What Investors Really Think About Putin In Syria

Kenneth Rapoza

Listen to Vladimir Putin talk about any world leader and you will hear him say he doesn’t know what they think. He can only judge by their actions. Russia’s actions in Ukraine have led to sanctions. And now its actions in Syria, while not related to Western sanctions, gives some investors the jitters.

“I don’t think Russia gets points for showing that it can be an effective mercenary force for a regime like (Syrian leader Bashar) Assad’s,” says Vladimir Signorelli, a macro researcher from Bretton Woods Research LLC in New Jersey.

We don’t know what Putin thinks, but that won’t stop us from taking educated guesses.

With Europeans getting tired of sanctions against Russia, an important business partner, many funds are getting constructive on Russian assets — whether its a stock and bond fund manager, or European corporates waiting for sanctions to lift so they can go back in and invest.

“The Russian air force is now an active participant in attacking any number of opponents to Bashar al-Assad’s regime in addition to ISIS. Tension between the United States and its NATO allies and Russia has risen. The risk premium for Russian assets has risen yet again on the back on Putin’s aspirations to be a lead player in global affairs, irrespective of the impact on Russia’s economy,” says Michael Reynal an emerging markets fund manager at the $18 billion RS Investments firm in Des Moines.

Market Thoughts

There are known knowns and unknowns.

Here are a few.

We know multinational companies – those that are allowed in there thanks to sanctions – will not stop investing in Russia because of Syria. The sanctions that have crippled the economy are based on adherence to the Minsk II Accord, which Russia is following in eastern Ukraine. Russia is a sentiment-driven market today and investor sentiment on Russia is dependent on Ukraine first, oil second, Syria a distant third.

As a result, Russia has the upside risk of sanction removal and the downside risk of of oil, and perhaps getting in a battle of wits with Washington over Syria. Such a fight could turn large, institutional investors off to Russian securities.

Putin has made his reasons public many times.  He says his Syria aims are to weaken if not eliminate the Islamic State of Iraq and Syria, aka ISIS. And by doing so, he wants to strengthen what he calls the “legitimate government” in power, which is Assad.  Keeping him in power, at least for now, helps keep Syria from turning into another failed Middle eastern state..

Unlike the money the U.S. has thrown at Iraq and Afghanistan, Syria is chump change to Russia’s defense budget.

Defense intel firm IHS Janes estimates that Russia spent between $80 million and $115 million since air strikes began Sept. 30. Russia has a $50 billion defense budget.

Why is Russia Involved?

“We do not need to secure energy assets, because we have our own,” Putin told foreign investors at the Russia Calling! investor forum on Oct. 13. “We are there to defeat ISIS and protect the legitimate government of Syria.”

That’s not the only reason, Russian investment bank VTB Capital says in a Syria primer they sent out to their European clients this week.

Syria is Russia’s biggest Middle East military ally. Putin’s involvement could be driven by a desire to maintain Russia’s long-standing naval base and other ‘listening posts’ in Syria that not only provide it access to the Mediterranean but also to the broader Middle East North Africa region from a central location. Losing these facilities would mean losing its only foothold in a geopolitically important region and one of its few bases outside of Russia and ex-Soviet states. Remember how fast Russia moved to annex Crimea once it became clear that Ukrainian nationalists were taking over the country and moving it politically Westward. Crimea is home to Russia’s Black Sea naval fleet.

Keeping Assad in power is another reason for bombing anti-Assad groups. Assad might not be liked by U.S., but an Assad government is better than what Libya, Iraq, Afghanistan and Yemen have today.  Putin has made overtures to giving the opposition a chance to rule Syria, but Russia is clearly Assad’s sole non-Arab supporter.  Russia’s military operations there come at the request of Assad, giving the air strikes the requisite international legal cover. The United Nations won’t take this up with Russia, for instance.

VTB thinks that Russia’s involvement in Syria is designed to display its global influence, its continued relevance and centrality to global issues, and its ability to do exactly what the U.S. and NATO have been doing all along: taking Middle East matters in their own hands.

Syria and Investment Risk

While downside risks are manageable and relatively low, a positive outcome in Syria facilitated by Russian intervention has the potential to improve relations with the West, namely Europe, which is reeling from a Syria refugee crisis. Moreover, there is hope among investors with money at work in Russia that the MiGs currently pounding Syrian rebel outposts might force them into negotiations with Assad. Whether these religious sects can forgive Assad for officially sanctioned violence against them is doubtful. But if Russia can get them to talk and facilitate it along with the U.S. and Europe, it will be a positive. It is unlikely that Russia will stay in Syria for long, but that remains an unknown. Putin said he won’t be there for more than a few months. The U.S. said the same thing about Iraq and Afghanistan, now in its 14th year of mayhem.

“What we expect is that Putin will be the grown-up among all these kids playing with fire and ultimately making no decisions in the West,” says Martin Charmoy, director of Prosperity Capital Management, a $1.8 billion London-based fund manager specializing in Russia. “The impact can be on the oil price if the Syria conflict escalates. It can have a consequence that way. But the sanctions are a much bigger issue, and a much bigger catalyst. As an investor we have a to spend a lot of time talking to clients about these political dramas, unfortunately,” he says, adding that most of it is one part true, one part hogwash.

“If the E.U. wants to extend sanctions by six months or a year, they need 27 countries to agree to that,” says Charmoy.

That kind of consensus seems very unlikely today. At least six members are against extending them, including Italy and Austria.

” I think there is a chance E.U. sanctions end in January,” Charmoy says, irrespective of the Syria chapter in the “ Russia is Evil” episode now playing on U.S. and British television.  ”We don’t expect U.S. sanctions to be lifted anytime soon.”

http://www.forbes.com/sites/kenrapoza/2015/10/22/what-investors-really-think-about-putin-in-syria/

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