We are on the 5th day of the Russia-Ukraine war, with a more correct approach, of Russia’s attempt to invade Ukraine. Russian military forces continue their attacks on Ukrainian cities.
Although the war continues as ‘military’ in Ukraine, we see that it has started to take ‘bolder’ steps against the superpower Russia, with the encouragement of the whole world in the face of Ukraine’s resistance. The West, which is the target of sanctions like the mountain gave birth to a mouse, made important decisions over the weekend: It was decided to remove ‘some’ Russian banks from the SWIFT (messaging system with correspondent banks), which is the gmail of the global banking system. It should be noted that 70% of the Russian financial system consists of Sber, VTB and Gazprombank banks.
The US and Europe’s SWIFT sanction is seen as the most important ‘financial nuclear weapon’ to limit Russia’s central bank’s ability to support the ruble and finance Putin’s war effort. SWIFT is a Belgium-based company. Nor is it an institution with an official supra-state status like the IMF. This system, which was created by the leading banks in the 1970s and is headquartered in Brussels, today provides services to approximately 11,000 financial institutions from 200 countries. The SWIFT system is jointly supervised by the Belgian Central Bank and by the world’s leading central banks, primarily the USA and the UK. For example, local banks operating in the TRNC are unfortunately not members of SWIFT due to the fact that the TRNC is not recognized!
While the SWIFT issue seems to be a candidate to push Russia out of the global financial system and punish it, it was decided to stop the international assets of the Russian central bank. The reserves of the Russian central bank are at an all-time high with $643 billion, as can be seen in the chart below. Because Russia was afraid of US sanctions, it also diversified to a certain extent in the composition of its reserves. In this context, 130 billion dollars of gold is kept in Russia, 60 billion dollars of Renminbi is in China; We see the rest being held in the G7 countries.
We think that the expectation, which is the base scenario that Russia will rapidly invade Ukraine, is weakening day by day, which may cause the battle to intensify. According to Reuters reports, Russia carried out weekend attacks on Ukraine’s oil and gas facilities: Oil terminal, gas pipeline set on fire. We see that the West, rather than being a ‘spectator’ to the process, is emboldened in parallel with the brave defense of the Comedian (!) and his people. Inevitably, these developments will bring about an increase in the level of geopolitical risk.
Of course, we think that the only development that will reduce the risks will be with the establishment of the negotiating table. On Friday, the parties (Russia and Ukraine) agreed to start negotiations in Minsk, the Belarusian capital, Bloomberg reported. Of course, we cannot predict how useful or beneficial diplomacy can be (at this stage) as the dose of war increases and the hope of Ukraine and the West increases. However, there is no doubt that the events will have political repercussions in the global arena.
With the outbreak of the war on Thursday, the global financial markets suddenly turned upside down and stormed into safe havens, the negotiation table came to the fore on Friday, and the expectation that the size of the conflict will remain limited (!) We have also witnessed that he adopts a ‘insensitive’ attitude in a way.
The number one antidote to the times when geopolitical risk perception is at its peak, the price of gold, which is the number one antidote to the times, climbed to the level of $ 1,974 on Thursday, and after testing the peak of the last 27 months, it fell by almost $ 100 on Friday and retreated to the bottom of the level of 1,880. Similarly, the price of Brent crude oil closed the week at $97, down almost $10, after testing the new high of the last 8 years based on $106. Anyone who looks at gold and oil prices and doesn’t follow the news could even comment that the war is over on Friday. We would like to underline that we do not believe in this pricing.
The exclusion of ‘some’ Russian banks from SWIFT means they will have quite a hard time transferring dollars. In this context, the decrease in the dollar transactions originating from the Ruble is a positive development for precious metals, which inevitably have limited supply and are in demand in such special periods. Let’s underline why Bitcoin, which has a decentralized structure, and Blockchain technology together with it, is a ‘revolution’.
We can easily say that Turkish financial markets suffered a heavy break in the initial pricing on Thursday, due to its geopolitical position and the squeeze between NATO and Russia with the S400 / F35 issue in recent years. As we have pointed out for weeks, the USDTRY exchange rate quickly overcame the significant resistance of 13.90 and rose up to 14.62 with the demand for safe-haven dollars. Subsequently, the continued support of the public increased and, although in need of confirmation, the market participants claimed that approximately 3 billion dollars It ended the week just below the 13.90 level with a dollar-sized intervention.
Speaking of the exchange rate, let’s note that the figures for the Currency Protected Deposit (KKM) product, which was last included in the BRSA daily bulletin dated February 14 and have not been updated since then, have also been removed from publication! In the meantime, we think that the tax advantage granted to companies that want to enter under the umbrella of KKM is on Friday, and this has also played a part in the downward movement of the USDTRY exchange rate.
Of course, it is necessary to accept what happened on Friday as a kind of filing of the panic atmosphere. As the geopolitical risk perception eased a bit, attention was turned to the PCE inflation, which was announced on Friday and followed as the number one data on inflation by the FED. We saw the PCE rise 6.1% year-on-year to its highest in 40 years. Of course, although all eyes are on Ukraine, it is eagerly awaited how the FED will decide in this delicate environment (there are days now for the ordinary FOMC meeting in March) in parallel with the inflation data reaching the peak of multi-years.
In our bulletins last week, we discussed that the developments would have negative effects on the Turkish economy in many respects. We think that the competitive TL, that is, tourism and exports, which the new economy program relies on, will be adversely affected by the events in Ukraine and Russia as the main tourism corridors. Moreover, we are certain that the rise in energy prices will increase both Turkey’s import bill (current account deficit) and inflation (pump prices) in an environment where inflation is getting out of hand. Moreover, the events in the two countries, which have a say in wheat production, pushed wheat prices to the highest level of the last 13 years with 9.5 dollars on Thursday. The prolongation of the war may put such main items under further pressure, and the new economic policy, which is based on the hope of a surplus in the current account balance, may be very difficult.
If we need to look at the diplomatic dimension of the developments, Foreign Minister Çavuşoğlu, confirming the statements of President of Ukraine Zelenskiy, said, “We came to the conclusion that the situation in Ukraine has turned into a war. We will apply the Montreux provisions transparently.” said. This means that for the first time, Turkey has officially signaled that the Straits will be closed. It should be noted that in the event of a war in which Turkey is not a party, the Strait may be closed to the passage of ships of the warring countries.
Over the weekend, I came across a lot of comments about the President of Ukraine on social media. Zelenskiy was elected by the Ukrainian people with 73% of the votes, saying that he would lift the immunity of the president, deputies and judges, zero tolerance for corruption, imprison those who take bribes and pay bribes, hold a referendum on important decisions, support his country’s progress towards NATO membership, and maintain its goal of integration into the EU. . It should be noted that the EU and NATO did not let Ukraine down, as is supposed. Although it is not possible to compare with Putin’s military and state experience, we see that Zelenskiy, like the President with previous state experience, did not leave his country at the first opportunity and unexpectedly preferred to stay and fight in the capital Kiev in the face of the Russian threat!
While we are watching the news on the phone, we hope that this nightmare will end as soon as possible, while we watch the desperate human drama in Ukraine, where people are trying to emigrate and even preparing Molotov cocktails on the streets. I read the articles titled “The people of Ukraine shamed their country by electing a comedian head of state” on social media, with great sadness. While innocent people are dying and free countries are being invaded, Atatürk’s words “war is murder except for homeland defense” echoes in my ears!
We see that the global markets, which completed Friday in a callous mood, started the first trading day of the new week with a selling trend. We see that Putin ordered nuclear weapons to be ready for war, especially after very harsh sanctions such as removing Russia from the SWIFT system and freezing the assets of the Russian Central Bank. The ruble starts the week with a depreciation of approximately 20% against the dollar. We think that the Russian stock market may face a similar collapse after its opening.
While the Asian markets are relatively calm, losses exceeding 2% are seen in the futures of the US stock markets. The 10-year bonds, which are the market rate of the dollar, were withdrawn to 1.88% this morning with the safe-haven feature. While DXY (basket), the market rate of the dollar, recorded an increase to the level of 97.3 due to the increase in the demand for the safe haven, EUR and GBP, which we discussed with a medium-term perspective and highlighted this morning, were 1.1150 and 1.3350, respectively. declined to its level. In particular, we think that 1.08 level may come to the fore in case of weekly close below 1.11 level in EURUSD parity.
The USDTRY rate, which fell below the 13.90 level on Friday with the KKM tax exemption and the support of the public, rose to 14.10 in the first transactions of the new week; We see risks to the upside in the current environment. Let’s note that the price of oil per barrel has similarly exceeded $103.
It should be noted that the Russian-Ukrainian authorities came together in Minsk, the capital of Belarus, for peace talks, and the negotiation table was set up, to some extent, prevented the losses in the financial markets. Nevertheless, let’s underline that it is necessary to be prepared for a strong volatility and to keep a cautious stance.