Russia’s Revolt Has Made the Fed’s Inflation Fight Even Harder. Here’s Why.

(Barron’s) Markets appeared to shrug off the dramatic events in Russia over the weekend, when a group of mercenaries headed for Moscow, only to call off a potential revolt in a last-minute deal.

On the surface, the levers of power remain as they were before—President Vladimir Putin is still in office and in control of the military as he continues his assault on Ukraine. But his grip now looks shaky, and it’s only a matter of time before something or somebody else comes along to threaten his authority.

It creates a lot of uncertainty, and markets tend not to like that. When Russia invaded Ukraine in February 2022 oil prices spiked on concerns that production would be hit, rising to almost $140 the following month.

The disruption never came—despite Western sanctions, Russia’s oil continued to flow to Asia and global markets continued to function. Prices are now around $70 a barrel.

Russia has every incentive to keep the oil flowing, whoever’s in charge. But bad things can happen amid disorderly change. Imagine what would happen to the price of crude if disruptions were more than a worry—if the global oil market really did suddenly face a drop in supply.

The potential for another energy price spike would upend the Federal Reserve’s and other central banks’ forecasts that show inflation steadily marching back toward their target. The Bank for International Settlements on Sunday warned that the battle to put the inflation toothpaste back in the tube is far from won, now that it has seeped into wage demands and companies’ price setting.

Much of the drop in inflation is, in fact, due to “supply chains easing and commodity prices falling,” the BIS said. “The last leg of the journey to restore price stability will be the hardest.”

Indeed. The latest events in Russia could make it even harder.

• Brian Swint

‘Cracks’ in Putin’s Grip: Blinken

The central figures in the weekend revolt in Russia—President Vladimir Putin and Wagner Group paramilitary leader and Putin protégé Yevgeny Prigozhin—remained out of the spotlight on Sunday. Prigozhin’s advance on Moscow and sudden retreat still left questions about Putin’s grip on power.

• Secretary of State Antony Blinken said Prigozhin’s actions showed “real cracks” in the regime in Moscow, where Putin has held power for two decades. Blinken told CBS’s Face the Nation the “distraction” creates an opportunity for Ukraine’s counteroffensive to Russia’s war there.
• President Joe Biden talked with Ukraine President Volodymyr Zelensky on Sunday about the counteroffensive and events in Russia, the White House said. China’s foreign minister met with Russia’s deputy foreign minister in Beijing on Sunday, Bloomberg reported. China has boosted ties with Russia.
• The uncertainty could spill over into the markets, according to Clocktower Group’s chief strategist Marko Papic. Traditional safe-havens such as gold and the U.S. dollar could see a near-term pop and oil prices could move.
• Helima Croft, the head of commodity strategy at RBC Capital Markets, said in a note on Sunday that the risk of further civil unrest in Russia, one of the biggest oil producers, must now be factored into the firm’s oil analysis for the second half of 2023.

What’s Next: How the crisis shakes out longer term is something officials are monitoring closely, Blinken said Sunday. “We can’t speculate or know exactly where that’s going to go. We do know that Putin has a lot more to answer for in the weeks and months ahead.”

—Liz Moyer