Marko Papic on What Markets Got Wrong About Russia's Invasion of Ukraine

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:15)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

Joe, what's going on in Russia?

Joe Weisenthal (0:19)

That is such... I can't even start a conversation. I know it's more than a leading question, like the idea that I would be able to answer that in any meaningful way that doesn't make me sound like a complete idiot.

Tracy Alloway (0:33)

I'm not trying to set you up to sound like an idiot.

Joe Weisenthal (0:35)

You're trying to set me up.

Tracy Alloway (0:36)

I'm trying to start the podcast with a summary of current events. But there was some big news out of Russia recently, which was they were calling up reservists and basically forcing them to go to Ukraine and fight in the war. And the reason I bring it up is because it wasn't just big, topical geopolitical news, but it became a big thing in the market as well. We saw quite a bit of reaction to it.

And it kind of crystallized in my mind this idea about just how hard it is for investors to try to judge these geopolitical risks. Because on the one hand, I saw some people going, you know, this is great for the West. It means that Putin is really struggling right now and Ukraine is going to win the war and everything's going to be fine.

And then I saw some commentary basically saying, this is a massive escalation.

And if anything, we should be seeing risk premia on things like European assets and natural resources and grains and things like that actually going up. So the fact that there were these two extremely different or interpretations of the same move just really struck me.

Joe Weisenthal (1:48)

Yeah, I mean, look, it's so hard to understand like what this means for markets. It feels like we're in some sort of uncharted territory and maybe some people will perceive that to be positive that Russia has suffered setbacks in its war, that it's lost some territory that it had captured in Ukraine. But then others will say, yeah, this, as you say, this just massively increased the risks. Vladimir Putin gave a speech that was widely perceived to be highly bellicose. I think it's just a sense of like extreme uncertainty and chaos. And there's already so much going on. We're recording this September 23rd when there's just so much concern about inflation and energy and monetary policy and recession and all these other things.

And on top of this huge geopolitical wild card, again, I feel like many investors are truly swimming at sea, experiencing things that they have never seen in their careers.

Tracy Alloway (2:43)

Right. And it's funny kind of how earlier this year, how many investors suddenly stood up and declared themselves to be like military experts and World War II armchair strategists. But even if you think you know everything about how a military invasion actually works, that doesn't naturally translate itself into, well, here's my investment strategy playing off of that. So in an effort to understand exactly what is going on with Russia and Ukraine, and also in an effort to understand exactly what it might mean for investors, we're going to be speaking with Marko Papic. He is the partner and chief strategist at Clocktower Group. He is also the author of Geopolitical Alpha, an investment framework for predicting the future.

So he basically wrote the book on this topic. Marko, thank you so much for coming on Odd Lots.

Marko Papic (3:32)

It's such a pleasure and an honor. I love this show, so it's great to be on.

Tracy Alloway (3:35)

Oh, thank you.

So maybe just to begin with Russia calling up its reservists. What was your initial take on that, your interpretation?

Marko Papic (3:45)

Well, I mean, I think that it's clearly a sign that things have not gone well for Russia in Ukraine. Russia has a professionalized military force in 30 years of post-Soviet reforms. Like 30 years of effort to reform Russian military has focused on deepening and strengthening its strategic rocket forces, so nuclear weapons, for good reason, and creating a professional expeditionary force that can fight quick short wars in its near abroad, such as the 2008 Georgia intervention as a case in point. And so the fact that they now have to like revive the third pillar, which they have eroded on purpose and for good reason, like we're not going to need to mobilize ever again. We have nukes. No one's going to attack us. The fact that they're now like resorting to something that they've actually let follow, that they've not focused on, that they've eroded in the effort to strengthen the other two parts of their reforms, it just tells you that it is a desperate move.