putin will remain in power and Russia is not expected to descend into chaos. There is some speculation that Putin had conspired this mutiny. We note that Putin had visibly expressed genuine unhappiness and anger and is keenly aware that the previous two Russian leaders were toppled due to internal pressures. Whilst it remains to be seen if Putin’s power has been significantly eroded from this episode, we do not expect a civil war to evolve from here.

De-escalation in Ukraine. Regardless of the real reasons for the mutiny, we agree that this would be an opportune moment for Russia to exit its war with Ukraine. The Russian-Ukraine escalation has developed into a war of attrition for Russia, in what is essentially an exhausting fight against the West. This insurgence could mark a turning point.

Easing of geopolitical risk premiums in commodity prices. A de-escalation would ease the pressure on rising commodity prices due to the withdrawal of war efforts. Russia may also choose to gradually remove the blocking of exports in key commodities such as oil and agriculture, as sanctions are gradually lifted.

Portfolio implications

De-risking in the short term. The unpredictability of the political situation in Moscow remains a key challenge for investors. Nonetheless, the cracks in Putin’s regime, already visible and further exposed in this incident, could pose additional challenges for Russia’s key economic partners such as China, Turkey, and the Middle East. Investors are likely to seek portfolio downside protection strategies given the uncertainty. In this regard, equities may not be necessarily sold off as corporate earnings are still resilient.

China’s weakening growth outlook may gather pace. China will need to do its own calculations regarding its own political situation. It can be argued that the economy is not in dire straits, but the government may turn increasingly inward looking, in the face of rising deflationary pressures. The focus of the Chinese government could intensify in areas such as national security and military stability, instead of addressing its economic issues. This poses further downside risk for Chinese equities.

To be prepared for changes in risk premia. Our key assumption remains that there is no implosion in the Russian government. The prospect of an end to the Russian-Ukraine war is positive for risk assets, but the finality of this event may still be months away. Meanwhile, with China’s weaker outlook, Japan’s planned changes to its Yield Curve Control (YCC) policy, as well as uncertainty in Europe, we expect volatility for risk assets may increase. We would take advantage of rising bond yields to raise our position in long term US Treasuries and Bunds.