June
26
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Caterer to Mercenary – Inside look into the military coup in Russia
By David Nelson, CFA CMT
BREAKING NEWS! Every so often, a story takes shape that justifies the most overused graphic in broadcast media. The recent events in and outside Russia justify that headline as the most important story of the year unfolds.
Over the weekend, an attempted military coup took place in Russia. The Wagner Group, a longtime mercenary outfit, Putin has used to expand Russia’s reach without getting his hands dirty, turned on their former boss under the leadership of its founder, Yevgeny Prigozhin.
The news breaking over the weekend is right out of Hollywood. According to the Wall Street Journal, Prigozhin, a former convict, grew up in St. Petersburg, the same neighborhoods as Putin. The two became close when he worked for the Russian leader as, get this, his caterer.
How he managed to morph that role into leading one of the most vicious and effective military units on the planet is a story in itself.
In some ways, his character resembles that of a James Bond film. A vicious, bigger than life ruler that demands total allegiance or be executed with a sledgehammer. Now, quicker than it started, the Wagner Group leader has agreed to a deal brokered by Belarus President Alexandr Lukashenko. Halting their advance on Moscow and Russian troops, Prigozhin has ordered his followers to return to their camps.
Questions that need to be asked and answered.
- What’s actually taking place on the ground?
- What turned Putin’s closest ally into a threat?
- Why did the Wagner Group back down?
- Is this the beginning of a revolution?
- How will markets respond?
- And finally, is U.S. leadership up to the task of navigating the geopolitical minefield ahead? Let’s find out.
Risk Assets Hate Uncertainty
Bloomberg Data
Let’s get the obvious right out in front. The one thing risk assets hate most is uncertainty. And there’s nothing more uncertain than a military coup. Investors often have a myopic focus on what drives equity prices. All the usual suspects come into play. The Fed, a dysfunctional Washington, inflation, high rates, valuations all play a role in both sentiment and price.
Over the next few days, no one will care. The conversation will shift to events half a world away. Toppling a thug like Putin, even by a vicious mercenary like Prigozhin was difficult at best. Putin is like the Teflon Don, a reference to Mafia leader John Gotti.
Most serious threat in his 23 year rule
However this story ends, it’s clear, Putin walks away damaged. Reports out of Kyiv and the Wall Street Journal say that Wagner forces shot down six Russian helicopters and an IL-22 airborne command-center plane, killing 13 airmen. That isn’t going to be forgotten.
According to Prigozhin Wagner forces captured a key Russian military center without firing a shot. Perhaps the biggest fear for both Washington and markets is what would happen to Russian nuclear forces if, in fact, the coup did succeed. There’s already been talk of Russia turning to tactical nuclear weapons in Ukraine. We talked about that on The Money Runner podcast last year.
Everyone is scrambling for answers, but one thing is certain. Even if this coup has failed or the mercenaries have been bought off, it’s clear the war in Ukraine has pushed Russia and its people to the brink and that anything can happen.
If the breaking news banners fly again, we could get knee jerk reactions in stocks, especially given the recent rally in equity prices.
The urge to step to the sidelines
Nothing forces investors to lock in profits quicker than a military event, even if it’s a half a world away. Herein lies the opportunity. Much has been made about a potential bubble in artificial intelligence, with many pointing to the runup in stocks as reminiscent of the dot com bust.
First, this call is way too early. Second, during the dot com bust, we were chasing eyeballs, not revenue, earnings and cash flow.
While some of the warnings are legitimate, especially from smart money like Morgan Stanley’s Mike Wilson and hedge fund rock star Dan Niles, most are from talking heads that simply missed the ride.
Venture capitalist Andreessen Horowitz recently said the following. “A.I. is quite possibly the most important and best thing our civilization has ever created, certainly on par with electricity and microchips and probably beyond those.”
That’s a huge statement, and obviously will take decades to prove out. I suspect he’s right. In fact, I’ll go on record and say that the potential of A.I. and what it will mean for society is certainly the most important investment theme of my career.
The Weeks Ahead
While an all-out coup has been thwarted or bought off, it’s clear that Putin doesn’t have the same control of the nation he thought he had.
If the situation does change and markets do get hit, get out that shopping list, looking to buy what you missed.
Mutiny
Putin had vowed to crush the heavily armed Wagner Group, confirming this was a mutiny. Prigozhin says that the Russian military launched an attack on his troops, forcing them to retaliate. He went on to say that Russian military chiefs lie to Putin and the public.
Sorting out fact from fiction will be difficult and without access to intelligence, all of us, including yours truly, will have to watch this unfold in the press.
The behind-the-scenes military and diplomatic efforts, both here and abroad, will be pivotal in dealing with the chaos to be expected. Few have been impressed with the administration’s handling of rapidly unfolding geopolitical events. The chaos and unforced errors in Afghanistan, a spy balloon that waltzes across the United States, and a series of diplomatic missteps with our biggest threat China, doesn’t instill a high degree of confidence. We’re going to need more of a response from our president. then “God Save the Queen.”
“This feels like the initial phase of a revolution”
On Saturday, Abbas Gallyamov former speechwriter for and now a critic of Putin living outside of Russia, said the following. Whatever happens now, what we’re seeing is historic, and it will have serious consequences for Putin. This feels like the initial phase of a revolution.
Be careful what you wish for. When totalitarian governments fall, what comes out the other side can be worse than what you faced going in. All the above will drive the conversation for days, weeks and perhaps months to come.
Twitter turns up the volume
Speculation is already raging across Twitter that even a well-equipped, experienced military outfit like the Wagner Group couldn’t stage an operation of this undertaking without the help of outside intelligence agencies like the CIA or MI6.
A statement like that is just what I said it is. Speculation. We don’t know what we don’t know.
What we do know is that the Wagner Group took the city of Rostov to the south of Moscow, and after marching toward the city, Prigozhin and his loyalists aborted their mutiny.
Has Putin left Moscow?
At least as of Saturday, Russian authorities were claiming Putin remains in the city, but media outlets reported that flight monitoring equipment showed Russian aircraft normally used to transport leaders as having left Moscow heading to St Petersburg.
Over the weekend, Ukrainian President Zelensky said Putin is “very afraid” and probably in hiding.
Look, the situation is fluid and obviously a recorded podcast or article can’t keep up with live news coverage. What I can do is share advice for investors and those fearful of what the weeks ahead may bring.
Geopolitical events often bring opportunity. Remember, the knee jerk reaction is always to dump exposure and move to the sidelines. While that might prove profitable in the short run. What will be the catalyst to get back in?
Use that fear to your advantage and get out that shopping list of stocks you know you should have bought but were too afraid to pull the trigger.
I’ll repeat the most important line from my upcoming commercial. Are there risks. You bet. But there are even more opportunities.
DAVID NELSON, CFA 