Good Fences Don’t Make Good Neighbors

— Keenan PWM Blog Post —

Recently, we have seen an escalation of shared interest between Russia and China.

Putin and Xi Jinping have been dancing closer and closer to each other on the world’s Geo-political stage. Not only have they negotiated deals on gas and vowed cooperation with a common link of currencies, but they have also held major joint military exercises.

Of late, they have pledged opposition against the expansion of NATO in Eastern Europe, and both have called foul to the US and NATO’s vow to protect Eastern Ukraine.

The reality is that it would not be in China’s best interest to rattle swords against their major export markets in Europe and the US. However, Xi finds it just as important to form military alliances with its Neighbor to the North and clear boundaries against the West.

Such new, shared interests have dramatically increased with the mutual support shared between the Eastern Nations and, more recently, the current events surrounding Ukraine.

It’s been less than a decade since Putin invaded Crimea, a sovereign part of the Ukraine. There were sanctions and condemnation by Europe and the West but no real military movements against it.

This is different. Biden has escalated this to a point of inevitable action despite Russia claiming that its intentions are not to invade Ukraine.

How could this affect the world markets?

Well, it already has to some extent. The Russian bank Sberbank took a tumble yesterday and has now started to retrace. It just signed an agreement with Alipay, the financial arm of Alibaba, to allow transfers of money from Russia to China for a 1% fee. Not a bad deal for the Chinese internet juggernaut.

The worst-case scenario is that Putin invades Ukraine and initiates a worldwide sell off within all the markets tied to any the players. The other, more likely case is that Putin backs down after being influenced by China, their new and much more economically vulnerable partner. If China involves themselves in this conflict in any real way, the already political and public markets linked to the vulnerable Hong Kong and Mainland Chinese markets would produce an affect felt around the world. It’s important not to forget how interrelated China is financially to the West.

If some of the world’s most powerful markets take a nosedive on such a scale as this, there will not be a corner of the financial world left unaffected.