Russia Moves to Annex Occupied Lands in Bid to Halt Ukrainian Advance
Moscow plans to stage annexation votes in four occupied regions, and is moving to address troop shortages
MOSCOW—Officials in Russian-occupied parts of Ukraine announced plans for Russia to annex four regions in the country’s east and south, while Moscow moved to clear the way for a broader mobilization as an increasingly pressured Kremlin seeks a firm response to counter Kyiv’s offensive.
Russian-controlled parts of the Donetsk, Luhansk, Kherson and Zaporizhzhia regions of Ukraine said they would hold three-day votes on joining Russia starting this Friday, Moscow’s latest effort to consolidate its hold on territory it took months to capture but now risks losing to Ukraine’s forces.
Russia’s lower house of parliament also approved legislation that could help address its shortage of troops on the battlefield, raising fears that it could announce a full-scale mobilization possibly within days.
The moves come after Ukraine launched an offensive to retake land in the country’s northeast earlier this month, handing Moscow a stinging defeat and liberating some 10% of territory Russia had captured since the beginning of its invasion in a lightning-quick rout.
The advance has buoyed Kyiv and left Russian President Vladimir Putin facing increasing pressure both at home and abroad. Mr. Putin told Chinese leader Xi Jinping last week that he would address Beijing’s concerns about the war, while Indian Prime Minister Narendra Modi confronted the Russian leader in public the next day, telling him that “today’s era is not one for war.”
Mr. Putin’s efforts to weaken European support for Ukraine by sharply curbing its natural-gas supplies looks to be faltering while his government finances are deteriorating. China and India have been buyers of Russia’s rerouted natural-gas supplies.
But far from conceding that the war isn’t going in his favor on all fronts, Mr. Putin is preparing to deliver a firm response and raise the stakes for Kyiv of continuing to fight his forces, analysts say.
“The word escalation is too soft for the current situation. It’s not so much escalation as an ultimatum,” said Tatiana Stanovaya, a nonresident scholar at the Carnegie Endowment for International Peace. “Putin has nothing to lose and will use all of his resources to push his enemy out.”
Tuesday’s moves by the Kremlin indicate that Mr. Putin is laying the groundwork to describe fighting in the Ukrainian regions he plans to annex as an attack against Russian territory in order to justify a nationwide draft to defend the country, Ms. Stanovaya said. She said she believes Mr. Putin sees using nuclear tactical weapons as a last resort, but that the global community should not rule it out.
Andrey Kortunov, director-general of the Russian International Affairs Council, a Kremlin advisory board on foreign and defense policy, said Mr. Putin was determined to see through a Russian victory and wouldn’t back down despite the major setbacks he is facing.
“We are seeing what he has said before,” Mr. Kortunov said. “He will finish what he started but on terms dictated by the Kremlin.”
Since Ukraine’s lightning offensive, its leadership has reiterated a pledge to liberate all occupied territories and capitalize on the momentum it has achieved.
In his daily video address on Monday evening, Ukrainian President Volodymyr Zelensky said the country’s armed forces were working to stabilize their hold in the liberated Kharkiv region and were causing Russian forces to panic.
“We warned you—Russian soldiers in Ukraine have just two options: flight from our land or capture,” he said.
Denis Pushilin, the Russian-installed head of the occupied Donetsk region in east Ukraine, said Tuesday on Russian state television that he was actively working to hold a vote. Authorities in Kherson, a region under partial Russian control in southern Ukraine, also reiterated their desire for an immediate referendum, according to comments carried by Russian state news agency RIA Novosti.
Russia has for years been distributing passports to residents of the self-proclaimed Luhansk and Donetsk People’s Republics, proxy states that carved themselves out of eastern Ukraine during a Russian-fomented armed conflict that began in 2014. Moscow has spent vast resources cementing its rule there.
But the Ukrainian military offensive in the south, north and east, which has liberated the northeastern Kharkiv region and taken back more than 3,000 square miles of territory, is prompting Russian collaborators in occupied areas to vacillate in their plans and increasingly to admit that the security situation is unstable.
Russian-allied officials in the Kherson and Zaporizhzhia regions in the south initially signaled that referendums would be held on Sept. 11, but when Ukraine swept through the Kharkiv region and captured villages en route to the city of Kherson earlier this month, they said the votes would be postponed.
“We have prepared for the voting, and we wanted to hold the referendum in the nearest future, but due to the developments happening at the moment, I think we will pause,” the Russian-appointed deputy governor of Kherson, Kirill Stremousov, told TASS news agency on Sept. 5.
The initiative has received support from hawkish members of Russia’s political establishment, who argue that making occupied parts of Ukraine into parts of Russia proper would embolden Russia and give legitimacy to what it could portray as retaliatory strikes against its territory by North Atlantic Treaty Organization-backed forces.
“Today—a referendum, tomorrow—recognition as part of Russia, the day after tomorrow—strikes against Russian territory become fully-fledged war by Ukraine and NATO against Russia, which unties Russia’s hands in every way,” Margarita Simonyan, a Russian propagandist who heads the state-controlled TV channel RT, wrote Monday on Telegram.
The calls are being amplified by Russian officials who are angry over Russia’s humiliation and endorsing moves that might escalate the conflict. Dmitry Medvedev, deputy chairman of the Russian Security Council, wrote on Telegram Tuesday that the incorporation of new territories into Russia would become irreversible even under future presidents by amending the constitution. Mr. Medvedev also said interference on Russian territory amounts to a crime that would allow Moscow “to use all means of self-defense.”
In a move that appeared to ease the legal path to mobilization in Russia, the country’s parliament on Tuesday advanced legislation that tightens penalties for evading mobilization, desertion, surrender and looting during wartime. The lower house, the State Duma, approved amendments to bring in the concepts of mobilization and martial law to the criminal code. However, the proposed legislation still needs to go through the Federation Council, the upper house of parliament, and receive Mr. Putin’s signature.
Under the proposed law, failure to show up for military service or desertion will be punished by up to 10 years in prison. Looting will be punishable by up to 15 years in jail.
The debate over whether to annex parts of Ukraine comes as Kyiv’s advance slows but continues to push Russia out of strategic areas such as a swath of land east of the Oskil River in the Kharkiv region, and as Russia scrambles to find the additional manpower to continue its war.
The proxy states that Russia recognized as independent in February don’t entirely control the areas of Ukraine that they claim as their sovereign territory. While their recognition could bolster the Kremlin’s false narrative about liberating rightfully Russian territories that it could claim are occupied by Ukraine, it could also highlight the fact that it is unable to take over territory it claims as its own.
“Partial annexation at this stage would also place the Kremlin in the strange position of demanding that Ukrainian forces unoccupy ‘Russian’ territory, and the humiliating position of being unable to enforce that demand,” said the U.S.-based think tank the Institute for the Study of War. “It remains very unclear that Russian President Vladimir Putin would be willing to place himself in such a bind for the dubious benefit of making it easier to threaten NATO or Ukraine with escalation he remains highly unlikely to conduct at this stage.”
Annexation would placate the many Russian public figures who have been calling for Moscow to stop relying on dwindling reserves of trained soldiers in its campaign against a country benefiting from full-scale mobilization, and move to announcing a mobilization of its own that would draft into the ranks of its forces a pool potentially numbering millions of fighting-age men.
Russia has referred to its invasion of Ukraine from the outset as a special military operation, but declaring it a war, as Ms. Simonyan hinted, would broaden the political options at the Kremlin’s disposal including the capacity to frame attacks on Russian-held territory as attacks on Russia itself, analysts say.
It could also make it easier for Russia to conduct a mobilization on occupied Ukrainian territory before taking the politically dangerous move of announcing a mobilization at home. Vladimir Saldo, the Russian-installed head in Kherson, said Tuesday that “it is necessary to create volunteer battalions” to shore up defenses against Ukraine.
Mr. Putin on Tuesday called on the defense industry to boost the production of Russian weapons, according to a statement from the Kremlin. Ukraine’s SBU intelligence service recently said Russian forces under pressure from Ukrainian troops were leaving whole ammunition arsenals behind as they retreated.
Meanwhile, Moscow Mayor Sergei Sobyanin wrote on his personal blog that his administration would create facilities to help foreigners sign up for military contracts in the Russian armed forces, while the State Duma approved legislation for foreign recruits to apply for Russian citizenship after one year of service.
The prospects for a diplomatic solution to the conflict have been dim for months. After meeting Mr. Putin at a security summit in Uzbekistan last week, Turkish President Recep Tayyip Erdogan said in an interview with PBS that the Russian president had signaled a readiness to bring the war to a close.
“We had very extensive discussions with him,” Mr. Erdogan said. “And he is actually showing me that he’s willing to end this as soon as possible.”
Still, Kremlin spokesman Dmitry Peskov said Tuesday that there were currently no prospects of a political and diplomatic settlement.
An Anti-ESG Activist Investor Presses for Changes at Apple and Disney
Vivek Ramaswamy urges iPhone maker not to do a racial equity audit and wants Disney to refrain from engaging in political discussions
An activist investor who has been a sharp critic of so-called environmental, social and governance, or ESG, investing is urging Apple Inc. AAPL +1.83% and Walt Disney Co. DIS -1.20% to not engage in political discussions and to make employment decisions without taking an individual’s race, sex or political opinions into account.
Vivek Ramaswamy, who recently launched Strive Asset Management, said Disney should no longer take public positions on political issues that aren’t related to the company’s core business. The letter cited how Disney Chief Executive Bob Chapek took a stance on Florida’s parental rights in education bill.
“Disney must act now,” Mr. Ramaswamy wrote in his letter, dated Monday. “If Disney continues speaking out on political issues that do not affect its business, it will face even greater pressure to act when they do. And the sides Disney will be expected to take won’t be the ones that are favorable to its business.”
A Disney spokesman said in an email that the company regularly receives input from its shareholders. “We listen to their perspectives,” he said.
In a separate letter to Apple, Mr. Ramaswamy pushed back on the company’s plans to conduct a racial-equity audit and asked the tech giant to make all hiring decisions without taking into account political beliefs, race or sex.
Apple declined to comment.
Strive holds positions in Apple and Disney in a recently launched exchange-traded fund that invests in large public companies. The fund has roughly $11 million in net assets.
Mr. Ramaswamy is the author of “Woke Inc.,” a book that argues companies shouldn’t be swayed by politics. Strive Management’s main fund, focused on energy, has $320 million in assets. Earlier this month, he publicly called on Chevron Inc. to pump more fossil fuels over the next decade and slow spending on its energy-transition plan. His energy ETF holds a position in Chevron.
He says companies have a fiduciary duty to their shareholders, not the firms who represent those stockholders, like big asset managers such as BlackRock Inc.
“You owe a fiduciary duty to the actual owners of Disney, not to the institutions who claim to represent them,” Mr. Ramaswamy wrote in his letter to Disney. “There is strong reason to believe that these large asset managers are not acting with their clients’ best interests in mind.”
Many asset managers have previously pushed back on criticism of ESG—the loosely defined practice of considering issues beyond short-term profits when making financial decisions—by noting that companies that take into account environmental risks and opportunities tend to be more profitable over time.
Earlier this year, Disney’s Mr. Chapek changed course on his policy of staying out of politics. At the company’s annual meeting, he said he had told Florida Gov. Ron DeSantis that he was concerned about the education bill’s potential impact on LGBT children. He also pledged to spend $5 million on contributions to LGBT causes. Florida in April passed a law eliminating Disney’s special tax benefits in the state.
In his letter to Disney, Mr. Ramaswamy also called on the company to commit to having human resources policies making it clear that both customers and employees won’t be punished for expressing their political beliefs.
He said Disney should make all of its decisions based on profitability “without regard to social, cultural, or political pressure from employees, activist groups, or other stakeholders.”
Buffett Indicator Says Markets Are Going To Crash?
“The ‘Buffett Indicator’ says the stock market will crash.“ Such was an email I received recently and was worthy of a more detailed discussion. Let me begin with my favorite line from “The Princess Bride.”
“I do not think it means what you think it means.”
The Buffett Indicator is a valuation measure that compares the stock market’s capitalization to the Gross Domestic Product. A favorite of Warren Buffett, the indicator sits shy of 2.44 times market-cap to GDP. That number doesn’t mean much on its own, but it’s striking when placed in a historical context. Even after the recent fall in markets, the ratio is still one of the highest on record, north of the 2.11 level recorded during the dot-com bubble of 2000, and considerably elevated compared to the average since 1950.
Since 2009, repeated monetary interventions and zero interest rate policies have led many investors to dismiss any measure of “valuation.” The reasoning is that since there was no immediate correlation, the indicator is wrong.
The problem is that valuation models are not, and were never meant to be, “market timing indicators.” The vast majority of analysts assume that if a measure of valuation (P/E, P/S, P/B, etc.) reaches some specific level, it means that:
- The market is about to crash, and;
- Investors should be in 100% cash.
Such is incorrect. Valuation measures are just that – a measure of current valuation. More importantly, when valuations are excessive, it is a better measure of “investor psychology” and the manifestation of the “greater fool theory.”
What valuations do provide is a reasonable estimate of long-term investment returns. It is logical that if you overpay for a stream of future cash flows today, your future return will be low.
Why The Buffett Indicator Is Valuable
While often overlooked, the Buffett Indicator tells us much as it measures “Market Capitalization” to “GDP.” To understand the relative importance of the measure, we must understand the economic cycle.
The premise is that in an economy driven roughly 70% by consumption, individuals must produce to have a paycheck to consume. That consumption is where corporations derive their revenues and, ultimately, profits. If something occurs, which leads to less production, the entire cycle reverses, leading to an economic contraction.
The example is simplistic, as many factors impact the economy and markets short term. However, economic growth and corporate earnings have a long-term historical correlation. Therefore, while it is possible for earnings to grow faster than the economy at times, i.e., post-recession, they can not outgrow the economy indefinitely.
Since 1947, earnings per share have grown at 7.72% annually, while the economy has expanded by 6.35% annually. Again, the close relationship in growth rates should be logical. Such is particularly the case given the significant role spending has in the GDP equation.
Therefore, the Buffett Indicator tells us that overvaluation is not sustainable when the market capitalization of stocks grows faster than what economic growth can support. Therefore, a market capitalization ratio (the price investors are willing to pay times the total number of shares outstanding) greater than 1.0 is overvalued, and below 1.0 is undervalued. Today, investors are paying almost 2.5x what the economy can generate in revenues and earnings.
Does that excess valuation mean the stock market is going to crash? No.
However, there are significant implications that investors should consider.
Valuations & Forward Returns
As is always the case, while valuations are a terrible “market timing” indicator, they are an excellent predictor of future returns. I previously quoted Cliff Asness on this issue in particular:
“Ten-year forward average returns fall nearly monotonically as starting Shiller P/E’s increase. Also, as starting Shiller P/E’s go up, worst cases get worse and best cases get weaker.If today’s Shiller P/E is 22.2, and your long-term plan calls for a 10% nominal (or with today’s inflation about 7-8% real) return on the stock market, you are basically rooting for the absolute best case in history to play out again, and rooting for something drastically above the average case from these valuations.”
We can prove that by looking at forward 10-year total returns versus various levels of PE ratios historically.
Asness continues:
“It [Shiller’s CAPE] has very limited use for market timing (certainly on its own) and there is still great variability around its predictions over even decades. But, if you don’t lower your expectations when Shiller P/E’s are high without a good reason — and in my view, the critics have not provided a good reason this time around — I think you are making a mistake.”
And since we are discussing Mr. Buffett, let me remind you of one of Warren’s more insightful quotes:
“Price is what you pay, value is what you get.”
The “Buffett Indicator” confirms Mr. Asness’ point. The chart below uses the Willshire 5000 Market Capitalization versus GDP and is calculated on quarterly data.
Not surprisingly, like every other valuation measure, forward return expectations are substantially lower over the next ten years than in the past.
Fundamentals Don’t Matter Until They Do
In the “heat of the moment,” fundamentals don’t matter. As stated, they are poor timing indicators.
In a market where momentum is driving participants due to the “Fear Of Missing Out (FOMO),” fundamentals are displaced by emotional biases. Such is the nature of market cycles and one of the primary ingredients necessary to create the proper environment for an eventual reversion.
Notice, I said eventually.
As David Einhorn once stated:
“The bulls explain that traditional valuation metrics no longer apply to certain stocks. The longs are confident that everyone else who holds these stocks understands the dynamic and won’t sell either. With holders reluctant to sell, the stocks can only go up – seemingly to infinity and beyond. We have seen this before.There was no catalyst that we know of that burst the dot-com bubble in March 2000, and we don’t have a particular catalyst in mind here. That said, the top will be the top, and it’s hard to predict when it will happen.”
Furthermore, as James Montier previously stated:
“Current arguments as to why this time is different are cloaked in the economics of secular stagnation and standard finance workhorses like the equity risk premium model. Whilst these may lend a veneer of respectability to those dangerous words, taking arguments at face value without considering the evidence seems to me, at least, to be a common link with previous bubbles.“
Stocks are far from cheap. Based on Buffett’s preferred valuation model and historical data, return expectations for the next ten years are as likely to be negative as they were for the ten years following the late ’90s.
Investors would do well to remember the words of the then-chairman of the SEC, Arthur Levitt. In a 1998 speech entitled “The Numbers Game” he stated:
“While the temptations are great, and the pressures strong, illusions in numbers are only that—ephemeral, and ultimately self-destructive.”
Regardless, there is a straightforward truth.
“The stock market is NOT the economy.But the economy is a reflection of the very thing that supports higher asset prices: earnings.”
No, the Buffett Indicator doesn’t mean markets will definitely crash. However, there is a more than reasonable expectation of disappointment in future market returns.
Nasdaq considers crypto trading as it pushes into digital assets
US equities exchange undeterred by market crash that saw bitcoin and ethereum plummet in value
Nasdaq is expanding into the crypto market in a fresh sign that the world’s biggest financial institutions have not been deterred from the crash in digital asset prices.
The US exchanges operator said on Tuesday that it was launching a digital assets services business that would begin with custody of crypto tokens for institutional investors. The New York company, which handles billions of dollars of share deals every day in stocks such as Apple and Tesla, also said it was considering rolling out trading of digital assets.
Its push comes on the heels of other big Wall Street names also introducing crypto services, shaking off a turbulent summer for the market where the most popular crypto tokens such as bitcoin and ethereum plummeted in value, and the failed terra stablecoin project caused financial ruin for investors.
The size of the crypto market also fell from more than $3tn to less than $1tn, claiming once-prominent crypto firms such as Celsius and Three Arrows Capital as casualties.
Asset management group BlackRock announced the launch of a spot bitcoin private trust made available to institutional clients and connected its trading network to Coinbase, the crypto exchange. Fidelity also said it would allow investors to add cryptocurrencies to their portfolios in 401(k) retirement schemes.
Nasdaq said the custody of digital assets could lay the foundation for crypto trading services in the future.
“That is a progression that Nasdaq sees”, said Ira Auerbach, Nasdaq’s senior vice-president and new head of the unit, called Nasdaq Digital Assets.
Auerbach, a former executive at digital exchange Gemini, added that trading is “certainly further down the line. We believe custody is foundational.”
He said the market’s interest in the blockchain technology that underpins many digital assets had sustained the market’s interest in spite of the crash. “Distributed ledger technology is transformational for business, for finance, and for the world at large,” he added.
However, the market for custody of crypto assets is growing competitive. Unlike traditional assets such as shares or futures, the owners of the assets are as responsible for safeguarding the asset, much as they would be for protecting their cash. One Nasdaq rival, Intercontinental Exchange, failed to make headway in the market with its custody venture Bakkt.
Auerbach said Nasdaq had “absolutely unrivalled” institutional knowledge, and had talked to market participants about “pain points for institutions” involved in the crypto space. “We think we are in a unique position and have a right to win in that space both on custody and eventually building on top of that for other services”, he added.
Nasdaq said it would also be able to employ its other capital market services, such as surveillance, market abuse and financial crime software, which is widely used by traditional financial institutions. Last year was a record $14bn worth of cryptocurrencies used for illicit activity, more than double the figures from 2020, according to analytics firm Chainalysis.
“The problem is not going away, if anything it is getting bigger”, said Valerie Bannert-Thurner, Nasdaq’s senior vice-president of anti-financial crime technology.
Germany poised to take control of struggling utility Uniper
Final discussions under way over acquisition of majority stake from Finnish energy group Fortum
The German government is poised to nationalise struggling utility Uniper, which has been brought to the brink of insolvency by the fallout from Russia’s invasion of Ukraine.
Once Europe’s biggest importer of Russian gas, Uniper has suffered as Moscow cut supplies of natural gas to Europe, forcing it to buy more expensive gas on the spot market in order to meet its supply contracts.
Uniper said on Tuesday it was in final discussions with Berlin about a new rescue package, in which the German government would provide a further €8bn of capital and acquire the 56 per cent of its shares currently held by the Finnish energy company Fortum.
“As a result, it is envisaged that the federal government will obtain a significant majority stake in Uniper,” the company said.
Germany already owns a 30 per cent stake, which it acquired in July as part of an initial €15bn rescue package. Chancellor Olaf Scholz said at the time that Uniper was of “paramount importance” to the country’s economy and for safeguarding energy supplies to companies and consumers. The utility requested more support in August, raising the bill for its bailout to €19bn.
Fortum confirmed that negotiations over a sale of its shares to the German government were in “the final stages” and included the return to Fortum of the financing it had already provided to Uniper, previously estimated at about €8bn.
However, both companies said a final agreement had yet to be reached.
Uniper reported a €12.3bn first-half loss this year, among the largest of any German company in history.
German officials have been working to avoid a collapse of the utility, fearing it could trigger a wave of insolvencies across the sector.
VNG, one of Germany’s biggest importers of natural gas, in September requested a bailout from the government, saying it had been forced to absorb heavy losses caused by reduced deliveries from Russia’s Gazprom.
The government this month pledged €67bn in loan guarantees and liquidity assistance for energy companies, money that had originally been set aside for companies struggling to survive Covid-19 lockdowns.
Other European governments are also under pressure to bail out energy companies. Switzerland’s largest renewable electricity producer has secured state-backed credit lines while Finland and Sweden unveiled €33bn in liquidity support to electricity producers.
Fortum, majority owned by the Finnish state, this month agreed to a €2.35bn liquidity facility with a state-owned holding company.
Private equity may become a ‘pyramid scheme’, warns Danish pension fund
Tendency for buyout groups to sell companies to themselves and peers is ‘not good business’, ATP executive says
A top executive at Denmark’s largest pension fund has compared the private equity industry to a pyramid scheme, warning buyout groups are increasingly selling companies to themselves and to peers on a scale that “is not good business”.
Mikkel Svenstrup, chief investment officer at ATP, said he was concerned because last year more than 80 per cent of the sales of portfolio companies by the private equity funds that ATP has invested in were either to another buyout group or were “continuation fund” deals, where a private equity group passes it between two different funds that it controls.
“We’re a big fund investor, we have hundreds of funds and thousands of portfolio companies,” he said. “This is not good business, right? This is the start of, potentially, I’m saying ‘potentially’, a pyramid scheme. Everybody’s selling to each other . . . Banks are lending against it. These are the concerns I’ve been sharing.”
ATP is a major investor in private equity funds. It has $119bn under management and has committed money to 147 buyout funds, according to PitchBook data.
Svenstrup’s comments, made at the IPEM private equity conference in Cannes, are similar to those made by Amundi Asset Management’s chief investment officer Vincent Mortier in June. Mortier said some parts of the private equity industry “look like a pyramid scheme in a way”.
Svenstrup said the “exponential growth” of the private equity industry in recent years, as investors have poured cash into its funds, would stop “at some point”, adding that this was “just a question of time”.
“It’s not that I think the private equity market is going to drop off a cliff,” Svenstrup said. “We’re just going to be looking [at] potentially low returns and high costs.” He added that the industry played an important role as “a key driver of taking some companies from one step to the next and eventually hopefully getting IPO’d or owned by some long-term owners”.
ATP is cutting down on the number of private equity groups it commits money to, he told the conference.
“Obviously we’ve been looking very carefully at . . . who’s been tweaking [returns figures by] using bridge financing, leveraged funds . . . all those tricks they do to kind of manipulate the IRR,” he said. IRR, or internal rate of return, is a key measure by which private equity groups report returns to their investors.