Terminal Value

Russia-Ukraine War Forecasts

Doug Utberg

Business Growth Authority | Technology Strategy & Resourcing | Cost Optimization Expert | Business Process Architect | Financial Strategist | Founder - Terminal Value Podcast

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We’re actually going to be doing a forecast Friday edition of the podcast. And I’ll be talking about something that is pretty topical, which is the current war between Russia and Ukraine. At least the war is going on at the time of this recording. So what I would like to do is just give my analysis of the situation and go out on a limb and give you my forecast of how I think it is going to unfold, which, of course, nobody can know for sure.

So, of course, there are a lot of media stories that you read about whether it’s Vladimir Putin, whether he’s unhinged, crazy, whatever. My observation is that Russia, their economy is in pretty bad shape. I know in 2020, the Russian economy dropped a lot. In 2020, what had improved a bit. But still, their economy is not doing great, particularly because Russia’s economy, their principal economy, is based on oil, natural gas. I think Russia supports or supplies somewhere along the lines of 40% of Europe’s energy. Now, that’s a lot. Now, pair with this, that there is a very significant pipeline in the Ukraine that Russia pays approximately $2 billion a year in transit taxes to transport that oil and natural gas over for distribution. Europe.

Now, kind of my analysis from my assessment is that I think Vladimir Putin is playing for a couple of things. Number one, by destabilizing the ruble, the Russian debt, et cetera. What happened was, for example, the Russian debt before the invasion was basically trading almost a par, essentially 100 cents on the dollar. And that’s dropped precipitously. It’s almost become untradeable. Okay, well, we know that there are transactions taking place and somebody is buying it. Now, if I was prone to conspiracy theories, I would think that one thing that they could potentially do with an invasion such as this is their central bank through third party intermediaries could go in and start retiring their debt essentially at pennies on the dollar just because the value has dropped so much. People are dropping Google’s and are dropping Russian debt pretty much at any price. Well, so one potential for this is this could be a way for Russia to effectively refinance debt for about five to $0.15 on the dollar.

Granted, it’s a very violent, destructive way of doing it, but that is one possibility that I think is very likely probable. And again, I have no inside information. I’m just a person who beats the news. This is just my analysis on the situation. Another thing that I think is very likely to be an outcome of all of this is that I think at some point there will be some sort of ceasefire, negotiated agreement. And two things that I think will be very key to that is I think Russia will be looking to negotiate perpetual pipeline rights so they no longer have to pay Ukraine. They may negotiate some of the disputed territories. I don’t think that’s really actually that important to them. I think the principal reason why Russia was going into the disputed territories was the stage for the later invasion. But then I think one of the bargaining chips will be giving back the Chernobyl nuclear facility, because, of course, the principal thing with Chernobyl is that it has a very elaborate containment system around reactor four because of the six nuclear disaster. And essentially if you put charges on that shell, you can essentially have the world’s biggest dirty bomb that will irradiate more or less two thirds of Western Europe. Now, granted, it would also impact Moscow. So that’s not the kind of thing we want to do lightly, but it’s an error in Russia’s quiver that I think the west would be very eager to be able to take back.

These are some of the things that I see as possibly unfolding. I think, of course, the news articles are all going to be talking about, right? Nuclear war, nuclear winter, usually assured destruction. Of course, those are the things that grab headlines. But truthfully, I think they are very unlikely to happen just because in the event that Russia launches a nuclear warhead more or less against anybody, then what will immediately happen is there will be a counter strike from pretty much all of the other nuclear armed, nuclear armed countries, the United States being principled. But of course, if you have many nuclear powers in Western Europe, you get an immediate counter strike that would neutralize all of Russia’s industrial capacity, their political landmarks, their political establishments, more or less everything. And so there’s really no situation where that plays out positively other than if you’re trying to grab headlines, which is what I think this is all about.

Now, one of the things to think about also is to say, okay, how do we think that this Russia Ukraine situation is going to manifest itself into the global financial markets? Well, one thing that we’re seeing right now is the oil prices are spiking, principally due to speculation over limited supply. Another thing that we’re seeing is that there is a lot of volatility equity markets. Well, one of the things that I foresee is that if this volatility starts to spark off margin calls, which is possible because there’s a significant amount of financial assets out in the equity markets that are purchased on leverage. If this volatility being sparked margin calls now you can have a deleveraging because deleveraging is a situation where you have forced liquidation of assets because that’s required based on margin contracts in order to avoid an insolvency situation for that particular contract. And so

if the financial market volatility because of the Russian Ukraine war sparks deleveraging, it could bring an abrupt end to the economic expansion that the US and global economy is experiencing right now.

Granted, this is a remote possibility, but something to think about. And if I was going to make a forecast, I think that is something that is likely because you pair this with the fact that roughly 20% of companies that are publicly traded currently are what they call zombie companies or are companies that are not currently earning enough to pay down their debt. And so what happens is you have continually expanding corporate debt and now you pair this with equity market volatility from a war between the Ukraine and Russia with energy market volatility. This is driving inflation

when that inflation ultimately results in higher interest rates. This is going to trigger defaults on the part of these zombie companies.

And I think ad leveraging is very likely. Now, this is not something that I necessarily want to see happen. I am simply sharing with you what I am observing and the analysis that I am putting on the situation. Now, in the event that a market deleveraging happens, then what will happen is that you will see extensive volatility in both equity and debt markets. And trust me when I say that anybody who hasn’t lived who didn’t live in the 2008 financial crisis, this will seem crazy. It will not be exactly the same as the financial crisis because that was a financing, a bank financing based deleveraging. This would be a corporate default based deleveraging, but it’s still a similar situation, which is where you would have a lot of forced liquidation of financial assets that drives the price down. I don’t know that I’m necessarily going to go conspiracy theorists and say go out by gold, buy, Bitcoin, whatever, but I would say

be very mindful of how your financial assets are positioned. Particularly what is going to happen if there is a very significant change in equity valuation? What’s going to happen if there’s a very significant change in debt valuation and then also how much in the way of assets will you have available to deploy if and when there is this deleveraging and at some point it starts to form a bottle.

Now, of course, nobody can know exactly what a bottom is when you’re at the bottom of a crash, but you can know when the rate of deceleration is starting to slow. That typically is how the body formation process works. And again, this show is not based on intended to deliver investment advice. I’m really just delivering my analysis, but my general analysis would be that now is probably a good time to be mindful of your exposure to equity in debt markets and possibly to mitigate some of that exposure either by with Hedging instruments or possibly just by holding additional cash. Now this does have some risk because inflation rose the value of cash but cash also reduces your impact of volatility. So like all things in life, nothing is risk free. Anyway, that is my forecast Friday assessment of the current global geoeconomic political situation and I would just like to thank everybody for listening and I hope you have a wonderful day and great rest of the weekend.

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