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Russia ‘has insulated itself from sanctions,’ professor says

Evercore ISI Senior Managing Director Julian Emanuel and Northwestern University Professor of International Relations Karen Alter join Yahoo Finance Live to discuss how Russia's attacks on Ukraine could impact the markets and economy in 2022.

Video Transcript

JULIE HYMAN: Let's talk more about the implications of the sanctions and all of these issues. I want to bring in Karen Alter, Northwestern professor of international relations and professor of political science and law, co-director of the Research Group on Global Capitalism and Law as well, and Julian Emanuel, a senior managing director of Equity Derivatives and Quantitative Strategy at Evercore ISI. Thank you both for being here this morning.

Karen, I want to start with you as we try to figure out what the implications of these sanctions are going to be. I saw something earlier that it's kind of like trying to take the meat away from a vegan who's at a steakhouse. In other words, Russia's already fairly independent on this front. What's your read-through for all of this?

KAREN ALTER: Well, Russia, as a country-- as its, like, state budget-- has insulated itself from sanctions. Something that I read was that the budget is designed to function at $44 a barrel in oil. So in that sense, it won't be a hit on the everyday Russians. But that's not really the strategy. The strategy is to really target Putin's inner circle and the people that really matter.

Let me step back a second. If the SWIFT sanctions hit in, that would really hit anyone who has any international connections. So that would go to a deeper, everyday person level. But the overall targeting strategy is to target Putin's friends, to try to put more pressure on Putin personally. I don't think Putin himself is deterrable, so you just have to try to get his support circle to try to change their perspective.

BRIAN SOZZI: Julian, we saw a major market reversal yesterday. Midday, we're seeing some of that strength carry on over today. Is this a sucker's rally we're seeing in these markets here?

JULIAN EMANUEL: We don't think it's a sucker's rally, Brian. What this is is a bottoming process. It's going to be volatile for weeks to come, in all likelihood.

So we're telling people that you can start deploying a little bit of capital, but be careful about it, be patient about it, because we're going to have an enormous-- if you think about the last six hours, you know, at 4:00 in the morning, the market, the S&Ps, were down 50, and we were worried about the imminent pictures of troops coming into Kiev. And here we are right now, and there's talks about more talks. You know, S&P's were up 30 or 40 not too long ago. So what it is is a time-- because of the market volatility, there's a lot of emotion in the markets. And this is one of these times, as an investor, you don't want to get caught up in the moment-to-moment fluctuations and the headlines and really focus on the bigger picture, which we think is eventually higher stock prices.

BRIAN SOZZI: Where should one be putting capital right now? Is it time, Julian, to fade that move in commodities and dabble a little bit here in Bitcoin? Bitcoin backed up about 40,000 here. We're seeing some other high risk areas of the markets come back here. What do you think?

JULIAN EMANUEL: Well, I think cryptocurrencies, right now, are sort of caught in this cross-current of use case versus inflation hedge, versus geopolitical hedge, versus, frankly, as they've been for the last number of months, a risk-on asset. So for us, there's a lot of noise surrounding there that's likely to go on for a number of more months. Frankly, though, when you think about it, what was interesting yesterday was that when West Texas hit $100 a barrel, you really had the start of the about-face. And what we've seen is some of our investors that have been involved in the energy space starting to take profits a little bit, really redeploying into places where there's high short interest-- places like the homebuilders, which have a domestic focus-- and really starting to dip their toes into some of these technology names down 30%, 40%, 50% that have earnings.

JULIE HYMAN: I want to take a little bit of a step back here, because obviously, there's a little bit of a dissonance, right? Because obviously, we have to talk about the markets. That's what we do. It's important for our viewers. At the same time, you have a disaster going on. I think we're all cognizant of that.

But I just wanted to sort of say it out loud, as it were. And Karen, on that front, when we're talking about sanctions, we're talking about something that is not going to prevent tanks today, necessarily, from rolling on Kiev, right? We're talking about something that takes more time to take effect. What kind of timetable are we looking at here potentially, and at some point, will it actually stop what Russia is doing?

KAREN ALTER: It's going to take time. And also, sanctions are going to grow in response to how much violence one finds in Ukraine. So it's easy to win a battle. And Russia will succeed in taking over the capital.

But Putin has some larger objectives-- instilling a government that is friendly to himself, I'm sure he wants to get a promise that the Crimea is really his, for whatever that is worth. But he also has these historic agendas that he wants to establish-- a greater Russia in the larger region. And for those agendas, it has to be seen as succeeding. So sanctions are trying to ebb and take away what Putin wants to achieve in his larger agenda in the war, to the extent that we know what his larger agenda is in the war actually is. And so I do think that there'll be more support for tighter sanctions-- this is a kind of a gallows analysis-- the more the violence grows.

So if you think about the Ukrainian military strategy, it's going to be asymmetric warfare, because they can't deter the tanks, and the overwhelming air power, and the overwhelming missile power. What they're going to do is try to send a lot of body bags back to Russia. Russia got the Crimea almost for free, and they want to make sure that this becomes bloody and costly, and that Russians don't have a stomach to pay for the settlement of the war.

The sanctions side of the equation is to make Europe and the West an unfriendly place for Russians to be, and to really hurt them where it counts. Now, as the West is closing the door, it looks like-- and this is a bit early to say-- but it looks like China is going to open up its door. Now, it's going to open up its door, I heard this morning, to grain exports.

But also, if you think about where the oligarchs like to hang out-- I mean, if they switch their financial transactions through China, and start selling to China, then they're going to have to also want to have a fancy apartment in Shanghai, in Beijing. And I don't know if that's really where they want to be and where they're going to be grumping about. So it is a long-game strategy. And in the short game, it's going to look like Putin keeps winning.

If I can say something as well about the economic effects in the US economy, which is a question I know is on people's minds-- and we heard that the stock market might go up. And that's because our economy is a global economy. So on the one hand, we're energy efficient and we're food self-sufficient, and that is a really fantastic thing. But we're also a market economy, which means that when global prices go up, the prices of all the goods that we buy also go up. But also, the profits that all the companies that sell these goods make goes up.

I think it's really Europe that's going to be paying hugely for this, because when we look at our gas prices at the pump-- and that, of course, does affect the family's budget-- we're not dependent for our heating on Russia's energy. And Europe is dependent for their heating. And it is winter there. And their energy bills, they can't-- that's not an optional expense.

That's going to go up, as well as the trade-- it's going to impact them more directly. We're not as dependent on Russian trade. So it's because we're involved in this global economy that the prices are going to fluctuate.

JULIE HYMAN: And Julian, that brings me back to the Fed, of course, if we're talking about fluctuating prices and what's going on with inflation. We are hearing-- you know, it keeps sort of going back and forth whether we're going to see 50 basis points in March, as we react to each new Fed Speaker. What's your current thinking-- of-the-moment thinking-- on that issue and the implications for the market?

JULIAN EMANUEL: We think the Fed is very committed to doing 25 on March 16th. I know that there has been talk-- and frankly, surprisingly, yesterday from some of the Fed officials-- of really toeing the line with regard to the market expectations of six hikes, six 25 basis point hikes in 2022, and the start of quantitative tightening, which also happens to be Evercore ISI's view. But frankly, I think what you have to ask yourself now is, is the risk to that number of six asymmetrical? And we would say that if you start seeing more negative headlines-- which, again, at some point, you certainly are-- out of Ukraine, and that starts to affect other asset markets, and the volatility starts spiking once again, that the risks are going to be fewer hikes. But they really do need to do 25 at March 16th to deliver a commitment, and really, to sort of satisfy markets.

JULIE HYMAN: Thanks so much, guys. Really great to get both your perspective on this very busy morning. Once again, Julian Emanuel of Evercore ISI and Karen Alter at Northwestern. Thanks to you both.