Publicising intel that later proves to be incorrect could undermine credibility
Oil futures are up today due to tensions on the Ukrainian border. This comes on the back of an increase in energy prices that have been taking place since October, with prices for crude oil more than doubling in the last five months.
No doubt if Putin invades Ukraine oil prices will rise. An invasion would clearly interrupt a key supply of oil and gas into Europe, driving prices higher. And the markets are worried that the invasion will take place — in part thanks to all the sensationalist headlines in the western media.
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Yet we must also consider how the invasion is being communicated to the markets and the public at large. Politico has a long and fascinating report on how the intelligence on Russian troop movements is being shared in an unusual way. Former director of the CIA and the NSA Michael Haydon summarises the communications strategy as “very different” due to us living in the “Information Age”.
Intelligence communications in the West are geared toward getting Russia to back down. The idea is that if the NATO countries hammer the Russian troops build-up in the press, this will “pre-emptively [expose] — and thus [derail] — Russian lies that could lead to a war”.
But there are murmurs in DC about the potential downsides of this strategy. Putin could simply be provoking the NATO allies into showing their hand so that he can understand how they will respond and what intelligence they will act on. If Putin does not invade, the hit to the credibility of the intelligence agencies, not to mention the countries promoting the intelligence, could be quite severe.
No one has yet pointed out the dangers of this strategy from a markets point-of-view, however. First, it results in rising prices in the futures market. This can exacerbate price rises in the actual or ‘spot’ market for energy and so consumers may take a hit. In the context of rising inflation, price rises in one market can be passed into other markets and this can lead to further inflationary uptick. It is no secret that inflation is far higher on the list of voter priorities than Ukraine.
Then there is the issue of credibility. Futures markets are useful because they guide market prices for commodities. They take in information in the present situation and guide prices for commodities in the future. But futures markets will discount any information that they view as unreliable. If NATO adopts this new intelligence disclosure strategy in the future and the ‘calls’ made often miss, markets will lose interest in the statements of politicians on foreign policy. Some may argue that this is no bad thing, but nor is it a healthy symptom of a functioning state when markets are ignoring elected leaders.
There is no doubt that we live in an information age. Information is, as the philosophers say, ‘performative’. It can ‘do’ things. Markets know this too because they depend on valuable information. But those in markets also know how to filter signal from noise. The new strategy of disclosing intelligence pre-emptively risks diluting the credibility of our institutions — and if this happens, markets will treat their statements as more noise than signal.