By Sunday, the challenge appeared to have been defused, in an agreement mediated by Belarusian President Alexander Lukashenko. The troops have now abandoned their advance, withdrawn from Rostov, and are reportedly returning back to field camps. Media accounts suggest that the Wagner mercenaries will not be prosecuted and that Prigozhin will go into exile in Belarus.
What does it mean?
While the rebellion represents one of the most significant challenges to President Putin’s authority since Russia's invasion of Ukraine, we do not believe that these events will transform the bigger picture for financial markets, at this stage.
Investors have grown broadly used to the residual risk of an escalation in the conflict over the course of the past year—and provided the failed rebellion doesn’t trigger a series of events that increase risk of conflict directly involving NATO members, or a severe disruption to global commodity supplies, we think the weekend’s events are unlikely to significantly alter the global market backdrop.
Global markets have adapted to sanctions on Russia, and while energy markets are fragile, we continue to see the risk of economically damaging disruptions to European energy supplies as low. Commodity income remains vital for the Russian economy, irrespective of who is governing the country, so all sides domestically have a vested interest in maintaining supply.
That said, while Prigozhin’s attempt seems to have failed, the events show that an armed rebellion or coup in Russia is not beyond the realm of possibility, and the chances of another such event have therefore increased. Prigozhin apparently lacked sufficient support to continue his action, but press reports suggest there was support for the rebellion in the areas briefly occupied by the Wagner group. US Secretary of State Antony Blinken told CBS News that "this raises profound questions" and that "it shows real cracks.”
As we consider the implications for the war in Ukraine, it’s important to note that the challenge to Putin’s power largely came from mercenaries, not from anti-war protestors. We also think it is more likely that any future challenge could come from pro-war hardliners—therefore implying a continued (or more) hawkish stance on the war rather than a negotiated peace settlement.
If Putin remains in power—the most likely scenario—we also see the probability of a negotiated deal or peace agreement between Russia and Ukraine as low, given the significant personal stake President Putin has invested in the war and his purported desire not to increase perceptions of weakness. Meanwhile, the threat of a further rebellion might prompt more internal repression and lead to a higher loyal military presence domestically.
How do we invest?
While the situation appears to be defused, and we see it as unlikely to change the global market backdrop for now, it is still an important reminder to investors that an unpredictable war is ongoing and geopolitical risks are elevated at a time when they have not been a central focus of market attention.
The fact that investors have been gradually worrying less about higher oil prices, European winter industrial shutdowns, and nuclear posturing has been an underlying supportive factor for markets this year. If these events change this view, this could result in a negative shift in sentiment for a number of markets that are “priced for perfection,” and increase downside risks.
We believe this backdrop supports our preference for high-quality bonds over stocks. Bonds are likely to outperform equities if the macroeconomic environment deteriorates, and also if heightened sensitivity to geopolitical risks prompts investors to shift out of risk assets and seek safe havens in government bonds.
We also continue to view commodities as an attractive source of portfolio diversification, as well as a partial hedge against more persistent inflation. We maintain a most preferred stance on oil, where we expect supply tightness to support prices in the second half of the year. We also have a preference for gold, which should benefit in our base case from an expected weaker dollar and lower real rates, as well as acting as a portfolio hedge, should geopolitical tensions increase.
Main contributors - Solita Marcelli, Mark Haefele, Kiran Ganesh, Vincent Heaney, Jon Gordon
Content is a product of the Chief Investment Office (CIO).
Original report - Russia mutiny attempt – investment implications, 26 June 2023.