MAGGIE LAKE: Hello and welcome to the Real Vision Daily Briefing. It's Monday, February 28th, 2022. I'm Maggie Lake. We begin another week with Russia continuing its offensive against Ukraine and the global community ratcheting up the sanctions. Here to help us make sense of the latest developments and their impact on the markets, Jacob Shapiro, Director of Geopolitical Analysis at Cognitive Investments and Harry Melandri, advisor at MI2 Partners. Gentlemen, great to have both of you with us today.

Jacob let's start with you. Both sides met for talks today, the Ukrainians and Russians, but at this hour, it appears the fighting is intensifying. More countries and companies have joined the sanctions leaving Russia looking increasingly isolated in the global economy. There's so much going on, so many different threads here. Give us your assessment of where things stand. What are you watching right now?

JACOB SHAPIRO: Yeah, well, so there's the old Lenin quote that I feel like has been making the rounds. There are decades where nothing happens, and then there are weeks where decades happen. And it's felt like a decade in just the last couple days. I'm watching two things. I'm watching a more of a short-term tactical thing and one bigger long-term thing.

The short-term tactical thing you hit the nail on the head. Are these negotiations real? Is it propaganda, both for the Russians and Ukrainians to say that they tried before they amp up again? I'm personally of the opinion that I think the Russians are actually gearing up to hit Ukraine really, really hard. They've had a rough couple of days in the operation, but their logistics supply chains are moving forward. They're gaining more air superiority.

I'm really worried that we're about to see the worst of this conflict, that this has all just been the prelude. The bigger picture thing, though, and I can't overstate this enough, is Germany has woken up. Germany is talking about not being dependent on Russia for energy security anymore. It's talking about building LNG terminals, and it's throwing a billion Euros at the German military. For the first time since 1945, we're talking about Germany militarizing.

And if this is Putin's legacy, Putin's legacy is that he's the Russian leader who made for Germany, Russia, this target for the first time since 1945. What a colossal miscalculation on his part. On the short term, what is Russia going to do is? Are these negotiations really going to push forward? And then on the bigger picture, Germany's back and what that means for Europe in the world.

MAGGIE LAKE: Both of those, so much to unpack there. And when you're talking about a remilitarized Germany, there's just so much to discuss. But Harry, what are you watching from a market perspective? I get the feeling that there's a lot going on, or a lot of conversations and potential risks building up behind the scenes, because it's hard to react in real time to everything we're seeing, especially because so much of it is unprecedented. What are you watching from a market perspective? And what part of the market are you watching?

HARRY MELANDRI: All the action for me as a macro trader is in short rate contracts, in the Euribor contracts, in the Eurodollar contracts, which are estimates of the likely time that the central banks are going to hike how much they're going to hike. And we had an awful lot of prices [?] because rates are well, zero everywhere, negative in the Eurozone. And we were anticipating some response to inflation. Well, just like in the 1970s, so to speak, and we can discuss why the 1970s mattered for this, now may not be the ideal time to hike rates.

There may be really good reasons why we have to delay those scheduled hikes, in particular for the Eurozone and Germany, because they've imposed meaningful sanctions, and they've taken meaningful steps, which unfriendly to Russia when they had been trained to stay out this. Why the hell are the Russians still supplying them nat gas? It could be because they have logistical problems switching the gas off and it degrades the wells.

But my suspicion is they have some capacity to vary the amount of gas ahead to Central Europe, Western Europe, and if that's true, it will result in the maximum loss could be about 20% of Europe's energy requirement just in gas, and another 20% in oil. The oil product is fungible and can go elsewhere. The gas is not and will either get locked in or moved into storage in Russia.

And if you don't have enough gas, you're not going to have enough electricity in the factories. People can turn down their thermostat, 20 percent's a big number to offset, it will hit industrial output, it will hit some of the more energy intensive businesses and it eventually will hit the DAX out.

MAGGIE LAKE: Okay, so there's a lot in there. Jacob, I know you and Harry were talking a little bit right before we got on air, we were trying to resist diving into the show before we were live because there's just so much to talk about but weigh in on that, the gas part and then Harry, I'm going to return to you with the connection with rates and the DAX. But how important is this? Because it does seem odd to so many people listening like, okay, we've got this new set of sanctions in a really globally coordinated way.

We're seeing countries either move off neutrality like Switzerland, or join in sanctions like Singapore, South Korea that don't always get involved here. You've got so many countries now joining, banding together, and then you hear this carve out for oil and gas. And it just seems odd. Talk to us about that. And what do you think about what Harry just said? Should we think about gas and oil differently, and how important is that?

JACOB SHAPIRO: I think the first thing is that the Russians thought this was going to be quicker than it has been. I think they had an initial plan. And they thought they were going to get to Kyiv, and they were going to depose Zelensky, and everything was going to be fine. I think in some sense, they don't know what to do. They thought that they were already going to be in Kyiv right now. And then it would all be a fait accompli, and that there wouldn't be time for Europe in the United States to get these videos of the Ukrainian defenders on the ground and all of us watching them and then want these harsher sanctions.

I think at some level, what you're seeing right now is the Kremlin is having to stop, pause and say, do we want to save face? Do we want to negotiate with these guys and try and pull back? If not, and if we're really going to double down on the war, what do we do with natural gas and oil because we didn't think it was going to get to this point in the first place? I think the second point here is that ultimately, when it comes to these things, we think that the provider has all the leverage. Sometimes it's really the customer.

And for the Russians, I think they still want to deescalate this, I think they still have in their minds that there was some path to where they can deal with Europe on some fundamental basis. The moment they shut off the gas, they're the ones that are basically saying the whole thing is over. They can keep it open. And if they can keep that propaganda message saying, no, we're meeting with them in Belarus, we want negotiations, we're just trying to get rid of these Nazis in Ukraine. That's not what I think, but that's what they're saying. That's the message they're trying to say.

If you get the Russian suddenly cutting off the natural gas, the information war, which they're already losing, they look that much worse. That's my best explanation, but I really do think Moscow is scratching its head because it doesn't have a lot of good options left because of their underperformance on the battlefield.

MAGGIE LAKE: Right. And, Harry, your point is, what's the point of selling the gas if they can't do anything with the money because now, they're cut off from the dollar system?

HARRY MELANDRI: There are two interesting observations to make about this. One of these is if you sanction a central bank, and you sanction another bank and block them out of SWIFT, they can't do anything with the money, exactly that. But there is another point, Surgut, which is one of the bigger Russian oil companies, held an auction for two cargoes of oil, nobody bid. You can't bid because if you send the cash up front, you don't know if the Russians will deliver the oil. If you send the oil up front, you don't know if they could actually pay the cash.

Because you've cut them off from SWIFT, some of the energy isn't going to go to the west anyway, it can only go to China. This is really a question more for Jacob than for me, but I can't help but link the negotiations with Iran to this current situation. And I'm assuming that the relationship with Iran will be improved in the near future. That will make it possible for Iranian cargoes that currently head to China to get redirected, or at least more Middle Eastern cargoes to go.

But the counterargument to that is it will take six months at least before that situation makes any meaningful. One of the things I'm petrified of is that there is some insignificant interruption both to the flow of energy, but also, it's a corollary to the interruption to cash flows. And if that happens, we can see oil at 150, which who wants that apart from Vladimir Putin? Jacob, what do you think about the Iran thing?

JACOB SHAPIRO: Well, I can guarantee you Putin doesn't want oil at 150 this way, he would like to be able to profit off of it if you sell it on the market. This is not the scenario where he wants. Look, I've actually been saying that the Iran-US deal is going to happen for the last eight months. And this really just pushes it forward. If you believe the Iranians and you probably shouldn't believe anything the Iranians say, they say they can pump an extra 2 million barrels per day as soon as the ink is on the agreement.

They're talking, and I think they're playing that up obviously, because they feel like they have leverage now, and now they can ask for all these concessions. But I think you're absolutely right about oil, there's an escape valve there. To your point, natural gas is the one to be concerned about, because that is not something that you can just load on a ship easily and decide to make up for it. You've got American shale oil producers too. There are ways to accommodate that lack of Russian oil on the market, the natural gas situation because Europe is dependent on them for 40%.

That's the situation where it's really hard to read and where if you get Russia shutting off natural gas suddenly, so at that point, why should Europe then not be arming the Ukrainians directly with even worse weapons, and then you get this thing that spirals out of control. It's really a staring contest, and it's about who wants to take steps to deescalate, or whether we're going to keep going around in circles. And then I would actually throw this at you too, Harry, because besides the energy, one thing I'm really worried about is that Ukraine and Russia are two of the biggest agricultural exporters in the world, especially for grains.

And Ukraine, we've got about four weeks here until Ukrainian farmers are supposed to be planting. If this war goes on for another four or five weeks, forget about the food price spikes we've already seen, you could see barley and corn and sunflower seeds, which Ukraine is the largest exporter of in the world, you can see those go through the roof too, because now you're not talking just about a panic in the market, but you're talking about fundamental short supply. I wonder from you from a food perspective, if you're also feeling those concerns, or if it's just related to energy?

HARRY MELANDRI: Yeah, you're definitely seeing squeezy markets in the grains. And I've read reports that American farmers are switching out of wheat and into soy for new plantings because there's a real global shortage of fertilizer. And why is there a global shortage of fertilizer? Well, it's a natural gas. It's the feedstock for fertilizer production. It gets worse though because Belarus and Russia have some of the biggest deposits of potassium, and I've got brain drain.

But in the Uralkali and Belaruskali, they have two of the biggest alkali producers of fertilizer things. There's also that right now the Ukrainian army has 60,000 soldiers parked outside of Donbas. They were meant to be launching an offensive against our best. It looks terribly as if the Russian push from the south and north is going to kettle them into that area. That area happens to be one of the most fertile pieces of Ukrainian land for wheat production. This is the grains of commodities, it's like a big storm of everything that could possibly go wrong going wrong.

I saw something that I was really shocked to see. You had visits from the Argentinian and Brazilian Presidents recently. Both of them requested and received quotas for Russian fertilizer supplies, and Jair Bolsonaro, who I wouldn't have thought was a Putin-friendly guy, actually said something quite supportive just before the war kicked off, but still wrote something relatively supportive, which to my mind tells me how much they need fertilizer.

MAGGIE LAKE: Yeah. Harry, I think this these calls to question, what are the risks that are not priced in the market? You just said you're worried about the DAX given the natural gas situation, given the food situation. What looks vulnerable? What are you concerned about? And what downside could we see?

HARRY MELANDRI: First of all, every rate hike we've priced in, particularly in the Eurozone, maybe we shouldn't have priced all those rate hikes in, point number one. Point number two, if you need energy for your activity, and energy prices go sky high, how much money are you going to make? And what valuation should your company be on?

And then right now, there's every reason and if you guys read Zoltan Pozsar's musings on financial flows and the dollar liquidity things, Zoltan's like the guru in this subject, he was concerned that you're going to have some, if you take out a big surplus dollar receiver like Russia, everyone who borrowed money from Russia and passed on to third parties has now got to scramble to replace that liquidity. There's going to be some stresses in funding markets.

Now, we have a Fed, those Fed officials, I would imagine who have been working very late recently gaming this out, and right now, they're probably doing their best to fill those liquidity holes that the Russians have put in place. But it does worry me that we may have payments problems at some point. And then finally, it's not impossible to see cyberattacks. If the one thing, like my wife asked me, is there anything I should be doing? I said, go to Costco, get on the [?], get the shopping done before the credit cards fail, just in case.

MAGGIE LAKE: That would be an escalation though, Jacob, These are the things that we think about, we have gal or humor about, but this is a real concern, but it would also escalate. It's another one of those things that would escalate this beyond the situation that it is right now. It's a line that no one wants to see crossed, but if there are racked cyberattacks on the US, this just goes to another stratosphere.

JACOB SHAPIRO: Absolutely. Cyberattacks are not nearly as destructive as nuclear weapons, but if you had stayed on state cyberattacks, Russia would treat that the same way and the US government would treat that the same way too. You have never had two major powers like that go at each other on a cyber level, and really try and ruin each other's economies or degrade their military capacities that way. If there's a silver lining to all this, and it's not particularly silver, it's certainly not good for the Ukrainians.

It's that despite all the sanctions and all the weapons that everybody is sending to Ukraine, no one in NATO and no one in the United States wants to deploy troops to defend the Ukrainians. And people probably don't want to hear it, but that's just the simple fact. And for as long as that is true, and for as long as Russia has its forces mass there, and this matters more to them than to everybody else, this is probably a contained conflict, because Russia is not trying to invade the entire world.

It's trying to take Ukraine and ultimately, nobody's going to stick up for Ukraine. There are scenarios in which this all remains contained to Ukraine. And we're dealing really with some of these commodities supply chain disruptions, the bifurcation of global finance, which are big enough on their own. I myself, I'm not losing too much sleep over nuclear forces being put on alert and cyberattacks here. I think, right now, neither side wants that. It's much more for me these commodity flows.

You're asking potential weaknesses. China's a big one. Anybody who's importing lots of energy, anybody who's importing lots of foodstuffs, those are countries that you're going to want to circle and watch very, very closely. And China's the biggest one with global implication.

MAGGIE LAKE: I'm so glad you mentioned that because we were talking about who doesn't want $150 oil. Anybody who imports, India, we have heard from so many countries, but notably, we haven't heard much from India, from China, from Saudi Arabia, from the UAE. How important is that? Will they be forced to, to oversimplify, take aside? How do you see that playing out and how critical will that be? What's happening behind the scenes in terms of the US and Europe talking to them?

JACOB SHAPIRO: Yeah, I'd be curious to hear Harry's views. But very quickly in mine, I have a varying view on the Chinese. I don't think they're happy about this at all. I don't think they wanted this at all. And I think from their perspective, if you try and put yourselves in the shoes of Beijing, Russia is just another European colonial power. They actually took part of China at the end of the 1800s. And now, they're doing it to Ukraine.

People like to make this Ukraine-Taiwan comparison, China recognizes Ukraine as an independent country, Russia doesn't. There's no apples-to-apples comparison there. And China's also in the middle of dealing with a real estate property bubble and trying to get some rationality in its Ponzi scheme of an economy. The timing couldn't be worse from China's perspective. India as well. Just a couple months ago, we were talking about electricity brownouts and India's power grid because they didn't have enough coal, or they didn't have enough energy supplies to keep their supply chains going.

I think you're seeing all of those countries, they're very quiet. They're trying not to take sides. The Chinese are saying, yes, we'll import the Russian wheat, but we really want there to be a negotiated settlement. I think they're going to try as much as possible not