The geopolitical risk from the Wagner Group mess has subsided and is now short-lived. However, the implications of a weaker nuclear armed Russia for the medium and long-term still poses a potentially high geopolitical risk to the world and the financial markets.
One takeaway from the events was the slight drop in defense stock shares on the hope that this will force Putin to the negotiating table with Ukraine sooner rather than later. This may have been premature.
Putin needed a way to save face initially. His options were limited as he could not attack the Wagner force due to the fallout of potential Russian civilian deaths. Thus, the supposedly deal brokered by the Lukashenko of Belarus. Today, this deal seems not to be a deal since Putin looks to press charges against Yevgeny Prigozhin.
It did not seem that Prigozhin had enough insider support to challenge further. Combined with the fact that Putin was going to side with his hand-picked military commanders (Sergie Shoigu and Valery Gerasimov) whom he relied on them to control the huge Russian army, the Wagner Rebellion was bound to fail.
Our takeaways from this geopolitical event are:
- Putin image as a strong leader has been dented thus expect him to counter this with more ruthless action.
- Russian image in the Middle East and African countries will suffer and cause concern for those countries regarding the strength of the relationship.
- Oil market coordination will be more difficult between Russia and Middle East on supply issues.
- Countries that had a closer relationship will need to reconsider this with the effect of distancing themeselves away from the Russian relationship gaining ground.
- Playing the game of sitting on the fence and using the Russian relationship to play off against the west, specifically the US, will be a less viable geopolitical strategy. For example, Turkey just lost some leverage against the EU and US. Expect it to approve the NATO bid by Sweeden soon.
- Other loosers in this scenario include Iran, China and Saudi Arabia. All these countries are now looking at a possible future without Putin in the medium to long-term closely.
- What happens to Wagner and its role in the Middle East and Africa remains a open question. Also, could some of the Wagner fighters open a new front from the Belarus side?
The effect on oil prices and commodities could elevate at any moment if Putin does not restore confidence in his regime. This risk will be slow moving but could spike at any moment. The reason is that we believe it is more of a medium term to longer term nature.
Finally, a prolonged war in Ukraine is not to the advantage of Putin as he initially had calculated. This might put pressure on Russia to enter negotiations, but I think this will depend on what happens on the battlefield in the next few months.