Hello there,

A fantastic Friday to you as stocks stage a dramatic comeback even as explosions rock the Ukranian capital which continues to be under siege by Russian forces.

In brief (TL:DR)

• U.S. stocks climbed Thursday with the Dow Jones Industrial Average (+0.28%), S&P 500 (+1.50%) and the Nasdaq Composite (+3.35%) all higher.

• Asian stocks rose as the Ukraine conflict and Western sanctions on Russia muddied the outlook for markets and the global economic recovery.

• Benchmark U.S. 10-year Treasury yields rose one basis point to 1.97% (yields rise when bond prices fall).

• The dollar was steady.

• Oil advanced with April 2022 contracts for WTI Crude Oil (Nymex) (+2.79%) at US$95.40.

• Gold was lower with April 2022 contracts for Gold (Comex) (-0.57%) at US$1,915.30.

• Bitcoin (+5.22%) rose to US$38,754 as risk appetite made a reappearance, with investors tempering their pessimism on conflict in Ukraine against prospects of a more sanguine Fed at its next policy meeting.

In today's issue...

1. Could Ukraine be Russia’s Chernobyl moment?

2. A Trifecta of Troubles Could Hold Back the Fed’s Heavy Hand

3. Cryptocurrencies Come to the Rescue for Sanctions Hit Russians

Market Overview

U.S. President Joe Biden imposed stiffer penalties on Russia, whose forces have pushed closer to Ukraine’s capital, Kyiv, in one of Europe’s worst security crises since World War II.

Western sanctions have now included action against five major Russian banks to impair their access to foreign currency. The measures stopped short of barring the nation from the SWIFT international payment network, however, and have spared Russian crude supplies to prevent putting further pressure on already elevated energy prices.

Investors are considering the possible inflation and growth shocks to the global economy from the conflict and ensuing sanctions.

Asian markets were mostly higher Friday with Tokyo's Nikkei 225 (+1.28%), Seoul's Kospi Index (+0.90%) and Sydney’s ASX 200 (+0.14%) up, while Hong Kong's Hang Seng Index (-0.33%) was down in the morning trading session.

1. Could Ukraine be Russia's Chernobyl moment?

• What happened at Chernobyl in April 1986 was emblematic of the systemic rot that had plagued the Soviet system for decades.

• Today, as Russian tanks roll into Ukraine and bombers roar overhead, there is no soul brave enough in the Kremlin who will tell President Vladimir Putin the truth, but plenty of Russians on the streets of Moscow who risk their personal lives and liberty who will.

Just five years before the eventual fall of the Soviet Union, nuclear scientists at the Chernobyl nuclear power station conducted an experiment with little regard to established safety protocols that resulted in the worst nuclear disaster in history, in both cost and casualties.

What happened at Chernobyl in April 1986 was emblematic of the systemic rot that had plagued the Soviet system for decades.

Years of institutionalized corruption and repeated purges created an economic, political and social environment where an objective truth was elusive – it depended on who was asking.

Even as the indisputable fact of fires broke out at the Chernobyl reactor No. 3, the chief engineer at the time refused to take the advice of the chief of the night shift to shut down the reactor immediately.

The resulting nuclear disaster unleashed a mass protest movement against the Soviet government and contributed to the eventual demise of the Soviet political system.

Today, as Russian tanks roll into Ukraine and bombers roar overhead, there is no soul brave enough in the Kremlin who will tell President Vladimir Putin the truth, but plenty of Russians on the streets of Moscow who risk their personal lives and liberty who will.

In a rare public display of opposition, anti-war protests have broken out in over 40 cities in Russia, despite anything beyond a single-person protest without a permit regarded as illegal.

Throngs marched in Novosibirsk and other cities, including the capital Moscow, while massive protests erupted in St. Petersburg, Russian President Vladimir Putin’s hometown, chanting and holding signs to object to Russia’s invasion of Ukraine.

And while the number of Russian protesters is large, a protracted war in Ukraine could re-ignite painful memories of the long and ultimately failed Soviet occupation of Afghanistan in the 1980s.

As the Russian invasion it is becoming increasingly apparent that Putin intends to occupy Ukraine at the very least, if not install a puppet regime which would require plenty of defending and brutal crackdowns of opposition.

Ukraine today isn’t the same Ukraine of 2014, when popular uprisings against the pro-Russian President Viktor Yanukovych led the country to the brink of civil war.

A stronger Ukrainian identity, one more aligned with the West has been fomented in the almost- a-decade since, and any attempt to Russify Ukraine under the iron fist of Putin is likely to lead to a long-drawn-out insurgency or a fresh revolution.

Putin’s goal may not necessarily be to occupy Ukraine because it would stretch his forces too much, given a population of 44 million in a territory the size of France, but that also assumes that he is making well-informed, rational decisions and he may well not be.

A protracted occupation, violence against civilians and a brutal crackdown could create more unrest back home that may potentially undermine the political system which Putin crafted around his own image.

Depending on what the Ukrainians do next, whether they will accept a puppet Putin government or instead stage a long and bloody insurgency against the Russians will help to determine if this was Russia’s Chernobyl moment.

2. A Trifecta of Troubles Could Hold Back the Fed's Heavy Hand

• While inflation was the biggest challenge to the U.S. economy just six months ago, a Russian invasion of Ukraine, especially one as extensive as is occurring now, was less contemplated.

• Higher inflation, lower economic growth and greater uncertainty are all conspiring to make things particularly challenging for the Fed’s policymakers, who had until now been set on a hawkish pivot.

Perhaps it was prescient but U.S. Federal Reserve Chairman Jerome Powell’s “nimbleness” doctrine of monetary policy may be exactly what the U.S. and the global economy need at the moment.

While inflation was the biggest challenge to the U.S. economy just six months ago, a Russian invasion of Ukraine, especially one as extensive as is occurring now, was less contemplated.

Wall Street’s money managers are scrambling to figure out how exactly the geopolitical fallout will hit all manner of cross-asset trades in the weeks to come and the current information vacuum will likely lead to more volatility.

With the U.S. Federal Reserve set to meet just weeks from now and raise rates more or less in line with expectations, there is yet the outside chance that it may adopt a more dovish stance to cater for the fact that waning consumer confidence and geopolitical instability could lead to a slowdown in the economy.

Higher inflation, lower economic growth and greater uncertainty are all conspiring to make things particularly challenging for the Fed’s policymakers, who had until now been set on a hawkish pivot.

Yet Western sanctions and the prospect that Putin will not stop at Ukraine, but pivot to other former-Soviet states could embroil the entire European continent in a far more widespread conflict would be enough for policymakers to want to continue baking in flexibility to their policy.

The risks of recession in Europe have increased and Powell has long held the view (rightly) that monetary policy is a blunt tool to cater to inflationary price pressures.

Instead, it’s entirely possible that Powell and his colleagues will inch up rates, perhaps as low as 25 basis points, while the Biden administration works to bring Iranian oil supply and strategic reserves online to put a lid on energy prices that could contribute to inflation.

3. Cryptocurrencies Come to the Rescue for Sanctions Hit Russians

• Just weeks before the Russian invasion of Ukraine, Moscow published a legal notice that started the country on a process of legalizing cryptocurrencies, allowing authorities to oversee cryptocurrency transactions to ensure consumer protection.

• Cryptocurrencies and decentralized exchanges could become the most effective way to circumvent sanctions, anonymous smart contracts that could be executed to ensure censor-proof payment for transactions.

Are you a Russian oligarch looking to pay for your mega yacht but find that your accounts have been frozen by Western sanctions?

Fret not, because cryptocurrencies may yet provide you with an avenue to ensure that you and your cronies have plenty of opportunities to revel in your oligarchical luxury well before your butler has had an opportunity to top up your champagne flute.

While U.S. President Joe Biden has authorized “strong sanctions” on Russian entities and individuals, to limit its ability to do business in dollars and other major international currencies, these measures may be toothless in a country which has sought to legalize cryptocurrencies and where digital assets are already widely owned.

Just weeks before the Russian invasion of Ukraine, Moscow published a legal notice that started the country on a process of legalizing cryptocurrencies, allowing authorities to oversee cryptocurrency transactions to ensure consumer protection.

In the past, countries would circumvent sanctions for instance through the offshore transfer of commodities like oil or fuel, as was the practice by Venezuela and North Korea, which used ship-to-ship transfers.

But cryptocurrencies and decentralized exchanges could become the most effective way to circumvent sanctions, anonymous smart contracts that could be executed to ensure censor-proof payment for transactions.

Sanctions imposed on Russian companies and individuals, as well as members of their families would essentially close them off to the fiat-based currency system that revolves around the dollar.

Russian oligarchs who secure Putin’s iron rule, have already been targeted directly, and cryptocurrencies could be used to circumvent sanctions by relying on anonymous transactions.

Given the increasing acceptance of cryptocurrencies globally, as a means for payment of goods and services as well as for investment, those hit by Western sanctions have more choice than ever before to circumvent them.

Unlike fiat currencies which need to be moved through third-party financial institutions, that have the ability to track, freeze, or block them, cryptocurrencies can be sent from one person directly to another, regardless of sanctions.

But would-be sanctions evaders would still need to contend with trying to off-ramp cryptocurrencies into the fiat currency system and the recent crackdown by the Canadian government on cryptocurrency accounts held by truckers who were receiving funds to support their blockades of border crossings shows that it’s not entirely full proof either.

Cryptocurrencies aren’t exactly “untraceable” either – as evidenced by the recent arrest of two individuals linked to the 2016 Bitfinex hack – the U.S. government was able to track the activity of certain wallets and freeze accounts as soon as they were converted into fiat currencies.

A recent Russian government paper suggests that Russians already own around US$22.9 billion worth of cryptocurrencies, but the actual amount is likely to be a lot more as over 12% of Russia’s population are said to hold cryptocurrencies, according to data from payment gateway TripleA.