President Trump and Vladimir Putin meet on Monday. Oh no. Run for your life. It’s collusion. Go nuts on Twitter; hyperventilate…
Bloomberg’s Leonid Bershidsky said it best when he predicted the July 16 meeting will be an “empty show in Helsinki.” Stephen Cohen, a Russia columnist for The Nation, called out the conspiracy theorists on the right and left. I have no idea how he manages to get away with this at the progressive advocacy magazine, but kudos to him for swimming in a riptide.
Barring the usual hemming and hawing from the pundits fixated on Russia tipping the election for Trump, the Helsinki Summit isn’t expected to bring any relief to sanctions or to Ukraine. Crimea will still be part of Ukraine, even if Trump complains about it. Sanctions will remain at least until December. Europe recently extended their sanctions for six months. Russia extended theirs on July 12.
Putting the bombastic emotional arguments aside, here is what likely comes out of all this.
Close Russia watchers believe the best to come out of a Trump-Putin meeting will be jump starting talks on nuclear disarmament.
Hedge fund managers I’ve spoken with in Moscow do not expect anything in the way of business deals, sanctions relief, or any major bounce in equities. With Russia, it is best to expect nothing, and allow yourself to be pleasantly surprised.
But if Trump’s Putin meeting goes at least as well as his meeting with Kim Jong-un, NATO, and Theresa May (discounting the protests and the Trump Baby blimp mocking the great mocker-in-chief), Russian equities could come out the winner here on sentiment alone.
Trump’s meetups always start off the same way: death, destruction, and no hope. They tend to end with sighs of relief. Even the ugly G-7 meeting this Spring did not turn Canada and Mexico away from the U.S. Mexico’s newly elected president Andres Manuel Lopez Obrador — seen in the political press here as the anti-Trump — actually invited Trump to his inauguration. Hopefully Trump goes. Dumb move if he does not. But I digress.
For sure, when it comes to headline noise, the Trump and Putin meetup will be a Six Flags Superman rollercoaster ride. The stress will be real leading up to it all. It will be scary to many as the long drop approaches. Talks of recent indictments of 12 Russian intelligence officers hacking the DNC will be the talk of the town. But the ride will end and everyone will go home in one piece. This is the base case scenario and the smart money knows it.
On the fiscal and monetary side — those things that matter to the market (not talking heads jibber jabbering plot lines to the failed novels in their desk drawers –, the Russian central bank kept its key policy rate unchanged at its June meeting, holding at 7.25%. However, taxes are going up and inflation is going up, so that means interest rates could go up unless oil helps things and the ruble gets stronger against the dollar and euro. The next policy meeting is July 27.
This week’s NATO summit saw “Putin spy” Trump bashing the Gazprom Nord Stream II pipeline into Germany (because that’s a reversal psychology trick, see that?) Worth remembering is that Nord Stream II is sanctioned. Implementing them is up to Trump. This is more of an overhang for European trade negotiations than it is for Russia, with the threat of a BNP Paribas-like fine against Nord Stream partners if it suits Trump.
There is no way Russian sanctions get removed because they now require a vote by Congress. Fat chance, even if Trump says removing some of them would be a good idea.
Trump also called Putin and Russia a competitor; a rival, being careful not to chose the word adversary or enemy. Their rivalry is more true today in the oil and gas space. U.S. rhetoric on Nord Stream II should be understood as a bargaining chip to sell American LNG to Lithuania and Poland, both with sizable, new, and very welcoming LNG terminals. This is what Trump really means by rivals.
On the NATO front, it is more likely that Trump gets member states to pony up and spend more on defense, a potential boon to some U.S. defense contractors, than leave the Alliance. This would also be political suicide at this juncture, handing red meat to the Trump-as-Putin-puppet attack dogs. Putin will not be shocked by NATO remaining, as much as he dislilkes it. This must be more Trump reverse psychology.
My best guess out the outcome is to look for Trump and Putin to move on reducing their nukes and revamp Obama’s New START Treaty, which expires in 2021.
If leaving Helsinki means a new arms deal, that’s a positive. Some sort of denuclearization move is what everyone is expecting out of Helsinki. This tells the market that Trump can talk to Putin without the world stopping.
Recent polls in Moscow suggest the Russians are fine with the West being rivals, but prefer friendly-rivals than belittling and punishing ones. Russians are currently witnessing another set of diplomats getting kick out of a country, this time Greece (accused of bribery), and with Washington’s blessing.
Russia investors have more to gain from Monday’s meeting. A good outcome, at least on par with what we have seen out of Europe, bodes well for Russian sentiment. If oil holds up, it helps the oil and gas heavy Market Vectors Russia (RSX) fund. But so long as Russia continues to be ostracized and sanctioned, with some of its best minds leaving the country, then the domestic focused stocks in the Market Vectors Russia Small Cap Fund (RSXJ) will remain underperformers.