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06.30.2023 by David M. Smith

Markets Yawn About Russian Insurgency and Comments from Secretary Condoleeza Rice

Last weekend I was glued to the TV, watching the news reports coming out of Russia. It was shocking to see the events unfold as a mercenary army marched toward Moscow unabated with little resistance. After the initial shock wore off, my thoughts turned to the markets. How would they react on Monday? Well, not much. Not any movement at all in the stock, bond, or energy markets. You could make the argument that the insurgency was over Saturday evening, but it was still stunning how little effect it had on markets. Usually, earth-shaking geopolitical events rattle the markets. With Russia being one of the largest oil and natural gas producers in the world, the expectation would have been some volatility, but there was none. And the reason why is how effective sanctions from the Ukraine invasion have been in isolating the Russian economy and energy from the West. After the invasion last year, most Western companies closed down businesses in Russia, so there is little economic impact now. And for the last year, Russia has been forced to circumvent sanctions and sell its natural resources on the proverbial dark alleys of world markets, not on widely used exchanges. With Russia still possessing nuclear weapons, this mundane outlook could change quickly as new events unfold. Still, the calm of the markets this week has been remarkable. Reuters

Something a Little Different: The economic news was relatively light this week, so I decided to go in a different direction with the newsletter. I was fortunate to be invited to listen to a webinar on recent Russian events sponsored by JP Morgan that featured Condoleezza Rice, the 66th Secretary of State under George W. Bush. Secretary Rice is now with the Hoover Institute and Stanford University, and many may not know that she is also a Kremlinologist and an expert on Russia. I wish there was a public link to share the webinar, but there is not. Hopefully, my summary notes and other linked articles are informative and interesting regarding the events that occurred in Russia.

Condoleezza Rice – Russian Comments: In her comments, she said the war wasn’t going well for Russia, and most experts she spoke with felt that Ukraine ultimately would win. But it will be tough, and Russia is much better at playing defense than offense. Russia can’t win, but it can keep Ukraine from reclaiming all its former territory.

As for the march to Moscow by Prigozhin, it was caused because his Wagner troops were to be incorporated into the army as of July 1. He couldn’t allow his troops to be under the incompetent command of General Shoigu (and she agreed that Shoigu was incompetent). But he also couldn’t lose his army, which gave him power and funds. U.S. intelligence knew something was up, so the Kremlin must have known too. The big question is why Putin and others in command let the march on Moscow continue. Most of the army was in Ukraine, leaving just the national guard and police to defend the city and Kremlin. The speculation is that Putin didn’t know who he could trust in those organizations to defend Moscow. In her opinion, the deal Prigozhin received was negotiated by Putin, not Lukashenko of Belarus. Even though Prigozhin is now in Belarus, she felt he should watch his back since there will be a target on it for the insurgency.

Secretary Rice felt the most damaging thing that came out of the insurgency was that Prigozhin very publicly denounced the reason for the war. He said the war was a lie, Ukraine was not going to attack Russia, and it should have never occurred. His words carry weight since he is considered a straight shooter by the Russian public. His remarks will eventually make their way through the ranks of the armed forces, and it could adversely affect their will to fight.

I’ll leave with this: Secretary Rice said history was not favorable for Russian czars who lost wars, that they are quickly removed after losing. But don’t expect any change at the Kremlin to come from the citizens. Russian people don’t rise up. Change at the top in Russia comes from military mutiny or palace intrigue. And it was reported earlier this week that the Russian military was involved in supporting the insurgency. It would be surprising if there wasn’t more breaking news coming from Russia soon. NYT

Secretary Rice – China Comments: The Secretary also shared views on China; first and foremost, what must they be thinking now? China’s Xi Jinping has formed close ties with Putin and declared a “no limits friendship” with him. But he has clearly backed the wrong horse. Putin’s war with Ukraine has been homicidal for troops, the army is junk, and China risks sanctions if they are accused of giving too much support to Russia’s war effort. According to the Secretary, China has big challenges to address, such as little economic growth, population demographics worse than expected (which was bad enough already), and 20% unemployment among the youth. China needs economic growth, so in public, they will still support Russia, but in practice, any support will not be big enough to risk sanctions and, therefore, will probably not be that effective. AP News Business Insider

Lastly, Secretary Rice felt the U.S. – China relationship was strained because Xi Jinping was an idealogue and was very aggressive towards the U.S. and its neighbors. The economic opportunities in China for U.S. companies have greatly diminished. Consumer brand companies like Coca-Cola and Pepsi will still be able to do business there, but almost all other economic sectors will avoid China due to intellectual property/data theft and the potential for sanctions.

Financial Planning/Investment Strategy Corner:              

Gift Annuities Funded from IRAs: When Congress passed legislation last year affecting retirement accounts, it allowed investors to contribute to charitable gift annuities using funds from IRAs. Investors can fund up to $50,000 in these annuities without making it a taxable event. The donation amounts can occur in different amounts but are capped at $50,000, and it is a one-time event – meaning you can’t do it every year. The investor will then receive monthly or annual distributions from the annuity based on their age which will be taxed as ordinary income. A typical annual payment for a 75-year-old who funds an annuity with $50,000 is approximately $3300. If the investor is required to take Required Minimum Distributions (RMDs), the charitable funding from the IRA counts toward the RMD. After the investor passes and the distributions stop, the charity gets to keep the remaining principal for the non-profit organization. One thing to keep in mind is that the annuity payments are only as safe as the charity backing them. The charity has pledged its assets to back the annuity, so choose a charity with a sound financial history. The Retirement Tax Break That Will Pay You an Annual Income - WSJ

Quick Hits:

  • How to get a stable and strong core without crunches: NYT Wellnessed
  • Carbonated sodas may be zero-calorie drinks, but they may not be great for your teeth: Axios
  • How to beat stress without exercise: Axios
  • For 40 years, this Russian family was cut off from all human contact, unaware of even WWII, until they were discovered in 1978: Smithsonian Magazine
  • Best drinks for the cookout this weekend (including non-alcoholic): Observer The Kitchn
  • From spicy potato salad to raspberry trifle with custard and whipped cream. Interesting recipes for the Fourth of July: Bon Appétit

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Happy Birthday ‘Merica! On Tuesday, our nation will be celebrating its 247th Independence Day. Have fun with historical and cultural trivia for your Fourth of July gathering. Here are some resources: Newsweek – Could you Pass the U.S. Citizenship Test?   Krafty Lab   Parade  

Here are a few U.S. questions for yourselves to get you started (Answers below):

  • The Statue of Liberty is a true American symbol (though she is an immigrant from France! 😊). What is Lady Liberty’s full official name?
  • What was the name of the treaty that ended the American Revolutionary War?
  • What is the biggest ancestry group in the U.S.?

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Trivia Answers: Liberty Enlightening the World; Treaty of Paris; German.

Quote: “Democracy is the recurrent suspicion that more than half of the people are right more than half of the time. ” Author E.B. White The New Yorker 1943

I am sure many of you will take Monday off from work. Enjoy the long Fourth of July holiday weekend!!!

Thank you for reading RSWA Financial Advisor Insights! We welcome feedback, and please forward this to a friend! Be well, take care, and stay safe!


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