For Years, Putin Didn’t Invade Ukraine. What Made Him Finally Snap in 2022?

Russia-Ukraine Conflict

Political

Summary:

Why did Vladimir Putin invade Ukraine and try to capture Kyiv in February 2022, and not years earlier? Moscow has always wanted to dominate Ukraine, and Putin has given the reasons for this in his speeches and writings. Why then did he not try to take all or most of the country after the Ukrainian revolution of 2014, rather than only annexing Crimea, and giving limited, semi-covert help to separatists in the Donbas?

On Friday’s one-year anniversary of Russia’s criminal invasion of Ukraine, it is worth thinking about precisely how we got to this point – and where things might be going.

Indeed, Russian hardliners spent years criticising their leader for not invading sooner. In 2014, the Ukrainian army was hopelessly weak; in Viktor Yanukovych, the Russians had a pro-Russian, democratically elected Ukrainian president; and incidents like the killing of pro-Russian demonstrators in Odesa provided a good pretext for action.

The reason for Putin’s past restraint lies in what was a core part of Russian strategy dating back to the 1990s: trying to wedge more distance between Europe and the United States, and ultimately to create a new security order in Europe with Russia as a full partner and respected power. It was always clear that a full-scale invasion of Ukraine would destroy any hope of rapprochement with the western Europeans, driving them for the foreseeable future into the arms of the US. Simultaneously, such a move would leave Russia diplomatically isolated and dangerously dependent on China.

This Russian strategy was correctly seen as an attempt to split the west, and cement a Russian sphere of influence in the states of the former Soviet Union. However, having a European security order with Russia at the table would also have removed the risk of a Russian attack on Nato, the EU, and most likely, Ukraine; and allowed Moscow to exert a looser influence over its neighbours – closer perhaps to the present approach of the US to Central America – rather than gripping them tightly. It was an approach that had roots in Mikhail Gorbachev’s idea – welcomed in the west at the time – of a “common European home”.

At one time, Putin subscribed to this idea. He wrote in 2012 that: “Russia is an inseparable, organic part of Greater Europe, of the wider European civilisation. Our citizens feel themselves to be Europeans.” This vision has now been abandoned in favour of the concept of Russia as a separate “Eurasian civilisation”.

Between 1999, when Putin came to power, and 2020, when Biden was elected president of the US, this Russian strategy experienced severe disappointments, but also enough encouraging signs from Paris and Berlin to keep it alive.

For Years, Putin Didn’t Invade Ukraine. What Made Him Finally Snap in 2022?_1

The most systematic Russian attempt to negotiate a new European security order came with the interim presidency of Dmitry Medvedev from 2008 to 2012. With Putin’s approval, he proposed a European security treaty that would have frozen Nato enlargement, effectively ensured the neutrality of Ukraine and other states, and institutionalised consultation on equal terms between Russia and leading western countries. But western states barely even pretended to take these proposals seriously.

In 2014, it appears to have been Chancellor Angela Merkel’s warnings of “massive damage” to Russia and German-Russian relations that persuaded Putin to call a halt to the advance of the Russian-backed separatists in the Donbas. In return, Germany refused to arm Ukraine, and with France, brokered the Minsk 2 agreement, whereby the Donbas would return to Ukraine as an autonomous territory.

In 2016, Russian hopes of a split between western Europe and the United States were revived by the election of Donald Trump – not because of any specific policy, rather because of the strong hostility that he provoked in Europe. But Biden’s election brought the US administration and west European establishments back together again. These years also saw Ukraine refuse to guarantee autonomy for the Donbas, and western failure to put any pressure on Kyiv to do so.

This was accompanied by other developments that made Putin decide to bring matters concerning Ukraine to a head. These included the US-Ukrainian Strategic Partnership of November 2021, which held out the prospect of Ukraine becoming a heavily armed US ally in all but name, while continuing to threaten to retake the Donbas by force.

In recent months, the German and French leaders in 2015, Merkel and François Hollande, have declared that the Minsk 2 agreement on Donbas autonomy was only a manoeuvre on their part to allow the Ukrainians the time to build up their armed forces. This is what Russian hardliners always believed, and by 2022, Putin himself seems to have come to the same conclusion.

Nonetheless, almost until the eve of invasion, Putin continued unsuccessfully to press the French president, Emmanuel Macron, in particular to support a treaty of neutrality for Ukraine and negotiate directly with the separatist leaders in the Donbas. We cannot, of course, say for sure if this would have led Putin to call off the invasion; but since it would have opened up a deep split between Paris and Washington, such a move by Macron might well have revived in Putin’s mind the old and deeply held Russian strategy of trying to divide the west and forge agreement with France and Germany.

Putin now seems to agree fully with Russian hardline nationalists that no western government can be trusted, and that the west as a whole is implacably hostile to Russia. He remains, however, vulnerable to attack from those same hardliners, both because of the deep incompetence with which the invasion was conducted, and because their charge that he was previously naive about the hopes of rapprochement with Europe appears to have been completely vindicated.

It is from this side, not the Russian liberals, that the greatest threat to his rule now comes; and of course this makes it even more difficult for Putin to seek any peace that does not have some appearance, at least, of Russian victory.

Meanwhile, the Russian invasion and its accompanying atrocities have destroyed whatever genuine sympathy for Russia existed in the French and German establishments. A peaceful and consensual security order in Europe looks very far away. But while Putin and his criminal invasion of Ukraine are chiefly responsible for this, we should also recognise that western and central Europeans also did far too little to try to keep Gorbachev’s dream of a common European home alive.

Source:Anatol Lieven

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Devin

Political

2023 should be a year of centennial jubilation for the Turkish Republic, and will be one of political decisions, with presidential and parliamentary elections set for May. Notwithstanding war in two neighboring countries and major challenges for its economy, starting with sky-high inflation, Turkey has long planned to celebrate a century since the founding of the republic in 1923 by Mustafa Kemal Ataturk. The February 6 earthquakes that killed more than 40,000 people will make the anniversary events more somber occasions, with their impact on Turkey's coming year still difficult to foresee.

Kemal Ataturk – whose mausoleum now dominates from a hilltop in Ankara, the capital he chose to replace Istanbul – stood for radical Europeanization and modernization. The changes undertaken in the 1920s included a total reform of the Turkish alphabet and language, and an end to public clothing norms such as the fez for men and veils for women.

Today, a century later, Europe's weaknesses are being laid bare and old certainties loosened. The Turkey of 2023 – or Türkiye, as the country now officially calls itself – has a population of 85 million, a sixfold increase. In recent decades it has undergone major transformations, with several cities growing into huge metropolises. Istanbul has become Europe's biggest urban agglomeration, and its youthful energy is often likened to New York, another "city that never sleeps." Turkish military personnel are stationed abroad from Qatar and Somalia to Syria and Libya. The country's national airline has become world-class and is now the number one operator for African routes.

End of the road?

Few countries in modern Europe have been led by the same person for as long as the Turkey of President Recep Tayyip Erdogan. Leaving aside Russia's Vladimir Putin, who has effectively remained in charge since 1999, Mr. Erdogan is the continent's longest-serving leader, set to reach two decades in power this March at the helm of the Justice and Development Party (AKP).

President Erdogan's 20-year rule marks an undeniable expansion of Turkey, not only in population but also in political, economic and military influence. Another notable dynamic is the shift of gravity away from Istanbul and its business tycoons — toward new elites in the east and northeast, where Mr. Erdogan's roots lie, and a more conservative, religious mindset.

On foreign policy, Turkey's critics highlight a sometimes-unpredictable assertiveness that comes with a politicized use of history. The government has taken up the long-neglected Ottoman heritage, attributing a greater role to religion than in the radically secular Ataturk era. Several years ago, this writer was startled to see an AKP election poster in Ankara referencing the year 1071, with an implicit suggestion to target the 2071 millennium for major achievements. The 1071 victory by a Seljuk army over the Byzantines marked the beginning of the conquest of Anatolia by Turkic tribes. A similar move was made in 1896 by Franz Joseph l, King of Hungary, to celebrate the millennium of the "Hungarian land-taking" in 896 and thus strengthen national identity.

Initially, Mr. Erdogan stood for a close relationship with the European Union and the opening of accession talks in 2005. The 2004 decision by Greek Cypriots to reject the United Nations plan to resolve the island's status was perhaps the most significant moment for Ankara's alienation from the EU. Admitting the Republic of Cyprus into the EU, and the strong political influence that this conferred on the government in Nicosia, seems to have caused a traumatic sense of disappointment in Ankara.

President Erdogan and his AKP are determined to win the coming May 2023 elections to secure him another five-year mandate and a supporting majority in parliament. The new presidential constitution, approved by referendum in 2017, hands the leader wide powers and makes it easy to govern as long as they have parliamentary backing. This could well change after the election in May, which would raise important practical and legal questions.

The double elections for president and parliament will arrive during a season normally associated with optimism, but sometimes also with renewal, reform or even rebellion. Recall the Prague Spring of 1968, or the simultaneous student unrest in Paris and Germany – as well as Turkey's vaguely ecological but rather undirected Gezi Park protests in May-June 2013. In the decade since, increasingly repressive actions by Turkey have deepened the divide with the EU. That dynamic accelerated in the wake of Gezi Park and peaked after a foiled coup attempt in 2016.

The erosion of liberties and defiance of EU standards and Council of Europe rulings have been harshly criticized by Brussels. But what often escaped Western observers was the bitter, hard-to-grasp rivalry between the "mainstream" conservative AKP and its temporary partner, the religious Gulen movement. Their fierce power struggle accounted for much of what happened in Turkey starting around 2010 and culminating in the clumsy but still bloody coup attempt of July 16, 2016.

After months of mutual recriminations between Ankara and EU capitals, some in various corners of Europe were quietly rejoicing at the prospect of ousting Mr. Erdogan, however undemocratically. What mattered more – and went on to cast a permanent pall over EU-Turkey relations – was the Europeans' failure to unequivocally sympathize with the coup's ultimate target, Turkish democracy. This contrasted with the immediate aid and solidarity coming from the British government and, importantly, from Mr. Putin's Russia, ushering in a steady warming of relations with both countries.

President Erdogan and his government have faced multiple foreign crises simultaneously. While the courtship between Brussels and Ankara sometimes degenerated into arguments or unfriendly behavior, the wars to Turkey's south (in Syria and Iraq) and north (Russia/Ukraine) have been more lasting sources of danger. Not to mention the migrant crisis – delivering four million mostly Syrian refugees – and tensions with Greece and Cyprus over the Eastern Mediterranean Sea borders, ahead of elections in both Ankara and Athens.

Coming elections

Against this backdrop, the 2023 elections should determine the direction of Turkey. However, regardless of the result, negotiations between political leaders and parties could prove more decisive.

As in past races, Turkish opposition parties hope to gain the upper hand this time around and finally oust Mr. Erdogan. Brandishing the AKP's conservative and religious profile, he has proven quite pragmatic, when necessary, always good for a surprise both domestically and abroad. There is no reason this time should be different, despite the rise of a unified opposition: the "table of six" parties. Their vanguard – the Republican People's Party (CHP), founded by Ataturk himself – is the traditional torchbearer of secularism, run by a seasoned leader who has already several times tried and failed to dethrone the incumbent.

The wide ideological variety of the electoral bloc recalls a recent failed attempt in Hungary to unite the opposition against Viktor Orban. As in Hungary, government structures and the influence over the media by the ruling party dominate Turkish politics, giving plenty of ammunition to those who claim that its elections are unfair.

At the same time, Turkey's democracy typically features thousands of election observers volunteering for ballot monitoring, which are usually characterized by high turnout rates. Add to that the volume of social media communications in a tech-savvy nation and there is a strong case that real democracy is at work, despite a framework that is unfair by conventional Western standards.

The opposition is still determining whether the CHP's longtime leader, Kemal Kilicdaroglu, who seems to fare well in the polls, will ultimately be nominated. The mayors of Istanbul and Ankara, Ekrem Imamoglu and Mansur Yavas, appear more attractive, even to many CHP supporters.

Meral Aksener, a popular figure in the nationalist camp, has declined to run for president. She hopes to return as prime minister to a stronger parliament after an opposition victory, when the role of president would be limited to more ceremonial functions. It is a bold bet, relying on the victors not to seize the current winner-takes-all constitution for their own gain.

Several small parties, led by former top politicians (like former prime minister Ahmet Davutoglu and deputy prime minister Ali Babacan) appear far from reaching even the lowered 7 percent threshold to reach the parliament. The left-leaning, pro-Kurdish Peoples' Democratic Party (HDP) is doing reasonably well in the polls but is threatened by a possible legal ban on the grounds of alleged collusion with the Kurdistan Workers' Party (PKK), the Kurdish militant group. The HDP's leader, Selehattin Demirtas, has been imprisoned for six years. Overall, the Kurdish vote could be decisive, as the AKP has always been able to rely on a major portion of ethnic Kurds to vote for them.

The AKP's smaller, nationalist coalition partner, the Nationalist Movement Party (MHP), is clinging to power amid internal strife. Some speculate that it might even be ready to tolerate an opening by the government toward left-wing Kurds, especially the HDP, or renewed dealings with PKK leader Abdullah Ocalan, imprisoned for terrorism.

After all, 10 years ago the AKP took big steps by attracting and incorporating Kurdish votes and Kurdish politicians, some of whom continue to hold important positions in the party. Taboos were broken when negotiations involving the imprisoned Mr. Ocalan led to a comprehensive cessation of all hostilities, ushering in two years of peace (from March 2013-July 2015). At the time, I vividly recall the joyful sense of relief in the air when traveling to Eastern Turkey, which had known decades of fighting, bombings and the recruitment of young people for the underground movement.

Alas, the truce broke down in the summer of 2015, by some accounts because the PKK and its Syrian affiliates (the People's Protection Units, or the YPG) attempted to profit from the Western military surge against the Islamic State. The Islamist group was occupying large swaths of Syrian territory at that time, culminating in the battle for Ayn-al-Arab (known by its Kurdish name Kobani). It may have been too tempting to try to carve out proper PKK territories along the Syrian border and connect them to contiguous YPG-held territory in Syria. Turkey reacted in a foreseeable way, harshly crushing the effort.

Source: GIS

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Justin

Central Bank

Economic

Forex

Speculation is rife about the March meeting

The market loves big events and the speculation built around them. With the current BoJ governor preparing for his last gathering, the market is trying hard to predict the post-meeting announcements. Will the BoJ pull the plug on the yield curve framework and wipe the slate clean for the new governor or opt to do nothing, giving the opportunity to Ueda to decide the best course of action? Both sides have sound arguments, especially the “withdraw the yield curve control framework” camp as the BoJ head nominee comes from the pre-Kuroda era and as such he does not carry the current administration’s successes and failures on his record. However, whatever is decided depends on the economic undercurrents. There have definitely been some positive signs when examining the inflation metrics and the latest average earning prints, but there are still certain dark stains in the economy.

Tokyo CPI frontrunning the nationwide print

With most developed countries flirting with double-digit inflation rates, Japan’s nationwide headline CPI figure managed to reach the 4.3% level in January. Next week we get the February Tokyo CPI, an early preview of the ongoing inflation pressures. The January print came at 4.4%, the strongest yearly growth since June 1981, and hence another strong print on Friday could set the scene for a similar figure on a national level. While the headline inflation numbers look tempting for the BoJ, the core CPI, excluding food, energy, and alcoholic beverages remains disappointing, thus, potentially tying BoJ’s hand. Last month’s nationwide print came at 1.9%, below the artificially inflated March 2014 figures. Considering the global inflationary pressure, a core CPI print in the region of 1-2% is nothing to write home about, but clearly represents progress compared to the BoJ’s recent record.

Could Economy Finally Allow Boj to Plot a Course Towards Normalization?_1

Decent retail sales growth despite low consumer confidence

While the market has been almost exclusively focusing on the CPI prints, the BoJ has been all over the consumer spending data. When examining the retail sales figures against the consumer confidence, we get an interesting disparity. While the latter has dropped aggressively, retail sales growth remains at elevated levels. This gap is even more evident when analyzing the large-scale retail shops data. Putting aside the volatile nature of the sales dataset, recent history points to a possible correction in retail sales ahead. However, the recent surprising jump in the average monthly cash earnings could mean that there is some underlying strength among consumers. If this strength gets confirmed at next week’s data releases, it could allow the BoJ to consider more aggressive scenarios for its 2023 strategy.

Could Economy Finally Allow Boj to Plot a Course Towards Normalization?_2

Industrial production raises question about GDP growth

With the fourth-quarter GDP report disappointing on February 14, the market would be looking closely at the preliminary February industrial production data on Tuesday morning. The January figure was equally disheartening and if we get another negative print, we could see the market pricing in an equally weak first-quarter GDP, potentially even negative. In addition, a weak industrial production result could raise questions on the expected impact of the Chinese reopening on goods demand and the supply lines in the region and globally.

Could Economy Finally Allow Boj to Plot a Course Towards Normalization?_3

Yen tries to recoup some of 2022 losses

The yen had a dreadful 2022 against the euro. A 19% rally pushed this pair to the highest level since December 2014, on the back of the divergent central banks’ policy stance and the overall economic developments. Yen bulls have been trying to stage a comeback since the October 21 high of 148.39, but the move lower has not been easy. The euro/yen pair continues to hover inside a descending broadening wedge as euro bulls seem to lack the appetite to push it above the upper boundary. The absence of a strong trend reveals the hesitance from both sides to make bold moves as they wait for the appropriate trigger. Yen fans would enjoy a drop towards the 141.04 area, but would loathe a break above 144.24 that could potentially open the door to a much stronger rally.

Could Economy Finally Allow Boj to Plot a Course Towards Normalization?_4

Source:XM

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Kevin Du

Cryptocurrency

A year of negative press and scandalous headlines has put the cryptocurrency market on the radar of many governments across the globe.

The spectacular FTX collapse, the insider trading scandal at Coinbase and the $40bn collapse of TerraUSD and sister token Luna, among others, made 2022 quite a year for the crypto market.

These events, and the fact that cryptocurrencies and the underlying blockchain technology are becoming a pervasive force in the global economy, make a compelling case for greater regulation of the market.

A World Economic Forum report shows the increasing acceptance and decentralised nature of digital currencies pose unprecedented challenges for capital markets, investors, financial regulators and tax authorities globally.

Concerned about the elevated risk investors face, authorities have been stepping up cryptocurrency regulation. Watchers warn that more stringent crypto regulation may be just around the corner.

For crypto investors, it has become imperative to understand what regulation may look like and how to navigate a more regulated cryptosphere.

But first, let's dive into why the market needs regulation.

Does crypto need regulation?

Crypto experts insist digital is the future of finance. Hence, the industry must be regulated in the same way as the traditional financial system.

"Within crypto, regulation can play a critical role to safeguard customer assets, protect investor interests and significantly limit cases of fraud," says Joseph Dallago, co-founder and chief executive of Rain Financial, which operates the Rain cryptocurrency exchange that is licensed by the Central Bank of Bahrain.

The decisions of governments to regulate crypto must be championed, says Nigel Green, chief executive and founder of deVere Group.

Digital currencies should be held to the same standards as the rest of the financial system, he adds.

Crypto has come of age and there is no greater proof of its mainstreaming than "the news that digital currencies are being brought into the regulatory tent in one of the world's largest economies and most highly-regulated markets", says Mr Green, citing the UK government's recent decision to regulate the industry.

Source: The National News

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Samantha Luan

Economic

Russia's invasion of Ukraine has disrupted economies and markets around the world, from energy and food prices to European banks, emerging market stocks and the Russian currency.

Below are five charts that show how Europe's biggest conflict since World War Two has shaped global financial markets in the last 12 months.

1/The Safest of Safe Havens

There are many reasons why king dollar reigned supreme in the past year and one is its status as the ultimate safe haven at times of uncertainty. The economic fallout of the war, which hit currencies such as the euro hard, also lifted the dollar.

The greenback is down from September's two-decade highs, but it's still up 8% against a basket of currencies since the conflict began.

The impact on other safe havens such as governments bonds is complicated, however. Yes, U.S. and European bond prices rose in the days following Russia's invasion as investors sought safety in top quality assets.

But they soon fell and yields soared as the war triggered an energy shock and inflation surged, while central banks responded with aggressive rate hikes. Germany's 10-year Bund yield has risen to 2.4% from just 0.2% on Feb. 23, 2022.

2/The Sting in The Pipeline

The war in Ukraine brought with it an energy crisis like no other. Post-COVID-19 reopening had already sent prices for anything from oil to coal to natural gas higher. But when Russian tanks rolled into Ukraine in late February, European natural gas prices rocketed by almost 400% in two weeks. By August, they were 700% higher than a year earlier.

Pre-war, Russia supplied over 30% of Europe's gas, most of it through a network of pipelines, thousands of kilometres long. Once Western sanctions hit, the flows of gas dried up. Energy prices soared, bringing the threat of blackouts, recession and a worrying switch back to dirtier sources of fuel.

Thankfully, winter has proven mild and Europe has found other suppliers, bringing the gas price back to around 50 MWh, its lowest since August 2021. But, there's a lag of around 6-9 months between what happens on the wholesale market and what happens to consumers' bills, meaning last August's punishing spike to almost 350 MWh - equivalent to an oil price of over $200 a barrel - hasn't even begun to bite.

3/Precious Food

Food prices, which were already on a tear in 2021 after COVID-19, leaped again after Russia's invasion of Ukraine on fears of shortages and disruptions to Black Sea trade.

Last year the U.N. food agency's average price index hit its highest level on record, up 14.3% from the previous year. The index had already gained 28% in 2021.

Higher energy and input costs, adverse weather and continued strong global food demand are adding to pressure from significant market disruptions. Over the whole of 2022, four of the five food sub-indexes - cereals, meat, dairy and vegetable oils - reached record highs.

Food price pressures are easing, but that does little to soften the blow for many developing nations, where food and energy prices make up a larger share of spending. Shocks related to the COVID-19 pandemic and the war in Ukraine mean the world is unlikely to meet a longstanding goal of ending extreme poverty by 2030, the World Bank has warned.

4/ Rouble Trouble

The past year has seen wild swings for Russia's currency - a more than 50% tumble following the invasion to record lows in March, followed by a more than 200% rise to a multi-year high in June thanks to soaring energy prices, FX restrictions and the central bank ramping up interest rates. Twelve months on, the rouble is broadly back to its pre-war 12-month average.

Russia wants a weaker rouble to boost hydrocarbon revenues, which is helping plug a widening budget deficit and soaring domestic spending due to the ballooning cost of the Ukraine war. But it is also attempting to shore up its finances by selling its foreign currency reserves, and started interventions for the first time in almost a year in January. Moscow burned through $38 billion of its rainy-day fund, the National Wealth Fund, in December alone to cover its deficit.

Fresh pressure on the currency could come from sanctions: EU members are expected to approve a 10th package around the anniversary.

5/Two Camps for EU Banks

European banks took a drubbing when Russia invaded Ukraine. Since then, those that have slashed links have outperformed and those that have not continue to see their shares take a hit.

Raiffeisen Bank International's shares suffered their worst daily drop since the onset of the war on Monday, as the Austrian lender drew the attention of U.S. sanctions officials over its Russian business. Shares of Raiffeisen, deeply embedded in Russia's financial system, have slumped over 40% since the start of 2022.

France's Societe Generale sold its Russia business Rosbank in May, taking a 3 billion euro ($3.18 billion) hit. Italy's UniCredit cut its cross-border exposure to Russia by two thirds, but still owns one of Russia's top 15 lenders. It has pledged to cut its presence, which has reassured investors. SocGen and UniCredit shares have rebounded from the post-invasion hit.

Source: Reuters

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Alex

Central Bank

If Fed steers on the time it takes interest rate hikes to hit the real economy are anything to go by, the state of the economy this summer will define the endgame.

The U.S. Federal Reserve clearly knows it's tightened credit a lot already - the past 12 months have seen the biggest official interest rate rise in more than 40 years. It's just far less certain when all that kicks in on demand - or at least slows things down enough to sink inflation back to target.

Although markets now appear to finally agree with Fed guidance on completing the cycle in July - at a peak rate 75 basis points above the current 4.50-4.75% range - the slippery concept of policy lags dictates whether it plays out that way.

At its latest meeting, the Fed laced its statement and minutes with a rider about cumulative tightening and uncertain lags.

And yet the timing of those lags likely splits the hawks and doves - the latter fearing those traditional assumptions of long 18–24-month lags risk policy overkill now if the economy is already weakening by the time existing hikes begin to hit home.

Hawks assume the transmission is far quicker these days and the ongoing buoyancy of the jobs market, retailing and the service sector shows little damage so far and more work to do.

In an interview with CNBC on Wednesday, hawkish St Louis Fed chief Jim Bullard reckoned what the Fed has done to date had already been well absorbed and more needed to be done.

"This is the age of forward guidance and so the long and variable lags argument doesn't make as much sense as it made decades ago," said Bullard, who doesn't get a vote this year on the rotating policy committee.

"Financial markets did a good job in adjusting."

The gist of the argument is that the Fed doesn't deliver credit directly to the wider economy - banks and financial markets do. And if the Fed is now communicating its future policy intentions successfully - unlike 40 years ago - and lenders and markets respond accordingly, then the impact of the whole Fed cycle is pretty quick, or at least quicker than it was.

That's why there's so much attention paid to broader 'financial conditions' and behaviour of stock and bond markets. Given that, the Fed should be reasonably wary of any confluence of ebullient markets and brisk growth if inflation is still way above target.

That's not the full picture of course - some lags always exist for borrowers refinancing fixed rate mortgages and loans or realizing asset gains or losses at later dates, and also in annual wage rounds.

But few seem to doubt that these policy lags have shortened considerably over the decades. Fed Flags Lags and Summertime Blues_1

Laggards

Speaking last month, Fed board governor Chris Waller said the 12-18 months' range once assumed no longer applies and he estimated policy moves now landed in just 9-12 months.

If that's true, then the first Fed hike in the cycle should be making itself felt now and raises eyebrows about talk of a re-acceleration of growth into the new year.

However, as Bullard stresses, the first half of the cumulative 450bps of tightening was just to get the Fed funds target back to an assumed 'neutral' rate around 2.5% - just to stop it actively stimulating the economy after the uber-easy settings of the pandemic.

So presumably a 9–12-month lag from the point at which policy rates turned restrictive above 2.5% last September would take its toll this summer - where the terminal rate is priced.

Fed officials are not picking that estimate from thin air.

A paper by Kansas City Fed economist Taeyoung Doh and the San Francisco Fed's Andrew Foerster late last year estimated that the lag had shortened markedly since 2009 as a result of both forward guidance and use of the Fed balance sheet.

It concluded that the biggest deceleration in inflation occurs about one year after tightening.

And it now models a proxy funds rate that incorporates these additional policy tools. Although only updated at the end of each month, January's estimate - just before the Fed's latest rate rise - was 6.1%, almost 150bps above the official target rate at the time, although already 35bps below November's peak.

"If financial market conditions tighten as policymakers provide forward guidance, the proxy fund rate can rise, even if policymakers have not raised the federal funds rate," they said.

Showcasing the study in December, San Francisco Fed chief Mary Daly adopted a more dovish slant on the gap between the funds rate and tightening financial markets. "Ignoring it raises the chances of tightening too much."

For markets, it's yet another lesson in not fighting the Fed too much - or drifting too far from its guidance.

Former Fed vice chair and now Pimco economic adviser Richard Clarida pointed out this week that the last time Fed rates were at 4.75% - on their way to a peak of 5.25% - was in 2006.

"A crucial difference today as compared with previous major rate hike cycles is communication."

"But investors should remain attentive to the occasional episodic disconnects observed between Fed guidance and some prominent indices of financial conditions," Clarida told clients.

"While financial conditions according to some indexes have eased somewhat... the U.S. economy likely has not yet absorbed the full force of Fed tightening to date." Fed Flags Lags and Summertime Blues_3

Source: Reuters

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Justin

Russia-Ukraine Conflict

Political

The United States is good at getting involved in wars and not as good at getting out of them.

A year on, the Russia-Ukraine war has no end in sight. The war is at a semi-stalemate, and both Russia and Ukraine are sticking to their demands. Ukraine has been able to defend itself against Russian aggression in large part due to the $29.8 billion worth of weapons and equipment that the US has sent so far. While the US has hit some limits, it is sending ever more advanced weaponry and provides Ukraine with intelligence to help it target Russia more effectively. Ukraine cannot continue the war without Western military and economic support.

All of which raises the question of whether the Russia-Ukraine conflict is entering forever war territory.

The US’s post-9/11 wars in the Middle East and Afghanistan turned into decades-long conflicts because the objectives kept shifting, because they were guided by ideological goals, and because they were enabled by legal authorizations that gave policymakers room to expand the wars. The situation in Ukraine is obviously different from US engagement in Iraq or Afghanistan — for one, the US does not have troops on the ground in Ukraine. But when I asked former high-ranking military officials and national security experts about the risk of protracted war in Ukraine, they told me that those other forever war factors are currently present in the US’s support for the Ukraine war.

The Biden administration does not view the war as endless. Defense Secretary Lloyd Austin said in October, “certainly we don’t want to see a forever war,” and he blames Russian President Vladimir Putin for the war’s continuation. But there’s a lot of time between here and forever. And in statement after statement after statement, officials describe the US’s enduring commitment to Ukraine. (Neither the White House nor the Pentagon replied to interview requests.)

“This is going to be a generational conflict between the West and Russia,” says historian Michael Kimmage of Catholic University, who has researched Putin’s strategy in the war. “The further the West moves in, the more Putin is going to be motivated to keep on going,” he told me. “This is going to be the mother of all forever wars, because of the nature of the adversary.”

So what can the US learn from its interventions in its Middle East forever wars? In the first year of the Iraq War, a young Gen. David Petraeus said he would repeat the mantra to himself, “Tell me how this ends.”

These days, Petraeus is retired from active duty and shares on social media daily Ukraine war situation reports from the Institute for the Study of War, where he is a board member. “I think the most important question has to do with how one might see this war ending,” Petraeus wrote in an email. “Related to that is the critical question of what needs to be done to convince Vladimir Putin that the war in Ukraine is not sustainable for Russia on the battlefield in Ukraine and also on the home front in Russia.”

But there are other ways of posing the question. Thomas Pickering, a former career ambassador who served in Russia and rose to be undersecretary for political affairs at the State Department, says the potential for a nuclear conflict means the US does have to think about “whether it would make sense to try to terminate the war on an advantageous but not perfect basis.”

“I don’t [think] Ukraine has to become a forever war or even a frozen conflict; in fact, we need to do everything that we and our allies and partners can to enable Ukraine and ensure that this does not become a forever war,” Petraeus, now a partner at the private equity firm KKR, added.

Talking about how and why Ukraine is becoming a forever war, then, is a fine place to start.

Lessons from Iraq and Afghanistan

The global war on terrorism was a sprawling and ill-defined project.

After 9/11, the US was responding to an attack on its soil, but then the George W. Bush administration expanded its international campaign to target not just al-Qaeda but the concept of terrorism — one that somehow the US is still fighting today. Though President Joe Biden withdrew from Afghanistan, US troops are still in the Middle East, and many aspects of the counterterrorism wars endure.

The way that Bush’s interventions in Iraq and Afghanistan began made that possible. Congress approved a joint resolution against threats to the US homeland in 2001 that was so broad that it evolved as the threats did. That vote authorized the use of military force against “nations, organizations, or persons” connected to the 9/11 attacks, and in 2002, Congress passed another broad authorization on Iraq that two decades later is used to counter the Islamic State terrorist group.

The US’s goals in Iraq, for example, ran the gamut of eliminating the risk of purported weapons of mass destruction, regime change, nation-building, countering Iranian influence, and then debilitating ISIS. US troops remain there in 2023. And when there were opportunities to end the initial invasion of Afghanistan — like when hundreds of Taliban fighters surrendered to the US — the Bush administration rejected them. Even now, 18 months after the US withdrew its last troops from Afghanistan and more than a year after the US assassinated perhaps the last known planner of the 2001 attack, the initial authorization has yet to be repealed.

As Rep. Barbara Lee, the only lawmaker who voted against the authorization of military force in Afghanistan in 2001, warned just days after the 9/11 attacks: “We must be careful not to embark on an open-ended war with neither an exit strategy nor a focused target.”

Some of the lessons of the Bush and Obama years seem to have been put into action. Strategists now recognize that a small footprint is better than a massive US presence of hundreds of thousands of troops, and that much can be accomplished by partnering with another country’s military (instead of having “boots on the ground”). From the first 20 years of the war on terrorism, the US learned well that corruption among recipients of aid is corrosive to US interests. That commanders on the ground offer overly rosy assessments of progress in a self-deceptive process that ends up extending the war is now a truism.

Throughout, the American people are somewhat willing to ignore ongoing US wars, even when US soldiers are deeply involved.

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But perhaps what the US ought to have learned from the forever wars is the importance of practicing humility and not underestimating one’s enemies. A more difficult lesson to put into practice is the importance of incorporating dialogue and negotiations with adversaries into policy.

Mara Karlin, a top civilian strategist appointed by Biden to the Pentagon, wrote a 2021 book on what the US learned from the post-9/11 wars. In The Inheritance: America’s Military After Two Decades of War, she details how wars without clear ends affect the morale, preparedness, and even civilian control of the military. Karlin warns of the danger of “overreacting to threats and attacks, as the United States did in response to the September 11, 2001, attacks” and of “under-responding, as the United States has done in its persistent inability to recognize and act on the growing security threats posed by China and Russia to the U.S.-led global order over the last decade or so.”

Karlin didn’t respond to a request for comment. But that a key Pentagon leader in 2021 worried more about a US underreaction to Russia than the potential for another endless war shows how committed a leading strategist in the Biden administration may be toward a long-haul fight.

How Ukraine can become America’s next forever war

The striking parallel between the US’s long wars in Iraq and Afghanistan and the ongoing war in Ukraine is the rhetoric surrounding the conflict.

The US role in supporting Ukraine has been framed as ideological. Biden from the get-go described the conflict in terms of good versus evil, democracy against autocracy.

Does the US “stand for the defense of democracy?” Biden asked again in his recent State of the Union address. “For such a defense matters to us because it keeps the peace and prevents open season for would-be aggressors to threaten our security and prosperity.” And senior State Department official Victoria Nuland wrote in testimony to Congress last month that “Ukraine’s fight is about so much more than Ukraine; it is about the world our own children and grandchildren will inherit.”

The Biden administration may believe that. But rhetoric like that is also how wars continue in perpetuity. It’s how the objectives creep, the goalposts shift. Ideological struggles are not so easy to win.

By some metrics, the objectives that the US set out to achieve in Ukraine have already been achieved. Christopher Chivvis, a researcher at the Carnegie Endowment for International Peace, explained that the US in the past year has managed to avoid a direct war with Russia, made Russia suffer a strategic defeat, and kept the NATO alliance unified. Ukraine has also maintained its sovereign independence.

Continued unqualified support is “good in the sense that it puts pressure on the Russians to try to moderate their more extreme objectives,” Chivvis told me. “But it’s not likely to get the Ukrainians to think seriously about restraining their own war aims, because they see the whole set of Western nations backing them to the hilt.”

Though many experts told me that it’s time to begin plotting the contours of talks between Russia and Ukraine, neither side sees value in negotiating right now.

The types of military support the West is giving to Ukraine — including US and German tanks and British promises to train Ukrainian pilots on their fighter jets — acknowledge this reality and could help contribute to it, argues Chivvis. The most advanced and heavy weaponry, like the US’s Abrams tanks, likely won’t arrive till next spring. “The trend is toward more and more military support to the Ukrainians, and they have no real reason as of now to limit their own war objectives,” says Chivvis, who previously worked as a US intelligence officer in Europe. “So it’s hard to see how it ends at this point.”

And yet, the longer the war goes on, the more people will die in Ukraine and Russia, and the risks for the war to spiral out of control are real. As Pickering put it, the US risks stumbling into “an endless war punctuated by nuclear use.”

What happens when the war keeps going

The war to defend Ukraine may be more coherent than the war on terrorism, but it also appears ill-defined in terms of goals and strategies. Analysts who might not agree on much else do agree that there isn’t enough of a debate on what outcomes the US seeks.

The Biden administration, for its unprecedented mustering of allies through NATO, Europe, and elsewhere, has left some gaps unfilled. Deferring to Ukraine, as Biden’s national security leaders have consistently done in public interviews, is not a strategy.

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Less attention has been paid to how this conflict might end in a way that serves US interests in Europe and the world, according to Samuel Charap, an analyst at the RAND Corporation. And those trying to have that conversation about how to end the war, he told me, are sometimes cast as Russian sympathizers. But there is an urgency to have these difficult conversations. “We know that, for example, conflicts that last more than a year are more than likely to continue to go on for 10 years,” Charap told me.

“I don’t think that we should tolerate a war that stretches on for years, because if we do, it means that we are tolerating greater risk that the war will spread,” said Evelyn Farkas, a former Obama defense official who now directs the McCain Institute think tank. “If we knowingly accept a war that will go on for years, then I think we are taking on a moral hazard because Ukrainians are dying every month this war goes on.”

The toll on human life is unfathomable, and the long-term effects on the country will be many. Kurt Volker, a former ambassador to NATO now at the Atlantic Council think tank, is worried about how the wartime mentality has forever changed Ukrainian institutions. “We’re going to have to help Ukraine get back to normal,” he told me.

“You have the presidential administration basically running everything. You have one centralized media operation for news for the country, which is highly censored,” Volker said. “These are things that can’t go on in a normal society. So they’re going to have to decentralize. They’re going to have to open new media outlets, going to have to have political pluralism in terms of political parties and competition — all kinds of things that they are not currently grappling with.”

The rebuilding of Ukraine will require massive investments, too. The country’s energy infrastructure will need to be rebuilt, and just keeping its economy afloat in the meantime may require up to $5 billion a month, the International Monetary Fund has estimated. After the hot conflict ends, the US commitment will likely continue. But an end to the conflict seems increasingly hard to find.

A Defense Department leader, Celeste Wallander, was recently asked at a Washington think tank event whether the Pentagon is planning for a negotiated outcome or an outright Ukrainian victory on the battlefield. “It is difficult ahead of time to precisely predict how an armed conflict will end,” Wallander said, though she did emphasize that “it ends in Russia’s strategic failure, no question,” and that the US will support the choices made by Ukraine as to whether it would negotiate with Russia.

But Wallander and her colleagues in the Biden administration have left open the question of how the US would extricate itself from this conflict. Without having a clear answer of how this ends or how the US will get out, they presuppose that Washington will be in this war for the long haul.