The turning point of a new world order begins painfully for all
Since 24 February 2022, i.e. Russia’s war of aggression against Ukraine, which violated international law, a turning point has indeed occurred. The date is likely to go down in the history books as the beginning of a new world order, the broad outlines of which are already becoming apparent. The Western alliance USA, EU, GB & Co. is standing up to “BRIC” & Co”. New supply chains and currency systems are being tested. The euro could be blown up. The US dollar could lose its dominance. Globalisation will give way to more of a regionally divided economy.
With the ever tightening sanctions against Russia, one must always ask how effective and meaningful the sanctions are and what they will ultimately lead to. One must also ask oneself every day whether the delivery of heavy weapons is effective and meaningful. Every government must also ask itself whether the increasing sanctions and the delivery of heavy weapons are not only damaging its own country more than Russia, but also that this could lead to a 3rd world war. The high inflation and the possible high unemployment in the case of a gas freeze are social explosives in Germany. Aren’t we sliding into a pre-programmed and partly responsible catastrophe in the EU and in our own country, which could even be the subliminal strategic goal of the elite in Great Britain and the USA?
While the world’s stock markets continue to slide, the Moscow Stock Exchange has been by far the best performing stock market in the world since it reopened. But here, too, the sanctions are hurting Western investors, which so far is almost tantamount to expropriation for a time, as Russian ADR/GDR are no longer tradable. Here, too, the question may be asked how meaningful such sanctions are if they harm their own people and Western investors. Even if the repayment of Russian Eurobonds is made impossible for purely technical reasons on the part of the USA, one has to ask what sense this is supposed to make apart from trying to drive a country into national bankruptcy? In this respect, the proxy war of the USA against Russia on Ukrainian soil also leads to a permanent economic, financial and currency war. Andreas Männicke gives his assessments of the background to the Ukraine war, but also of future opportunities and risks in this unfriendly environment, in his stock market letter EAST STOCK TRENDS (www.eaststock.de) and in his new EastStockTV video, episode 196 at www.YouTube.com .
Russia is the aggressor, but did it have to come to the Ukraine war?
Right up front, so that no false impression is created: Russia’s war in Ukraine, which violates international law, cannot be justified or even excused, but it has a history that should also be given more attention in the media. The Ukrainian people suffer most from the fact that the country has been caught in the grip of the geopolitical interests of the USA and Russia. Now it would also be up to the West to investigate the alleged 42 bio-labs in Ukraine and the role played by the son of US President Hunter Biden and the Pentagon.
The war could have been avoided if, on the one hand, the West had been more attentive to Russia’s security needs and, on the other hand, had pushed more for the implementation of the Minsk Agreement. Also, Western media should have investigated more closely and intensively through interviews in eastern Ukraine before the war what was true about the Russian accusations of continuous shelling by the Ukrainian military from 2015 to 2022 as well as the accusations of Nazis in the Azov regiment and other mercenary troops in Ukraine. What is strange is who all in Ukraine pays homage to Nazi collaborator Stepan Bandera and why they do so, often from a young age.
This goes as far as the Ukrainian ambassador Andrij Melnyk, who constantly insults German politicians on TV and also insults the German people in various talk shows. Melnyk believes that “all Russians are enemies”, whether they are for or against Putin. With such statements, he is doing more harm to Ukraine than he probably realises. Melnyk calls Stepan Bandera a hero and the right-wing Azov regiment “brave”. However, there are many Russophobes in the Azov regiment who also acted extremely brutally against Russian soldiers, as many video recordings prove. There were and are brutal war crimes on both sides. Unfortunately, that comes with every war. But once again: even if Putin’s accusations prove to be true, this does not justify the brutal war in Ukraine, which is contrary to international law.
Putin cites Kosovo as an example of the legitimacy of the independence of the republics of Luhansk and Donetsk
Putin repeatedly cites the example of Kosovo as having also wanted to break away from Serbia and become independent when it comes to the Donbas region. In Putin’s view, the citizens in the Donbass, especially in the “independent republics” of Luhansk and Donetsk, were also shelled for years by the Ukrainian military, where many civilians also died. There was something of a genocide in Kosovo at the time, which was then ended by the US bombing of Serbia. Serbia, which has been seeking EU membership for years, sees the war in Ukraine and the sanctions with different eyes and feelings, which is understandable. There are now repeated pro-Russian demonstrations in Serbia.
On 17 February 2008, Kosovo declared itself independent and just one day later the USA recognised Kosovo’s independence. Germany, which was involved in the war against Serbia under ex-Chancellor Gerhard Schröder, was not able to bring itself to recognise Kosovo’s independence until 20 February. The UN, however, did not join in. Kosovo is currently recognised as independent by 115 countries out of 193. The rest do not recognise the Islamic country as independent. Putin sees a parallel here with the Donbass region. In his view, Luhansk and Donetsk also have the right to declare themselves independent, which so far only Russia has recognised on 21 February. Then, on 24 February, Putin surprisingly launched the war of aggression against Ukraine. Putin’s main demands to end the war are: 1. Ukraine remains neutral and does not become a NATO member, 2.recognition of Luhansk and Donetsk as independent republics and 3. recognition of Crimea as Russian territory. It will probably come down to a similar formulation after the war ends, but do so many people have to die and flee for that? If there is no agreement, the danger of a 3rd world war increases. But is it all worth it?
A double standard for wars?
Every war is criminal and brutal – including the US war against Iraq, which is contrary to international law and mendacious, but also the US/NATO war against Serbia, which is not to belittle or even trivialise Russia’s war. The only thing missing is criticism of these brutal wars, both in the media and among politicians. Even after the war against Iraq, which violated international law, the USA never had to fear sanctions from the EU. There seems to be a double standard in Western thinking. From Putin’s point of view, the USA dominates NATO. The other members are only vassals of the USA. China and the “BRICS” (Brazil, Russia, India, China, South Africa) have a similar view.
G7 decide on further sanctions against Russia in Elmau
At the G7 summit in Schloss Elmau, the G7 agreed to supply more weapons and to further tighten sanctions. For example, gold sales by Russia via London are to be made impossible and new punitive tariffs have been imposed on technical and military supply products. At the G7 summit, Putin was also made fun of by the joking comments of British Prime Minister Johnson, who wanted to show off his powerful body to show Putin how strong he was. The G7 summit would have been a good opportunity to encourage Joe Biden to finally return to a diplomatic path and arrange a meeting with Putin and Selinskyi. So a historic opportunity for possible de-escalation was missed here.
“BRICS” are against the sanctions and side with Russia
At the G7 summit, an infrastructure programme with a volume of USD 600 billion and development aid of USD 600 billion were agreed, but this was probably also in order to bind many emerging countries more to themselves, which were not prepared to go along with the sanctions against Russia. Accordingly, the sanctions are not suitable to have a peacemaking effect. Unnecessary and ineffective sanctions and arms deliveries will only prolong the war. Moreover, the sanctions against Russia following Russia’s annexation of Crimea have basically achieved nothing. If anything, they are having the opposite effect. For example, not only the “BRICS” (Brazil, Russia, India, China and South Africa) reject the sanctions against Russia, but also Turkey, Indonesia and many other countries that represent the majority of the world’s population. So Russia is not as isolated after the Ukraine war as the West would like. On the contrary: through the sanctions, the West is only promoting a division of the world into “Western Alliance” and “BRICS & Co”. Whether this will promote or reduce global prosperity will soon become clear.
Weapons deliveries by the Western alliance turn a “defensive war” into a war of aggression by Ukraine
Even now, it must be critically questioned how effective the tough sanctions against Russia are and what they effectively achieve. So far, the balance sheet looks very sobering from the West’s point of view, also with regard to the delivery of heavy weapons. Russia is advancing further and further in the Donbass and seems to be able to achieve its military goals by the end of the summer. After that, Ukraine’s “defensive war” will inevitably turn into a war of aggression by Ukraine, where many civilians will also die from Ukrainian artillery and rockets, which is already partly the case in Donetsk.
Ukraine will first withdraw and then attack the Donbass with new heavy weapons. Selinskyi already issued the slogan during a front-line visit to the south that Ukraine will take the Donbass and Crimea again. But this also means that he is prepared for more and more soldiers and civilians to die. The USA supports Selinskyi’s bold military goal from afar. Even the German Chancellor Scholz, who is still acting relatively circumspectly, comes out with the slogan: “Putin must not win this war” and Ursula von der Leyen even says: “Putin will never win this war.” Both should know that there are never winners in a war, only losers. However, it is very likely that Russia will take the Donbass as far as possible and also defend it. At the latest then, diplomatic negotiations should take place. Anything else will only bring more damage and may even lead to World War 3.
No one can win the war
So it is already clear that neither side can win the war and that diplomatic negotiations are needed as soon as possible to at least bring about a ceasefire or, better still, an agreement along the lines of ex-Secretary of State Henry Kissinger, i.e. to hand over the Donbass to Russia and at least recognise the independence of the constituent republics of Luhansk and Donetsk. But the big issue will certainly be where to draw the borders. Anything else, such as a permanent war or even an attempt to win back Crimea, increases the danger of a third world war. This must also enter the minds of the G7 leaders who just sat together so harmoniously in Elmau.
The blockade of Kaliningrad as an example of further ill-considered escalations that could lead to a 3rd World War
Already, the danger of a third world war is increasing every day, as there are now more and more conflicts and points of friction due to the sanctions. Kaliningrad, for example, is no longer to receive deliveries of goods from Russia because of the EU sanctions. Finland and Sweden are striving to join NATO, where Turkey has now agreed to join NATO under certain conditions. Putin now also wants to give Belarus nuclear-capable missiles so that in an emergency he can launch nuclear missiles in coordination with Russia. One of the first targets will be London. The second targets will be Warsaw and Berlin. This is already being played out and simulated on Russian TV.
The USA will probably get nothing in the first step, except Ramstein, where there are many US soldiers and nuclear weapons. But then the NATO state of emergency will occur and there will be a great Third World War that can destroy entire civilisations. George Soros has been warning of this for a long time, as has Martin Armstrong.
The delivery of heavy weapons will not end the war, but unnecessarily prolong it.
The continued delivery of heavy weapons such as missiles and tanks to Ukraine only prolongs the war unnecessarily and also increases the danger of a 3rd world war, which no one wants but which is possible. If there is a 3rd world war and the baby has fallen into the well, afterwards one will always have to answer the question of when there were opportunities for de-escalation and when one behaved wrongly. Many more people around the world should be demonstrating and protesting now. The USA and Russia, together with Ukraine, must come to the negotiating table before things really start to crack, otherwise the worst is to be feared. This would also be the biggest crime of all, which the G7 in Elmau is now unwittingly deciding by showing no will to favour the diplomatic path. It is not true that one cannot make a peace treaty with Putin. At the end of April, they were already close to doing so in Istanbul, but for incomprehensible reasons Ukraine then changed the agreement, much to Putin’s frustration.
Ukraine as EU accession candidate has more symbolic character
The EU’s decision to admit Ukraine as a candidate for EU membership has more of a symbolic character, because nothing will change for Ukraine in the next few years. Priority will first be given to some Balkan countries such as Serbia or Albania, but also Bosnia. After the war, Ukraine needs a Marshall Plan for reconstruction with a volume of 400 to 700 billion USD and will probably get it. In addition, there will be a new unnecessary wave of rearmament in the West and in Russia, which benefits no one except the arms industry. There is a lack of money in many other places where it is urgently needed, such as in the social sector or in education/research. The unity of the G7 on further arms deliveries may later prove to be wrong and fateful in retrospect, if at the same time diplomatic efforts are not continuously increased to end the war as quickly as possible with a compromise.
Short-, medium- and long-term effects of sanctions
If the continuous supply of heavy weapons and the rearmament policy is already leading in the wrong direction and making a third world war more and more likely, one must now also ask how effective, meaningful and “efficient” the sanctions decided so far and the future sanctions will be. In answering this question, one must consider the short-, medium- and long-term consequences, effects and “side effects”. For the short-term effects, one can already draw a conclusion. For the medium-term effects, one can make rough estimates. For the long-term effects, one can only make assumptions and develop scenarios, although the rough direction can already be discerned.
The sanctions do not change Putin’s military goals
What should the “effectiveness of the sanctions be measured by? Sanctions are only “effective” if they contribute to changing the behaviour of the target (in this case Putin and his most powerful henchmen), i.e. that Putin ends the war or formulates his military goal differently. What have the sanctions achieved so far in the short term? For Russia, so far, almost only economic advantages!
Sanctions lead to an unnecessary economic, financial and currency war.
Besides the real proxy war in Ukraine, there has long been an economic, monetary, financial and cyber war, primarily between the USA and Russia. The EU is dutifully joining the US’s harsh sanctions against Russia, but it is facing greater economic disadvantages than the US. Putin claims that the West has lost the (economic) “blitzkrieg” against Russia and the facts so far prove him right. However, the coal embargo will only come into force in August and the oil embargo at the end of the year. So the economic consequences for Russia remain to be seen. However, it is already clear that India and China will buy much more oil. However, this cannot fully compensate for the future loss of oil and gas exports to the EU and the USA. Nevertheless, China will play an increasingly important role for Russia in foreign trade. The volume of foreign trade with China, for example, has already increased by 70 per cent since 2019, from USD 84 billion to USD 147 billion. It is expected to reach USD 200 billion this year.
High short-term economic benefits from sanctions for Russia in some important areas
With oil and gas prices still very high, Russia has a significantly increased current and fiscal account surplus. The current account surplus was $96 billion in the year to May, triple that of a year earlier. The export surplus was also $58 billion in Q1, a new quarterly record, due to high oil and gas revenues. In contrast, Germany has a trade deficit for the first time since 1991. Russia is set to harvest a record wheat crop. Russia exported 18 per cent more grain in recent months than last year. In Q1 2022, Russia’s GNP still rose by 3.5 per cent, far more than in the US or Germany. Even in the first month of the war, March, GNP in Russia still rose by 1.3 per cent Only in April did it fall by 3 per cent. Russia will probably enter a recession in the second half of the year. But it is still unclear whether Russia’s GNP will fall by 10 per cent, as Economics Minister Habeck is now speculating.
In times of crisis, Russia often surprises with relatively moderate growth weaknesses, because Russia has adjusted better to crises than many Western industrialised countries. Inflation is a high 17 percent, but it was already declining in May compared to the previous month. Unemployment in April was still close to the lowest level since the Russian Federation came into being, at just over 4 per cent. The Purchasing Managers’ Index (PMI) even rose by 2.8 points to 50.8 points in May into the “growth zone”, i.e. much higher than in the USA or Germany.
Continued high support for Putin’s policies among the Russian population
Some Western products have become very expensive or are no longer on the shelves, but it is by no means the case that the shelves are now empty or that Russians have to go hungry. There will be problems in the future with the modernisation of the economy and many spare parts will no longer be available, but this is not yet noticeable because the warehouses have to be cleared first. Putin also wants to become more self-sufficient in many areas, but he will not succeed everywhere because the technological backlog is too high. However, this will probably only really be noticeable next year. The toughest sanctions ever imposed on a country, which are highly questionable under international law, have had the opposite effect. Putin has continued to advance militarily in eastern Ukraine and has not moved one iota from his military goals. Approval of his policy among the Russian population has even increased from 60 to 80 per cent.
The Russian rouble became the strongest currency in the world
US President Joe Biden is certainly also very surprised about the development of the rouble through the skilful policy of Putin and the Russian National Bank, because Joe Biden wanted to turn the rouble into “rubble”. He thought that the rouble would permanently collapse to 200 USD/RUB as a result of the sanctions. So after the first sharp sanctions, such as the SWIFT exclusion and the freezing of two-thirds of Russia’s currency reserves, the rouble collapsed by almost 50 per cent from 85 to 145 EUR/RUB. Afterwards, however, the rouble rose again from 145 to 55 EUR/RUB from mid-March. In the last few days, however, it also rose again against the rouble by 16 per cent from 55 to 64 EUR/RUB from 3 to 6 July, as the price of crude oil slumped again to below 10 USD/barrel on 6 July.
The strong rouble before was mainly due to Putin’s decision that Russian export companies must exchange 80 per cent of export revenues into roubles. In addition, Putin wants all raw materials to be paid for in roubles. Many Western companies have already set up a dollar and a rouble account at Gazprombank to meet Putin’s demands for payment of gas bills, otherwise they will be cut off, as has already happened for Poland and Bulgaria. Russia already wants to break off diplomatic relations with Bulgaria after some Russian diplomats were expelled.
Russia has the upper hand when it comes to gas
Gazprom has already had to cut gas exports to Germany by 60 percent in recent days due to maintenance work because 2 turbines were sent to Canada for maintenance by Siemens, but then were not sent back because of Canadian sanctions, at least that is the Russian version. From 10 July, the flow through the North Stream pipeline will be stopped completely for a few days for maintenance work. Whether the gas supply will then be ramped up again will certainly depend on Germany’s behaviour. For Poland, Bulgaria and also for Shell, the gas supply has already been stopped by Gazprom because the bills were not paid in roubles.
So far, the gas storage facilities are only 48 percent full. Whether they can be filled to 100 percent by autumn is questionable. If Russia stops gas exports in autumn/winter, the German economy could go into a severe recession. The GNP could then fall even more than in Russia. The Minister of Economics, Habeck, is already pursuing a very risky course, which could also end in an energy disaster and a severe recession. Power cuts (blackouts) are then also possible on a regional basis. If oil and gas prices continue to rise due to shortages, not only Habeck, but the entire government with its anti-Russian policy will have literally been dealing with lemons. For then the harsh sanctions will hurt the German people more than the Russian, although both countries will then slide into a severe recession.
The automotive industry alone needs 38 percent of Germany’s gas consumption, but the chemical industry will also collapse without Russian gas, causing unemployment to rise rapidly. Are we now slipping into an economic and energy disaster with our eyes wide open due to the all too daring Russia and Ukraine policy of the traffic light government? In the hopefully not too cold winter we will know more whether the proverbial lights will go out in Germany. Some German companies will need state aid in the winter because otherwise there is a danger of bankruptcy. This also applies to Uniper, whose share price has already plummeted from €40 to €15.
Russia formally suffers a state bankruptcy – so what?
One can only shake one’s head at the sense of some Western sanctions if Western investors are harmed by them, but basically nothing is achieved in Russia that makes peace possible more quickly. It may well be that Russia will suffer a state bankruptcy (default on government bonds) in purely formal terms. However, this is not because they are no longer solvent, but because it is technically no longer possible for Russia to repay the debts and interest. But then this is only because US banks are no longer allowed to process payment orders from Russia or because Clearstream or Eurostream refuses to forward the payments because of the sanctions. At the G7 meeting, it was only decided to additionally ban the purchase of Russian gold in order to drive Russia even faster into national bankruptcy.
Formally, the first real default occurred in early June when Russia defaulted on a USD 1.9 million sovereign bond and the credit default swaps (CDSs) had to kick in. Now Russia is officially listed as a defaulting debtor. The government bonds had already been rated at “junk level” (C) and now even at default (D). Last week, $100 million (€95 million) in post-expiry interest payments were due on 27 June, which could have been paid with ease but did not arrive for technical reasons. Russia had instructed the payment, but the money is now stuck in the Russian paying agent, the National Settlement Depositary (NSD), which has now also been sanctioned by the EU. Russia wanted to pay the interest in roubles, but the US did not accept. Since one month had already passed, the rating agency Moodys now determined “insolvency” at the end of June.
According to Putin’s new rules and regulations, it is also not a default if the corresponding money is made available to a Russian paying agent in roubles. This was also done on 17 June. From the Russian point of view, Russia is thus not insolvent and certainly not unwilling to pay. The Russian Finance Minister Anton Siluanov described the situation as a “farce”, as Russia has enough financial means to pay the debts due to the high export earnings and tax revenues. The question now is whether foreign creditors now have access rights to Russian assets abroad if the debts have not been formally settled and the money does not reach the creditors. This will have to be decided by the courts. From Russia’s point of view, it makes little sense to obtain a declaration of insolvency in court, as Russia does not recognise such judgments by foreign courts. But if diplomatic assets are confiscated now, this would lead to the severance of diplomatic relations and this would be explosive for further escalations, which could even lead to a third world war.
According to the terms of the bonds, however, the claims only become worthless after 3 years. The creditors can therefore wait and hope that the sanctions will be lifted in the next 3 years or at least relaxed in such a way that payments from Russia to Western countries are possible again. On 29 and 30 June, further payments in the volume of USD 400 million were instructed to the Russian paying agent in roubles, although the money cannot be called up because of the sanctions.
This “state bankruptcy” is to be judged and evaluated differently than that of 1998 or 1918
Russia’s last state bankruptcy was in 1998, because mainly short-term debt instruments, the so-called GKO, in the volume of 40 billion US dollars could not be serviced abroad. Russia did not make this mistake of short-term debt this time. Russia already went bankrupt once in 1918, when the Bolsheviks under Lenin could not service the enormous payment burden from the Tsarist empire and simply wrote it off. This time, however, the reasons are purely technical. Of the 600 billion USD in currency reserves, about two-thirds are blocked by the US/EU sanctions and are not available for financing. However, Russia also has a “prosperity fund” with a volume of USD 150 billion. This means that Russia is actually a net creditor and has enough money to pay, but for technical reasons only in roubles at the moment due to the sanctions. The West obviously wants to cut off Russia’s money tap so that Russia cannot continue to finance the war.
“BRICS” want to make themselves independent of the IMF and the World Bank
Russia’s international creditworthiness is thus declining more and more in the West. Russia will now seek limited opportunities for refinancing and financing growth projects within the framework of the “BRICS” (Brazil, Russia; India, China and South Africa). The “BRICS” bank will probably replace the IMF or the World Bank in the future. The BRIC bank, namely the New Development Bank, is so far “only” endowed with 50 billion USD. It is thus not yet sufficiently capitalised like the IMF or the World Bank, both of which are mainly financed by the USA. It is primarily intended to co-finance new infrastructure projects such as China’s Silk Road project “One Belt, One Road” (OBOR). The BRICS Bank was founded on 15 July 2014. It is to finance USD 50 billion for joint development and infrastructure projects. BRICS is mainly financed by China. In the special reserve with a volume of USD 100 billion, China has a contribution of USD 41 billion. Russia, Brazil and India each contributed USD 18 billion and South Africa USD 5 billion. However, the “BRICS” also want to develop a new internal payment settlement system in order to be more independent of the West. Argentina now wants to join the “BRICS” because it does not agree with the strangulation of the IMF (= the USA). The “BRICS” already unite 41 per cent of the world’s population and 25 per cent of the world’s gross national product with more than 3 billion people.
Dollar dominance is to decline
The goal of the “BRICS”, especially China and Russia, is to reduce dollar dominance and make their own currencies more important and stable. However, this is a very dangerous goal for the USA, because the USA is excessively indebted at all levels (private, corporate, government) and the USA has too high current account and budget deficits. However, they can only afford this as long as the US dollar remains the world’s number one reserve currency. But this is exactly what China and Russia want to prevent. Putin even wants to establish the rouble as a commodity-based and gold-backed currency. In addition, commodity transactions should no longer be conducted in US dollars or euros, but only in roubles or, alternatively, in one of the “BRICS” currencies. A “BRICS” internal payment processing system is also to be developed in order to become independent of the Western SWIFT.
A new world order is emerging: “Western Alliance” or NATO against “BRICS & Co,
The Western alliance USA/EU/Canada/Japan & Co and BRICS & Co already roughly describe the new world order. In future, “globalisation” will be carried out more among these countries themselves. So in the future there will be a divided world of friends and enemies, but Russia is not as isolated after the Ukraine war as the Western alliance would like it to be. Many Latin American and African countries, and even Arab countries like Saudi Arabia, will turn more to the BRICS than to the Western alliance in the future.
Moreover, Russia can also finance itself domestically through ruble bonds. The Russian central bank could also print more money, but this would further drive the high inflation of currently 17 percent. In the future, Russia will no longer be able to refinance itself through the international capital market, which is what all countries usually do, thus getting further and further into debt. The payment methods that Russia was still able to use in the USA until the end of May are now no longer possible. However, the US Treasury is to blame for the technical default, not Russia. The last major payment was due on 23 June with over 235 million USD. The CDS (credit default swaps) on Russian bonds have a volume of USD 2.54 billion. However, there will be injured creditors in the West in the future. It will then be particularly exciting with Russian corporate bonds, which have a volume of over 500 billion USD.
In reality, however, Russia is one of the least indebted countries in the world. The national debt abroad amounts to 48 billion US dollars, not even 20 percent of the GNP, a figure Western countries can only dream of. Moreover, even in times of crisis, Russia always has a relatively low budget deficit due to high oil and gas revenues. But these will be much lower next year. A good half of budget revenues are based on the oil/gas sector. Western countries, on the other hand, are now over-indebted, increased by the high expenditure on measures against climate change and the nonsensical rearmament policy.
NATO is arming, but contributing nothing to de-escalation
NATO’s rearmament policy is also clearly leading in the wrong direction, namely towards escalation rather than de-escalation. The Rapid Reaction Force has been increased from 48,000 to 300,00 soldiers. Russia and China were officially cited as the reason for this and Russia was declared the main enemy. But these enemy images existed even before the Ukraine war. NATO’s direction is determined more by US foreign policy. Turkey buckled at the last NATO summit, so that Finland and Sweden will join NATO. For Russia it would now be important that no additional NATO military equipment is brought to Finland or Sweden, because otherwise new tensions are pre-programmed. Basically, these are also possible harbingers of a third world war. Everything at the moment seems to be more tension-promoting and escalating instead of peace-building and de-escalating. Everything is therefore developing in the wrong direction, from which both the Western alliance and the BRICS could suffer in the future.
Germany makes lazy compromises on energy policy through sanctions
For the first time, Germany is now meeting the USA’s goal of spending at least 2 percent of GNP on armaments. However, the €100 billion in “special funds” for armament will then be lacking in other areas, especially in the social sectors, but the Germans are supposed to put up with more privations because of the Ukraine war, according to Habeck, Bearbock and Scholz. The German economy is now being permanently damaged by excessively high energy prices, which are also home-made, and is thus losing competitiveness. American liquefied petroleum gas is not only 40 percent expensive, but is also extracted by environmentally harmful methods such as fracking, which is still banned in Germany, although the FDP wants to bring about a change here.
Stagflation and fears of recession weigh on world stock markets
The world’s stock exchanges reacted with huffiness not only because of the ongoing Ukraine war and the nonsensical sanctions, but also because of the persistently high inflation and the restrictive central bank policy of the FED and soon also of the ECB, both of which will raise interest rates in July with inflation rates of over 8 percent in both the USA and the EU. In addition, the FED is withdrawing liquidity from the market by selling securities. In addition, there are also fears of recession due to the sanctions and the lack of supply chains, and this with increasing debt, which is now becoming more and more expensive for the state due to the strong rise in interest rates and yields on government bonds. In recent days, however, commodity prices have also fallen sharply. The central banks find themselves in a dilemma when they raise interest rates, because on the one hand they have to fight inflation, but on the other hand they also have to prevent a recession. Stagflation” is difficult for central banks to handle anyway.
So it is not surprising that the stock markets in your USA and also in Europe are approaching the lows from March or will soon even fall below them. This means that the first half of 2022 will probably go down as one of the worst in stock market history. By 30 June, the DAX had fallen by 20 per cent to 12,793 index points, the Euro Stoxx 50 by 20 per cent to 3,454 index points, the S&P index by 21 per cent to 3786 index points and the NASDAQ Composite Index by 30 per cent to 11,381 index points. On 5 July, all the above-mentioned marks were even undercut once again. The DAX even reached a new low for the year of almost 12,400 index points. The mood on the world’s stock exchanges remained very poor, with the lack of gas supplies from Russia continuing to be the main problem for Germany. Opening and certifying the Nord Stream 2 pipeline would have solved the problem immediately. But now millions of investors are suffering from the pointless and ineffective sanctions.
Crypto markets also collapse
However, the crypto markets also collapsed in the first half of the year and the prices of Bitcoin (BTC), among others, halved to below 19,000 USD/BTC (in November 2021 still at over 65,000 USD/BTC) and Ethereum to almost 1000 over USD/ETH (at its high in November 2021 still at over 4500 USD/ETH). On 30 June, both major cryptocurrencies, Bitcoin and Ethereum, each slumped by over 7 per cent at the low.
But gold and silver were also in little demand despite the high inflation rate and thus not a “safe haven”. Gold bobbed along near its low for the year of around 1800 USD/ounce and silver at 20 USD/ounce. In addition to precious metals, industrial metals also tended to be very weak due to fears of recession. Copper, for example, fell by 1.8 per cent to 7478 USD/tonne on 6 July, which was also a new low for the year. Copper is always considered a leading indicator for the economy, and the outlook looks very bleak at the moment. But agricultural commodities also fell significantly, such as wheat. This trend could continue in the second half of the year, which would reduce the risk of inflation. Deflationary tendencies are even possible in the second half of the year, which would suit the central banks and could support the stock markets.
The euro fell below 1.02 EUR/USD and is also close to its low for the year. The yen has been particularly weak since April this year. Even the weak euro rose against the yen from 130 to 144 EUR/JPY, but has now corrected back to 137 EUR/JPY. The Japanese central bank is probably afraid to raise interest rates in Japan despite high inflation because of the immense national debt. But the ECB is also in the same dilemma because of the excessive debt of southern European countries.
Moscow stock exchange one of the top performers among the world’s stock exchanges in the last 3 months
The only stock exchanges that gave much pleasure last month, also due to the currency, were, of all places, NATO’s top enemies (USA) China and Russia, which is not likely to please Joe Biden very much. Although the Moscow stock exchange has only trended sideways since it reopened on 24 March 2022, in hard currency terms large gains resulted from the strong rouble. Thus, although the MICEX 10 index of the Moscow Stock Exchange lost 8.5 per cent in rouble terms in the last 3 months, falling from 4500 to 3600 index points, including 6 per cent on 30 June alone, the Russian RTS index rose 42 per cent in US dollar terms by 30 June. At the beginning of July, however, the RTS index also collapsed from over 1400 to only 1100 index points due to the sharp fall in oil prices and the weak rouble. The MICEX 10 index in roubles, however, remained stable at 3700 index points.
In contrast, the DAX 40 fell by 12.5 per cent and the S&P 500 index by as much as 17.7 per cent in the last three months up to 30 June. This means that the MICEX 10 index is down 36 per cent in 1 year, but the RTS index is down only 32 per cent. This also shows that the Russian stock market has remained very stable in rouble terms since the Moscow Stock Exchange reopened, despite the harsh sanctions, and even rose strongly in US dollar terms temporarily until the end of June. Here, too, Joe Biden was wrong, who is losing considerable votes in the US and could come out the loser in the midterm elections in November. Trump is very critical of Joe Biden’s foreign policy and it may indeed be that Trump would not have gone as strongly to confront Putin as Joe Biden is now. Trump could negotiate a deal with Putin, which would bring peace closer than just constantly delivering new weapons.
Russian ADR/GDR are not tradable and harm Western investors (also as a result of the sanctions)
Western investors, of course, did not benefit from the good performance of Russian shares in hard currency because the Russian ADR/GDR were suspended from trading by the London and New York Stock Exchanges with few exceptions and now the depositories in London and News York have also been terminated by the Russian companies. German investors can now convert the ADR/GDR into original shares, but they now need a depository in Russia. But even then they can neither buy nor sell, because foreigners are not authorised to trade on the Moscow Stock Exchange. According to a decree by Putin, foreigners are also not allowed to receive dividends. This is another good example of the futility of Western and Russian sanctions, where Western investors are only harmed. Whether these are all sensible “sacrifices” to help Ukraine in the war against Russia is very questionable, as has already been clearly shown above.
Conclusion: The most severe sanctions ever imposed on a country have so far achieved exactly the opposite of what they were intended to do. Of course, one has to distinguish between short-, medium- and long-term effects. If we look at the short term, we come to the conclusion that the sanctions are not only ineffective, but also increase the danger of a third world war. This is especially true if Kaliningrad can no longer be supplied with goods due to the blockade of Lithuania because of the sanctions. The Kaliningrad enclave is home to nuclear-tipped missiles that could very quickly land in Berlin and Warsaw, which has already been threatened by the Russian side. From a purely economic point of view, with the exception of the high inflation rate, which we also have in the West, Russia has rather had advantages such as high current account and trade surpluses and a very strong currency. Production has not yet collapsed very much, but that may yet come. At the same time, Putin has achieved almost all of his military goals so far by being able to advance very far in the Donbass. In contrast, Germany also has very high inflation rates of over 8 per cent, fears of recession, energy problems and, for the first time since 1991, a negative trade balance.
In the medium term, however, i.e. from 2023 onwards, very adverse effects are emerging for all parties involved. The partial oil embargo will not come into force until the end of the year and the coal embargo not until August 2022, both of which will lead to considerable revenue and production losses in Russia in 2023. If Russia were to react with an export ban on gas as a last resort, the consequences would be disastrous for both Russia and the EU. Both countries would then slide into a severe recession or even depression. For Germany, the sanctions could end in an energy disaster, causing more damage at home than in Russia. But even if sufficient oil, gas and coal can be procured elsewhere, Scholz/Habeck’s daring foreign and energy policy endangers Germany’s competitiveness as an industrial location in the medium term, which would be fatal. But they are also endangering peace in Germany. The high inflation is socially explosive and Germany is becoming a party to the war, which could yet take its revenge.
In the long term, the sanctions will cement a new world order, which is already becoming apparent, namely the “Western Alliance”, i.e. the G7 & Co. against “BRICS” & Co. Here, too, there will then be fierce economic, financial, currency and cyber wars, which may then also be resolved militarily and could end in a 3rd world war. The question is how the wheel can be turned back at all. Nor would it be good if there were a permanent Iron Curtain between Russia and the EU/USA again. In any case, NATO is initially taking a confrontational course with Russia and China, which does not contribute much to de-escalation, but rather increases the danger of a third world war. The first step would now be to call on all parties to start diplomatic negotiations in order to bring about an end to the war and a diplomatic solution. Peace would also require many more to take to the streets now, because human civilisation is at stake. The only solution is peace, Mr. President Putin, Selinskyi/Biden!
First inform, then invest
Inform yourself now also in detail about the background and the development of the Ukraine/Russia crisis but also the future recovery potential of the undervalued shares from Eastern Europe. There are also new opportunities in the Baltics, Romania and Ukraine, with the respective stock indices all up in 2019. For example, some Ukrainian agricultural stocks have already more than doubled in price since 2016, and in 2018 the PFTS index was already up over 70 per cent again. Kazakhstan stocks were among the top performers in the world in 2017 (+56 per cent), but not in 2018 and not in 2019, but again in 2020/21.
In 2018, 10 stock markets from Eastern Europe were already among the best-performing stock markets in the world, all of which clearly outperformed the DAX and also the US stock market. In 2019, the Moscow Stock Exchange was once again the clear outperformer among all global stock markets, with a plus of over 46 percent in euro terms. However, the Bucharest Stock Exchange (Romania) also rose by over 32 per cent in 2019. The stock markets in Southeast Europe and also in the Baltic countries remained very stable on the plus side (Croatia +13 per cent). In 2020 year 6 stock exchanges from Eastern Europe were among the 30 best performing stock markets in the world and last year even 11 stock exchanges from Eastern Europe. This year, 5 Eastern European stock exchanges, mostly from the Balkans, clearly outperformed the DAX. After the Ukraine war, it is still worthwhile to look beyond the horizon to Eastern Europe.
Order now a trial subscription (3 issues by e-mail for only 15 €) of the monthly stock exchange letter EAST STOCK TRENDS (EST) with another Ukraine/Kazakhstan/Russia special and a dividend special as well as with a lot of background information and new investment suggestions such as the “Stock of the Month” and lucrative certificates at www.eaststock.de, there under Stock Exchange Letter. The last EST was published on 20 June 2022.
TV/radio notes: The last radio interview was on 10 May 2022 on Börsen Radio Networks. Also watch the latest EastStockTV video on YouTube about the Ukraine war and the new outperformance opportunities for Eastern European stock markets. You can download the interviews at wwww.eaststock.de, there under the heading “Interviews” as well as the EastStockTV videos. On 5 April 2022, Mr. Männicke gave a lecture at VTAD Hamburg. By the way: have you already subscribed to the EastStockTV YouTube channel?