Podcast Transcript: [Emergency podcast] Timothy Ash on Why Investors Are Underestimating Fall-Out From Russia/Ukraine Conflict

This is an edited transcript of our podcast episode with Timothy Ash, published 9 March 2022. He is a Senior EM Sovereign Strategist at the $125bn fund, BlueBay, and is widely considered one of the leading experts on Ukraine and Russia. Tim was Head of CEEMEA Credit Strategy at Nomura International. Before this he was Head of EM Research (ex-Africa) at ICBC-Standard Bank until May 2015; Head of Emerging Markets Research at the Royal Bank of Scotland until June 2012; and Head of EMEA fixed income research at Bear Stearns International (later JPMorgan Chase) until April 2008. In the podcast we discuss, why Timothy has been expecting a larger conflict since 2015, why NATO expansion is not the core issue, why the conflict won’t end soon, and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.

Introduction

Bilal Hafeez (00:01): 

Welcome to Macro Hive Conversations with Bilal Hafeez. Macro Hive helps educate investors and provide investment insights for all markets, from crypto, to equities, to bonds. For our latest views, visit macrohive.com. 

It’s Wednesday, 9th March, and markets are rallying on hopes that the Russia-Ukraine conflict is deescalating. So I thought it was a great time to have an emergency podcast on the situation. On this podcast, I’ve got one of the leading market strategists for the region, Timothy Ash, and he’ll give his unfiltered view on the situation. 

And as a reminder, you can get access to all of our analysis, from topics like Russia to crypto, as a member of Macro Hive. There’s normally a charge for monthly membership, but to help you navigate these crazy times, we are dropping our paywall for a week, no credit card needed. So, you can visit macrohive.com and claim your free access. 

Now onto this episode’s guest, Timothy Ash. For background, Tim is a senior EM sovereign strategist at the $125 billion fund BlueBay. Before this role, Tim was head of senior credit strategy at Nomura International. And before Nomura, he held head of EM research roles at ICBC Standard Bank, the Royal Bank of Scotland, and Bear Stearns. I should add that Tim has been following Ukraine and Russia for decades and is widely viewed as one of the leading strategists for the region. Now onto the podcast. 

So welcome Tim, it’s great to have you on the podcast. It’s unfortunately not a great time, but nevertheless, we have to deal with what we have at the moment. You’re an expert on Ukraine-Russia, so what’s your take on this current situation? 

Timothy Ash (01:37): 

Well obviously, incredibly challenging, as I guess you probably know and other people. I worried about a war between Ukraine and Russia since 2015 essentially, because I think Minsk II was always implementable. The Ukrainians signed up to it, they hated it, but they were facing massive military defeats at the time from Ilovais’k and Debal’tseve, and the Russians thought they got them, well literally up a barrel, and thought that they would be forced to accept a federal solution and autonomy for DPR and LPR, a federal solution, which would stop its Western orientation. The wording, maybe the Germans and the French kept the wording kind of vague, and the Ukrainians don’t accept that they accepted a federal solution autonomy for them was very loose sort of decentralisation. 

And essentially, I guess Putin waited and hoped that it would be implemented as per his idea, and in the end realised that the status quo wasn’t working for him. I mean in the end, Minsk II allowed Ukraine’s continued Western drift. Every year that goes by, Ukraine becomes less Russian. I’m not saying it was Russian in the first place, but it’s Western drive, it just comes further away from Moscow, and I think Putin realised if he didn’t move now, he’s lost Ukraine forever. 

And look, this is not about NATO, it’s bullshit. It’s not about NATO, it’s not about security, the Russians pushed that line. It’s not about NATO encroachment, NATO is no threat to Russia, it’s bullshit, bullshit, bullshit. I always remind people, 2013, no American troops in Europe, 2013, no US tanks in Europe. 2014, Ukraine had no aspirations for NATO, opinion polls suggested just single digit supports for Ukraine in NATO, and Ukraine had no military capability basically. I mean, the fact the Crimea was taken in a matter of hours, and it was a neutral status already, nonaligned neutral status. Its military doctrine of the Ukrainian military was anti-Western, it was built on the premise that the attack was going to come from the West, not the East. And yet, despite all that Russia annexed Crimea and invaded Donbas. 

Why Timothy has been expecting a larger conflict since 2015 

Bilal Hafeez (03:28): 

And you said, you were worried from 2015 onwards, I mean, how come us in the west we weren’t? So Germany carried on with Nord Stream and so on, the US, I guess did have some positions on this, but all of a sudden this year we’ve had this big intelligence that there’s going to be invasion, but what was happening in this interim period? 

Timothy Ash (03:45): 

Well, we need to ask ourselves, I mean, wishful thinking, appeasement, business interests coming first, Russian leverage, Russian money, dirty money laundromat, all that kind of gig. Russia had a huge PR lobbying machine, lots of Western politicians bought off, all that kind of gig. I mean, the serious people, the Chatham House guys, the Fiona Hills, the people that really understood Ukraine and Russia, have been warning for this a long time. Unfortunately, our policy makers have preferred to look in the other direction. 

But I mean, look, I always make this point, and people used to ask me, what do you think about sanctions on Russia? I always make the point look, the direction of travel in terms of Russia-Western relations, since arguably Putin’s Munich Security Council speech in ’07 has been crystal clear, and then you add ’08 Georgia, you can go through the list, it’s been one way. The messaging from Putin I think has been pretty clear. People didn’t want to listen to it, and I think now that they’ve woken up and smelt their coffee. 

Western exposure to Russia and ESG, and the scale of sanctions 

Bilal Hafeez (04:45): 

Yeah. No, I just need to situate us time wise, because everything’s moving day to day. So this is Wednesday, the 9th of March, and we’re speaking in the afternoon 3:30 UK time, this is one of those types of things. Now obviously, we’ve had the invasion a few weeks ago, we’ve had this what seems to me quite significant sanctions against Russia Central Bank, not all Russian banks, but some banks and SWIFT and so on, what’s your take on the sanction side of things? Do you think it was impressive in terms of how quickly the West but sanctions up, or what’s your take on that? 

Timothy Ash (05:14): 

I mean, let’s just go back. I think the reality is the West mismanaged the relationship with Russia, I would say not about NATO enlargement, but about the response to Russian aggression. So sanctions were not tough enough in response to Crimea and the Donbas, and Skripal, and cyber attacks, and all that stuff, we always found excuses not to do stuff. So I think if Iran is 10 out of 10, I’d say we were probably at 2 to 3, and given the scale of what Russia had done, it was nonexistent. So the Russians got this message that we weren’t going to do very much, Putin thought he could invade Ukraine and basically he’d get away with it. 

What I expected in response to this probably a 6 or 7 out of 10, because Iran is 10, so 6 or 7, I’d say we’re probably 8 or 9. And the reason we’ve scaled up so much is firstly, I think the Ukrainians have shamed us all, I mean Zelensky’s bravery. And I think people are realising the scale of the threat and actually the Ukrainians are fighting for us, they’re fighting to defend Western liberal market democracy. And I think, people realise now the absolute threat from Putin, so they were shamed into doing something significant. And I think now what we’ve seen is, say 8.5 out of 10, I mean no one expected CBR to be sanctioned, it’s pretty incredible. I remember just an inkling of discussion about it, I think I tweeted about it on the Thursday or maybe Friday, not really thinking it would happen. The Saturday morning I was getting lots of emails from people in DC, there seemed to be momentum, and it was done by Sunday. Remarkable. And now there’s a lot of focus on energy. 

I mean, I think where we are, people are critical of ESG, and look, what we’ve seen is SWIFT sanctions, CBR sanctions, major Russian bank sanctions, it’s become very, very difficult to transact with Russia, that’s the reality, I mean, Ruble collapse. I mean actually, what was interesting about this, the big losers in all this are Russians. Russians believed the lies of the Kremlin, they thought this invasion wasn’t going to happen. Foreigners have basically been reducing exposure to Russia the last two, three years because of ESG. Obviously, some guys got caught out wrong side of it, all that gig, they should have listened to US intelligence I think, but the guys who didn’t were the Russians. So the absolute collapse in Russian financial markets is going to hit Russian business, Russian oligarchs, Russian middle class, it’s going to have a devastating impact on those guys. 

So I think this is mega significant, major companies, I mean McDonald’s and everyone else pulling out, Putin has made kind of Russia almost a pariah. And there’s this focus on energy, which is interesting, it’s now from and ESG perspective difficult to buy or people don’t want to buy oil from Russia, it’s difficult to transact, to do the transaction, to trade in oil. So the Russians didn’t expect this, it’s a devastating blow. 

Obviously, I was around in ’98, it feels a lot worse than ’98. It feels a lot worse than ’98 because in ’98, it was foreigners who’ve got screwed. Devaluation, defaults, is great when the holders of your debt are external. Default, evaluation is not a very clever idea when it’s actually your own people who are suffering. And I think unlike ’98, there was expectations that it was going to happen, that there was a way out, because the IMF were there. What’s the way out for Russia? Seriously, you’ve got this massive economic crisis, the reserves are kind of gone with the sanctions, how does Russia get out this? Unless there’s a change in politics. 

Why the conflict won’t end soon 

Bilal Hafeez (08:20): 

I mean, let’s talk about potential paths, what’s a potential deescalation path here? 

Timothy Ash (08:26): 

Look, the Ukrainians are not going to surrender on their core demands. I mean, for them, they understand this, as I said, it’s not about NATO, it’s not about neutrality and all that kind of gig. Putin doesn’t accept the right of Ukraine to exist and Ukrainians to exist. That seems pretty clear, read his essay. So for the Ukrainians is about their survival, so they’re not going to roll over to Putin, they want their territory back. I mean, there is this talk about neutrality, but they want neutrality and security guarantees. So security guarantees from Russia are not worth a white piece of Munich paper, the Ukrainians are not that stupid. So it has to be cast iron NATO guarantees on its security, and I can’t see NATO really doing that. 

So I don’t know, I think look, ways out is, you think of scenarios as winners and losers, a war ends because defining winner and defining loser, or wars end because like the Iran-Iraq war which went for a decade, the two sides slug it out for a long time, and then in the end, figured out that there’s no winner and they have to come to this peace talks. Or there’s external intervention, that essentially some foreign partner or whatever you want to call it, decides that it’s gone too long, we need to bang their heads together and come to a solution. I just don’t see we’re close to any of those yet. 

Bilal Hafeez (09:33): 

I mean today, this is Wednesday, 9th March, markets are rallying, they think there’s some kind of movement to peace, what do you think about these sorts of moves? 

Timothy Ash (09:42): 

Markets have been wrong throughout this. I mean, people don’t get it, they don’t understand the core of the problem, and it’s about Ukraine, it’s about its survival, it’s identity, whatever. Again, I don’t see, Putin still thinks he can win, the Ukrainians still think they can win, the two sides are far apart. I mean, possibly a cease fire, temporary cease fire, but a solution that would mean sanctions are off Russia means Russian troops have to leave. A full withdrawal, maybe to where we were 10 days, 12 days ago, but I’m not sure Putin’s going to do that. Can they Ukrainians capture the territory back themselves? Unlikely. I mean, Russian troops are not doing a great job, it’s been a catastrophe from Russian perspective. I’m afraid, for me, there has to be political change in Moscow. Something has to change in Moscow to change Putin’s calculus. 

Chances of regime change in Russia 

Bilal Hafeez (10:30): 

But you followed Putin for years, he’s not going to step down, it’s unlikely for there to be a palace coup, from my understanding, or maybe not, maybe there could be a palace coup. Do you think there could be a leadership change there? 

Timothy Ash (10:42): 

Possibly, not my base case, but I’m not sure it’s a 10% probability, I think it’s more significant than that. I think for me, the pursuit of war has been pretty disastrous, the planning, the willingness, I expected a short, sharp, sort of Iraq 2003 style, where the Russians would use their advantage, which is air power, missiles, and artillery, to bomb the Ukrainian military into conceding a treaty soon, that was my scenario. The inability to use their advantage, and their use of land forces, boots on the ground, which plays to the Ukrainians’ advantage, it’s a huge military cockup. In the end, I think they thought the combination of some use of air power, try and take Kiev quickly, decapitate the administration in Kiev, take Zelensky out, and then the rest would fall. 

I mean, in the end, look, Russians always misunderstand Ukraine. It’s lazy, they think Ukrainians are like them, they’re not. I mean, it’s interesting about their effort to decapitate the administration in Kiev, look, one negative about Ukraine in the last 30 years is it’s a very diffused political landscape. One of the reasons that they’ve struggled with development is, you’ve got Shevchenko, Poroshenko, Yatsenyuk, Zelensky, there are all these political leaders, Boyko, they’re all fighting like a bunch of cats in a bag. But actually it’s a big advantage now, it’s an advantage because even if Zelensky unfortunately was taken out, there are plenty of leaders who will stand up. 

And again, this idea of Russia’s pursuit of this conflict, bombing civilian targets in the east of Ukraine, and the east of Ukraine is the area that if anywhere was going to support a Russian invasion, it possibly would be there, because that’s where most primary Russian speakers are. Putin’s conduct of this war has united the Ukrainian nation around Zelensky, remarkable in my mind. I mean for me, the one shot that I remember from this so far, was that the site of Yuri Boyko. Yuri Boyko was the leader of the opposition block, Yanukovych’s crew, former Regions outfit, he used to be very close to Moscow. There’s a picture of him in the Rada stood next to Zelensky’s guys. So even the pro-Russian, seemingly pro-Russian opposition block, aligned behind Zelensky. So the whole nation is against Putin. 

So in a long-winded, not really answered your question, but just going back to specifics of the question, lots of casualties, lots of body bangs going back to Russia, he’s fighting a united nation in Ukraine. I think elites are stunned by the financial collapse, the loss of their wealth. So the middle class, St. Petersburg, Moscow, maybe they were anti-Putin anyway. I think within the security apparatus, for me again, the picture of Patrushev, the Security Council guy, getting lambasted by Putin a couple of days before the invasion was striking. This was an ally of Putin, this was part of the siloviki, it suggested that there were divisions in the administration. And I would hope that some of those would do some stuff to make sure that Putin backs off. 

And people also ask me, this idea of, will the population rise up against Putin? Well, again, it’s not my base case, and I think the forces of control in Russia are very, very dominant. We’ve seen all the arrests now, and obviously in recent months we’ve seen that as well. But look at Kazakhstan, the protests that we saw in January, extraordinary, no one at all expected those protests. And if you think of the Russian population, yeah again, people generally say, well, they’ve lived through a lot, they can live through austerity. I would say, this is a different Russian population, they’ve had 20 years of prosperity. They’re used to going on holiday in Turkey, they’re used to buying nice property. I mean the foreign holidays, it’s not just elites, it’s ordinary Russians have got used to a reasonably good life. To have that totally taken away from them, I’m not sure they’re that up to that. 

Bilal Hafeez (14:12): 

You mentioned Kazakhstan, has Kazakhstan, since its independence, has it ever had a popular uprising before? 

Timothy Ash (14:18): 

There’s been a few mini ones, Western Siberia, particularly related to disputes around the oil sector, there’s been a few mini Islamist, very minor uprisings, but nothing as substantive as that. And I think going back to the Russia story, opinion polls show very strong support for Putin, but even the Levada poll which is respected, but I mean, come on, let’s face it. If I was living in Moscow, someone phoned me and said, do you like Putin? Dude, I am going to say, yeah, I love the guy. So I don’t think I believe that. 

But those same opinion polls also show that the population generally are not very happy with their lot in life. They don’t like the state, they don’t like governance, they don’t like corruption. There’s an underswell of discontent that Putin has kind of been able to brush over because the balance sheet’s been so strong, they’ve been able to give Russians relative prosperity and some kind of perspective for growth and all that kind of gig. 

What’s interesting as I said, the elites in Moscow and St Petersburg will be hit by the financial sector, the body bags, this will go to ordinary places in Russia, the kind of Ryazan, Tula, Tomsk, Omsk, these kind of places, ordinary cities, and I think that possibly will quickly change people’s perceptions of Putin. So I think I wouldn’t rule out a significant move against Putin. 

How China fits into the picture and why this is a globally systemic event 

Bilal Hafeez (15:32): 

And now from an investor perspective, when I speak to lots of investors, there’s a whole class of investors who are basically saying that Russian assets are distressed, I want to go in and buy. Then there’s others that say this Russia conflict, people who don’t necessarily focus on Russia per se, they think this will be resolved quickly, so we’ll get back to the risk on party more globally, I can go back to buy European equities, US equities. And then there’s others who are seeing this conflict as something that’s potentially globally destabilising, because Russia’s energy, the shock imparted by Russia. I mean, where do you stand in one of these? 

Timothy Ash (16:06): 

Yeah, I’m in the latter camp. I think for me, this is a globally systemic event on multiple levels, particularly in terms of Western security. People talk about clash of civilizations, this is a clash of systems, Western liberal market democracy versus autocracy. The Americans, Jake Sullivan and those guys got it totally wrong, China’s not the number one threat to our system, Russia is, and I think there’s a recognition now. So sanctions are not going to be, even if Putin decides to drive his tanks out of Ukraine, significant sanctions will remain, the relationship is not going to improve, because the West has realised that Putin is a bad actor who is trying to attack our system. And Putin himself said, this is a war with the West, he’s made that pretty clear. So I can’t see sanctions moderated. 

Bilal Hafeez (16:46): 

Well, what about the energy dependence of Europe? I mean, Schultz said, we’re not going to impose sanctions on the energy side, Europe is stuck here in some ways, in terms of- 

Timothy Ash (16:55): 

Well look, if people like Schultz understand or values our system, our very system, we live here. I mean investors, our base, it is Western liberal market democracy. The big banks, we prosper because we have rule of law, it is under threat. So I think there is now a recognition of that and there is a willingness to accept backdraft. It’s a pain, if you are going to counter this threat, we have to accept there’s going to be a cost. 

And I think there is a realisation that this is possibly going to be a long running confrontation, not just the conflict itself, but the battle to reign Putin in, and we have to impose a significant cost. The Americans yesterday banned imports of oil, sure, the Americans don’t import very much. The Europeans, I think made a pretty firm statement yesterday, the comment that they’re going to reduce energy dependence on Russia by two thirds by the end of this year, pretty significant. Whether they can do it, it’s a question, but to reduce dependency, to reduce energy inputs to zero over the medium term, that’s a huge statement and a huge blow to Russia in the end. It’s pretty devastating if that’s rolled through. 

Bilal Hafeez (18:03): 

And what do you think about Russia maintaining ties with China, India, the rest of the world, would that keep them afloat so to speak? 

Timothy Ash (18:10): 

Well, the China-Russia relationship is interesting. Obviously, Putin made a lot of the Beijing Olympics, he went there, he signed this big treaty. I think in a way they’re quite happy to be out of the doghouse. I mean, remember, six months ago, the American thought China was the big threat. Now, reality has dawned that China likes the status quo, Putin doesn’t. Putin’s a disruptor. The Chinese are quite happy for it to go back to some kind of normality with the Americans. 

And I think they see a window here, and I think they think, well, if we help the Russians, we’re just going to screw ourselves in terms of, the Americans will say, actually, we were right all along, you are the enemy, whatever. I think the Chinese think, there’s an opportunity to work with the Americans, to do them a favour with the Russian, that maybe could somehow improve that relationship again and change the trajectory. 

And I think the Chinese are actually a bit concerned by how rash Putin’s has been. I mean, again, they like stability, order, they don’t like things out of the blue. And remember actually, in previous, if you think of after Crimea and Donbas, Putin was trying to push through the East Siberian pipeline, the Chinese screwed him on that deal, totally. 

Bilal Hafeez (19:14): 

Oh really? I don’t know much about that, what happened? 

Timothy Ash (19:15): 

Well, the pricing deal basically was unbelievably advantageous to the Chinese. So they’ll be opportunists. But funny enough, they didn’t provide the financing for that deal, so they’re not going to write big checks. And it’s interesting that I think Chinese companies are very nervous, I mean, there was this comment that some Chinese companies might be looking at cheap assets out of Russia because of this, I think the Chinese companies will be very nervous about getting pulled into US sanctions. And if the Chinese do that, they will be sanctioned as well through secondary sanctions. 

So I don’t think it’s a no brainer that the Chinese support the Russians here. 

Bilal Hafeez (19:49): 

Yeah. And things lifting sanctions on Iran, Venezuela, do you think that’s all in play now it seems? 

Timothy Ash (19:56): 

Yeah. Look, I think the American thought the Chinese were the number one threat, they’ve realised it’s Putin. We had this summit for democracy and there was some recognition that Biden’s big agenda was democracy or autocracy, the test, the test of it is this. You mentioned China, I think it’s quite interesting, I think the Americans have realised that actually, if they don’t stop Putin in Ukraine, it’s a green light for China on Taiwan, that they’ll have no chance of stopping China if they’re weak on the Ukraine reaction. 

So I think there’s real commitment from the West, there’s real willingness to have pain, to take cost. Maybe where it goes from here, I worry now that Putin is desperate, is losing, people spoke about this great tactician, what a genius this guy was. Well, he’s not such a genius now, he’s miscalculated in Ukraine. He didn’t think Ukrainians would fight, he didn’t think sanctions were being posed, he thought fortress Russia meant Russian economy was beyond touch, totally wrong. He’s got himself in a terrible situation where he’s an international pariah. 

Bilal Hafeez (20:54): 

Who are the allies to Russia now? Are there any allies to Russia? Is anyone actually pro-Russia globally or not? I mean, China’s kind of playing it cautiously, there’s lots of neutral countries, but is anybody supportive? 

Timothy Ash (21:06): 

Not really. I mean, the Venezuela thing is extraordinary as you said. The fact that Maduro seems to be interested to talk and the Americans are very eager to somehow get much more Venezuelan oil onto the market, I don’t think there’s any particular allies. I think Putin’s just totally overstepped the mark, I mean the TV pictures tell the story. And I think the reaction of Western companies, I mean the number that are pulling out of Moscow, no one expected what we’ve seen in terms of the sanctions and the reaction from business. 

And ultimately, do Russians really want to have the same pariah status as Putin> if the direction of travel doesn’t change in Russia, Russia is going to be isolated for a decade. You mentioned Russian assets, what hope of restructuring? I mean, okay, there’s going to be a default, but it will be a Venezuela style scenario. Who’s going to negotiate with the Russians? What is the deal? There’s no IMF, there’s no recovery kind of story. 

Bilal Hafeez (22:03): 

Yeah. I was speaking to a number of people around how do you do like a CDS event? I mean, how do you actually agree on these things? How do you agree on restructuring? Who would participate in it as well? 

Timothy Ash (22:14): 

I mean, Putin has totally miscalculated, Russia is going to be a terrible place economically for a decade to come. Unless someone in Russia decides that Putin’s not the great guy that they thought he was and now there’s going to be some move against him. 

Bilal Hafeez (22:30): 

Okay. Well, that’s great. I mean, I know we only have a short period of time. And in terms of just out of interest, I follow you on Twitter, but what’s your sources for following news on this? Because Twitter seems quite good on this personally, there’s a few people I follow on there. 

Timothy Ash (22:42): 

Yeah, these are your sources. I mean, a lot of people have got it totally wrong. People like Fiona Hill, Andrew Weiss is very good. Mike Kaufman, Rob Lee on the military, Kaufman is superb, Mike Lee is superb on the military side, I follow those. Unfortunately people like Fiona Hill, they don’t do much on Twitter, but they do right stuff quite often, they talk sense. There’s a lot of people out there, I’m just amazed at the complacency about the Russia story. 

Bilal Hafeez (23:09): 

Great. Okay, excellent chatting to you. We’ll stay in touch, we might just do another one of these soon. 

Timothy Ash (23:13): 

Yeah, cheers man. Bye-Bye. 

Bilal Hafeez (23:15): 

Thanks for listening to the episode. Please subscribe to the podcast show on Apple, Spotify, or wherever you listen to podcasts. Leave a five star rating and a nice comment and let other people know about the show too, we’d be really grateful. Also, sign up to become a member of Macro Hive at macrohive.com. We’ll be back soon so tune in then. 

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)