Notes
on Russia
John Mauldin
Nov 19, 2014
Russia and its redoubtable president, Vladimir Putin, have been much in the news lately. The latest flurry came when Putin was taken out behind the woodshed at the G20 conference in the Philippines last weekend over his recent moves to inject more Russian troops and arms into Ukraine.
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For
today’s Outside the Box
we have two pieces that deliver deeper insights into the situation with Russia
and Putin. The first is from my good friend Ian Bremmer, President of the
Eurasia Group and author of Every
Nation for Itself: Winners and Losers in a G-Zero World. You probably caught my
mention of Ian’s presentation at the institutional fund manager
conference where we both spoke last weekend. He had some unsettling things to
say about Russia; and so when he followed up with an email to me on Monday, I
asked if he’d let me share the section on Russia with you. Understand, Ian is connected, and so what you’re
about to be treated to here is analysis from way
inside. (He’ll be presenting at our Strategic Investment Conference
again next April, too.) Russia and its redoubtable president, Vladimir Putin, have been much in the news lately. The latest flurry came when Putin was taken out behind the woodshed at the G20 conference in the Philippines last weekend over his recent moves to inject more Russian troops and arms into Ukraine.
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Then
we turn to a piece that my friend Vitaliy Katsenelson published last week in
his monthly column in Institutional
Investor. I need to preface this one by mentioning that Vitaliy was
born in Murmansk, Russia, where he lived until age 18, when his family
emigrated to the US. Fast-forward 23 years, and today Vitaliy is Chief
Investment Officer for Investment Management Associates in Denver and author of
the highly successful Active
Value Investing: Making Money in Range-Bound Markets and The Little Book of Sideways Markets.
That’s quite a journey, and Vitaliy has some very strong feelings about the
country he left as well as the one he came to. In his intro to today’s piece he
admits,
[This is] one of the most emotionally taxing
things I ever wrote. A few days ago my wife looked at me and said, “When are
you going to be done with it; this article is bringing you down.” She was
right.
But
I think you’ll agree that when Vitaliy recently subjected himself to a 7-day
news diet of nothing but Russian media, the better to comprehend current
Russian attitudes, he resurfaced with some valuable insights.
And
I can’t leave our deliberations on all things Russia and Putin without
mentioning again Marin Katusa’s new book, The Colder War, which I featured in Outside
the Box two weeks ago. It’s a compelling survey of the history and
dynamics of world energy markets and the role that Putin seeks to play in them.
Geopolitically,
the world seems to be a calmer place as we head into the Christmas season, with
the significant and glaring exception of Russia. And remember, falling oil
prices will seriously impact an already stressed Russian economy.
But
before we turn to the eye-opening if somber notes below, I want to share with
you a fabulous story from my friend Art Cashin, who is one of the world’s great
raconteurs. I make sure to have dinner with Art whenever I’m in New York. In
addition to his wisdom concerning the markets, he simply has the best stories.
The last dinner (also attended by Barry Ritholtz and Josh Brown) was at an
establishment called Sparks, an old New York watering hole and famous
steakhouse not far from Grand Central Station.
Art
shared the following story with us and had us in tears. Back in the day, the
New York Stock Exchange was a mighty interesting place with a very curious cast
of interesting and interlocking personalities. It has calmed down some over the
decades, but the stories … well, let’s just let Art tell it.
For years, one of the communal tables at the
Luncheon Club would issue a group challenge. They would all set a target for
losing weight by some date a couple of months out. The one who weighed up
furthest from their target had to buy dinner for the others.
In 1985, the loser was Maurice (Monk) Meyer of
Henderson Brothers. Among the others were Jack (Jackie D) D’Alessandro, Pat
McCarthy, Bill Fitzpatrick, and Roger Hochstin.
They decided to turn the event into a sort of a
Christmas party and scheduled the dinner for the week before Christmas. They
made reservations at Sparks Steakhouse.
As the day approached, there was an unexpected
development. Mafia kingpin Paul Castellano was gunned down, along with his
driver, on the sidewalk outside Sparks.
Nevertheless, the show must go on.
When the fated date arrived, the group decided
to meet at the Luncheon Club bar for some rehearsal cocktails. They rehearsed
for a couple of hours and then headed for Sparks.
As they arrived, around 7:00, there were some
early hints it might be a bumpy evening. When they walked in, the hostess asked
if they had reservations. “Only about the food,” snapped Pat McCarthy. That was
followed by the maître d’ asking where they’d like to sit, only to hear Roger
say, “In the non-shooting section, please.”
Once they were seated, they ignored the menu and
ordered more cocktails and several bottles of wine. For the next three hours,
they ignored the pleas of several waiters and the maître d’ to order some food
to go along with the wine and drinks.
In the meantime, Roger may have been getting
bored. He noticed another table with six Japanese men in their twenties and one
older man, who looked maybe 60.
Somehow, Roger found a Chinese takeout menu from
Chou Lu in his pocket. He put his napkin over his arm as though he were a
waiter and went over to the table of Japanese men and began reading the menu in
a form of broken Chinglish that would have embarrassed even the producers of
the old Charlie Chan movies. Things like “Pork Flied Lice.”
Ironically, only the older man spoke English,
and he seemed to think it was a wonderful joke. He told Roger that Roger’s
table seemed to be having a wonderful time and asked if he might join it
briefly.
Roger brought him over and introduced him around.
There was a pleasant exchange for about 15 minutes and then Jackie D asked him
where in Japan he came from. They man replied – “Actually, I’m from Okinawa.”
Bill Fitzpatrick darkened and said, pointedly, “My favorite uncle was killed on
Okinawa by you people during the war.” The man quickly excused himself.
Pat McCarthy reminded Bill that he had not had
an uncle in the war. Jack turned to Pat and said, “That doesn’t matter; Bill
went through the barrier about two drinks ago.”
Anyway, the waiter finally prevailed upon the
boys to order entrees by 10:00. Meanwhile, Maurice was sinking fast. He had
come out despite a bad case of the flu, since he was the designated payer. It
quickly became evident that Meyer would not make it much past 10:30. He called for
the check.
As they were about to help Meyer to his feet,
Jackie D noticed that McCarthy had had his untouched entrée put into a doggie
bag. Not wanting to be outdone, Jackie reached down and put his medium rare
petite filet in his inside jacket pocket without benefit of a doggie bag.
At the coatrack, Jackie attempted to help Meyer
get his overcoat on. In doing so Jack lifted his own hand high and out. That
swept his jacket off to the side, revealing a shirt dripping with blood from
the medium rare filet in his pocket.
Perhaps recalling Castellano’s recent fate, one
woman at a table spotted Jack’s shirt and screamed, “My God! He’s been shot!”
Everybody in the restaurant hit the deck,
including the maître d’ and our adventurous group. When everyone got back to
their feet, the maître d’ told the boys they were never allowed back –
collectively or individually.
In a huff, the boys headed off to the John
Barleycorn.
Art
can go on all night with stories like that. You really should put them into a
book, Art.
You
have a great week. I am off to the gym, where The Beast will continue to try to
whip this poor old body into some similitude of shape.
Your
still smiling from all the great stories analyst,
John Mauldin, Editor
Outside the Box
Notes on Russia
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By Ian Bremmer
Nov. 17, 2014
the russians are taking every opportunity to
escalate an already plenty hostile relationship with the united states and some
selected allies. the g20 summit was particularly negative on that front, with
russian president putin bringing along some warships to australia, while
canadian prime minister stephen harper led a rope line of western leaders calling
putin a scoundrel and a liar. putin left early, claiming a need to catch up on
sleep and some other business to attend to.
like in ukraine.
i had a chance to talk with some senior russians
last week, including two advisors to the kremlin. they explained that putin
expected his offer of a ceasefire in southeast ukraine would be sufficient to
get the americans to tolerate a status quo, while bringing the europeans to the
table with some sanctions reductions. that didn’t happen: instead a coordinated
harder line policy stayed in place, while the americans and germans looked set
to put more sanctions in place unless the russians actively backed down.
despite mounting economic pressure on the europeans, the frozen conflict/long
game the kremlin was playing didn’t look like it was going to succeed.
and so the kremlin moved backed to escalation,
dramatically expanding their direct military presence in the region – confirmed
by nato and the typically-conservative osce, denied by the russian government –
and announcing plans to build up troops in crimea. they’re preparing both sides
to consolidate their territory, initially through taking the port city of
mariupol...potentially then a land-bridge between eastern ukraine and crimea
and beyond (odessa being the most obvious place). the most likely path is the
kremlin now looking for provocations to “go further” – they’ve already
expressed a level of outrage around the ukrainian government severing economic
ties to the separatist region – then the fiction of ceasefire is erased and the
russians/separatists take more territory. ultimately, whatever the formalized
“governance” structure, the kremlin is moving towards making crimea and
southeast ukraine a singl e place.
there’s very little the ukrainians can do. the
ukrainian military will remain badly outgunned, and the local populations in
the region remain fairly anti-kiev, even if they’re skittish about the notion
of russian takeover. we’ll see a pickup in international calls to provide arms
for the ukrainian military, but they’ll be rejected, most particularly by the
united states. at best we’ll see a step up in intelligence and training
support, to little consequence.
putin’s military efforts are also stepping up
outside ukraine: the “unknown” but clearly russian submarine off sweden, a
russian nuclear armed exercise during an intelligence meeting in denmark;
bomber patrols in the gulf of mexico. they’re all bluster, but a clear message
to america and its allies...and pose a far higher potential for accidents – one
scandanavian airlines flight recently made an emergency alteration to its
flight path when a russian military jet suddenly appeared in front of it.
the likelihood of moscow backing down in this
environment is near zero. the sanctions aren’t having a meaningful impact on
the russian economy (yet) and the popularity of the kremlin isn’t taking a hit.
the speech from former soviet general secretary mikhail gorbachev – no fan of
putin, but clearly pointing the finger at the west for russia’s troubles –
makes that clear. and it’s getting harder for the americans to find an out.
german chancellor angela merkel continues to be the best opportunity for
compromise, but her relationship with putin is now only barely functional (the
kremlin advisors i spoke with said this was the single biggest misstep from
putin to date – they believed his bilateral conversations with her were too
aggressive and led merkel to feel misled; neither believed the relationship
could be salvaged near-term). and so russians are now presuming the sanctions
environment will be there for the long haul, and are thinking about the longer
term economic implications.
i’d now say that’s meaningful before we get to
russia’s 2018 elections: further sanctions causing steep recession leading to
unrest in the regions, which begins to metastasize to the cities. that would
spook russian elites, some of whom could split from the kremlin. the key early
warning indicator would be meaningful defections of any insiders to the west.
but critically, we’re at least a year or two away from that. by which time
ukraine has been economically devastated, while the strategic shift of
russia-china is thoroughly entrenched.
Putin’s World: Why Russia’s Showdown with the West Will Worsen
By Vitaliy Katsenelson
Institutional
Investor,
Nov. 17, 2014
My father, Naum Katsenelson, painted this
watercolor, “Dolls Become Humans,” two years after we came to the United States
in 1993. This is the only “thematic” picture my father ever painted.
If you look at the picture carefully you’ll see
the silhouette of Lenin in the clouds (representing the past). On the far left
there is a Stalin doll and a line of people going to prison. Across from Stalin
on the right there is a doll of Brezhnev (you’ll recognize him by his large,
distinct eyebrows). On the building on the right there is an image of
Gorbachev. Look carefully at the faces in the foreground (representing the
present and the future): as they get closer to you they become more humanized –
transforming from dolls into humans. The man in front of the woman draped in
the American flag is my father; the boy with the Star of David on his chest is
me.
This was an aspirational picture. In 1993 the
Soviet Union fell apart. Russia’s future looked bright – although it was in
chaos, it was a democracy. The dolls here are an analogy for robots, suggesting
uniformity of thought. As I was composing this I called my father and asked him
if he’d paint the same picture today. He said, “No. Today’s picture would look
very different.”
I spent three months aggravating over the
following article. It was one of the most emotionally taxing things I ever
wrote. A few days ago my wife looked at me and said, “When are you going to be
done with it; this article is bringing you down.” She was right.
I grew up hating
America. I lived in the Soviet Union and was a child of the cold war. That hate
went away in 1989, though, when the Berlin Wall fell and the cold war ended. By
the time I left Russia in 1991, the year the Soviet Union collapsed, America
was a country that Russians looked up to and wanted to emulate.
Twenty-three years
later, a new version of cold war is back, though we Americans haven't realized
it yet. But I am getting ahead of myself.
After Russia invaded
Crimea and staged its referendum, I thought Vladimir Putin's foreign excursions
were over. Taking back Crimea violated plenty of international laws, but let's
be honest. Though major powers like the U.S. and Russia write the international
laws, they are not really expected to abide by those laws if they find them not
to be in their best interests. Those laws are for everyone else. I am not
condoning such behavior, but I can clearly see how Russians could justify
taking Crimea back – after all, it used to belong to Russia.
I was perplexed by how
the Russian people could possibly support and not be outraged by Russia's
invasion of Ukraine. But I live in Denver, and I read mostly U.S. and European
newspapers. I wanted to see what was going on in Russia and Ukraine from the
Russian perspective, so I went on a seven-day news diet: I watched only Russian
TV – Channel One Russia, the state-owned broadcaster, which I hadn't seen in
more than 20 years – and read Pravda, the Russian newspaper whose name means
"Truth." Here is what I learned:
If Russia did not
reclaim Crimea, once the new, illegitimate government came to power in Ukraine,
the Russian navy would have been kicked out and the U.S. navy would have started
using Crimean ports as navy bases. There are no Russian troops in Ukraine, nor
were there ever any there. If any Russian soldiers were found there (and there
were), those soldiers were on leave. They went to Ukraine to support their
Russian brothers and sisters who are being abused by Ukrainian nationalists.
(They may have borrowed a tank or two, or a highly specialized Russian-made
missile system that is capable of shooting down planes, but for some reason
those details are not mentioned much in the Russian media.) On November 12,
NATO reported that Russian tanks had entered Ukraine. The Russian government
vehemently denied it, blaming NATO for being anti-Russian.
Malaysia Airlines Flight
MH17 was not downed by Russia or separatists. It was shot down by an air-to-air
missile fired by Ukraine or a NATO plane engaged in military exercises in
Ukraine at the time. The U.S. has the satellite imagery but is afraid of the
truth and chooses not to share it with the world.
Ukraine was destabilized
by the U.S., which spent $5 billion on this project. As proof, TV news showed a
video of Senator John McCain giving a speech to antigovernment protesters in
Kiev's Maidan Square. It was followed by a video of Vice President Joe Biden
visiting Ukraine during the tumult. I wasn't sure what his role was, but it was
implied that he had something to do with the unrest.
Speaking of Joe Biden, I
learned that his son just joined the board of Ukraine's largest natural gas
company, which will benefit significantly from a destabilized Ukraine.
Ukraine is a zoo of a
country, deeply corrupt and overrun by Russian-haters and neo-Nazis
(Banderovtsi – Ukrainian nationalists who were responsible for killing Russians
and Jews during World War II).
Candidates for the
recent parliamentary election in Ukraine included Darth Vader (not kidding), as
well as a gay ex-prostitute who claims to be a working man's man but lives in a
multimillion-dollar mansion.
I have to confess, it is
hard not to develop a lot of self-doubt about your previously held views when
you watch Russian TV for a week. But then you have to remind yourself that
Putin's Russia doesn't have a free press. The free press that briefly existed
after the Soviet Union collapsed is gone – Putin killed it. The government
controls most TV channels, radio and newspapers. What Russians see on TV, read
in print and listen to on the radio is direct propaganda from the Kremlin.
Before I go further,
let's visit the definition of propaganda with the help of the Oxford English
Dictionary: "The systematic dissemination of information, especially in a
biased or misleading way, in order to promote a political cause or point of
view."
I always thought of the
Internet as an unstoppable democratic force that would always let the truth
slip out through the cracks in even the most determined wall of propaganda. I
was wrong.
After watching Russian TV, you would not want to read the Western
press, because you'd be convinced it was lying. More important, Russian TV is
so potent that you would not even want to watch anything else, because you
would be convinced that you were in possession of indisputable facts.
Russian's propaganda
works by forcing your right brain (the emotional one) to overpower your left
brain (the logical one), while clogging all your logical filters. Here is an
example: Russian TV shows footage of schools in eastern Ukraine bombed by the
Ukrainian army. Anyone's heart would bleed, seeing these gruesome images. It is
impossible not to feel hatred toward people who would perpetrate such an atrocity
on their own population. It was explained to viewers that the Ukrainian army
continued its offensive despite a cease-fire agreement.
Of course if you watched
Ukrainian TV, you would have seen similar images of death and despair on the
other side. In fact, if you read Ukrainian newspapers, you will learn that the
Ukrainian army is fighting a well-armed army, not rebels with Molotovs and
handguns, but an organized force fully armed by the Russian army.
What viewers were not
shown was that the cease-fire had been broken before the fighting resumed. The
fact that Putin helped to instigate this war was never mentioned. Facts are not
something Russian TV is concerned about. As emotional images and a lot of
disinformation pump up your right brain, it overpowers the left, which
capitulates and stops questioning the information presented.
What I also learned is
that you don't have to lie to lie. Let me give you an example. I could not
figure out how the Russian media came up with the $5 billion that "America
spent destabilizing Ukraine." But then I found a video of a U.S. undersecretary of State giving an
8.5-minute speech; at the 7.5-minute mark, she said, "Since Ukrainian
independence in 1991 … [the U.S. has] invested more than $5 billion to help
Ukraine." The $5 billion figure was correct.
However, it was not given to
Ukraine in three months to destabilize a democratically elected, corrupt
pro-Russian government but over the course of 23 years. Yes, you don't have to lie
to lie; you just have to omit important facts – something Russian TV is very
good at.
Another example of a
right-brain attack on the left brain is "the rise of neo-Nazism in
Ukraine." Most lies are built around kernels of truth, and this one is no
different. Ukraine was home to the Banderovtsi, Ukrainian nationalists who were
responsible for killing tens of thousands of Jews and Russians during World War
II.
Putin justified the
invasion of Crimea by claiming that he was protecting the Russian population
from neo-Nazis. Russian TV creates the impression that the whole of Ukraine is
overrun by Nazis. As my father puts it, "Ukrainians who lived side by side
with Russians did not just become Nazis overnight."
Though there may be some
neo-Nazis in Ukraine, the current government is liberal and pro-Western.
Svoboda – the party whose members are known for their neo-Nazi and anti-Semitic
rhetoric – did not get even 5 percent of the votes in the October election, the
minimum needed to gain a significant presence in parliament. Meanwhile the TV
goes on showing images of Nazis killing Russians and Jews during World War II
and drawing parallels between Nazi Germany and Ukraine today.
What also makes things
more difficult in Russia is that, unlike Americans, who by default don't trust
their politicians – yes, even their presidents – Russians still have the
czarist mentality that idolizes its leaders. Stalin was able to cultivate this
to an enormous degree – most Russians thought of him as a father figure. My
father was 20 when Stalin died in 1953, and he told me that he, like everyone
around him, cried.
I keep thinking about
what Lord Acton said: "Power corrupts, and absolute power corrupts
absolutely." The Putin we scorn today was not always like this; he did a
lot of good things during his first term. The two that stand out the most are
getting rid of the organized crime that was killing Russia and instituting a
pro-business flat tax system. The amount of power Russians give their
presidents, however, will, with time, change the blood flow to anyone's head.
Come to think of it, even Mother Teresa would not have stood a chance in
Russia.
A few weeks ago Putin
turned 62, and thousands of people took to the streets to celebrate his
birthday. (Most Americans, including this one, don't even know the month of
Barack Obama's birthday.)
In my misspent youth, I
took a marketing class at the University of Colorado. I remember very little
from that class except this: For your message to be remembered, a consumer has
to hear it at least six times. Putin's propaganda folks must have taken the
same class, because Russian citizens get to hear how great their president is
at least six times a day.
We Americans look at
Putin and see an evil KGB guy who roams around the country without a shirt on.
Russians are shown a very different picture. They see a hard-working president
who cares deeply about them. Every news program dedicates at least one fifth of
its airtime to showcasing Putin's greatness, not in your face but in subtle
ways. A typical clip would have him meeting with a cabinet minister. The
minister would give his report, and Putin, looking very serious indeed, would
lecture the minister on what needed to be done. Putin is always candid, direct
and tough with his ministers.
I've listened to a few
of Putin's speeches, and I have to admit that his oratory skills are excellent,
of a J.F.K. or Reagan caliber. He doesn't give a speech; he talks. His language
is accessible and full of zingers. He is very calm and logical.
Russians look at the
Putin presidency and ask themselves a very pragmatic question: Am I better off
now, with him, than I was before he came into power? For most the answer is
yes.
What most Russians don't see is that oil prices over the past 14 years
went from $14 to more than $100 a barrel. They are completely responsible for
the revival of Russia's one-trick petrochemical economy. In other words, they
should consider why their economy has done better the past decade, and why it
may not do as well going forward. Unless Putin was the one who jump-started
China's insatiable demand for oil and other commodities that drove prices
higher, he has had very little to do with Russia's recent "prosperity."
I place prosperity in
quotes because if you take oil and gas riches away from Russia (lower prices
can do that with ease), it is in a worse place today than it was 14 years ago.
High oil prices have ruined Russia. They have driven its currency up, making
its other products less competitive in international markets. Also, capital
gravitates toward higher returns; thus oil has sucked capital from other
industries, hollowing out the economy. After the Soviet Union collapsed, Russia
had a chance to broaden its economy; it had one of the most educated workforces
in the world. Sadly, it squandered that opportunity. Name one noncommodity
product that is exported from Russia. There aren't many; I can think only of
vodka and military equipment.
But most Russians don't
look at things that way. For most of them, their lives are better now: No more
lines for toilet paper, and the stores are full of food. Their personal
liberties (such as freedom of speech and freedom of the press) have been taken
away from them, but many have so much trust in their president that they don't
mind, whereas others are simply complacent.
Today we see three
factors that influence oil prices and are working against Russia: Supply is
going up with U.S. shale drilling; demand growth will likely decline if the
Chinese economy continues to cool; and the dollar is getting stronger, not
because the U.S. doing great but just because the rest of the world is doing
worse. If oil prices continue to decline, this will expose the true state of
the Russian economy.
When I visited Russia in
2008, I sensed an anti-American sentiment. NATO – which in Russia is perceived
as a predominantly American entity – had expanded too close to Russian borders.
Georgia tried to join NATO, but Russia put a quick end to that. Russians felt
they extended a friendly hand to the U.S. after 9/11, but in response America
was arraying missiles around its borders. (The U.S. says they are defensive,
not offensive; Russians don't see the distinction. They are probably right.)
The true colors of this
new cold war came to light recently. In August 2008, according to Henry
Paulson, the U.S. Treasury secretary at the time, "top level" Russian
officials approached the Chinese during the Olympics in Beijing and proposed "that
together they might sell big chunks of their GSE (Fannie Mae and Freddie Mac)
holdings to force the U.S. to use its emergency authorities to prop up these
companies."
This incident took place
just weeks before the collapse of Lehman Brothers. The U.S. economy was inches
from revisiting the Stone Age. The proposed Russian-Chinese maneuver could have
made such an outcome more likely. The Federal Reserve would have had to step in
and buy Fannie's and Freddie's debt, and the dollar would have taken a dive,
worsening the plunge in the U.S. economy. Our friend Putin wanted to bring the
U.S. economy down without firing a single shot, just as he annexed Crimea from
Ukraine.
Today anti-American
sentiment is much greater in Russia. European sanctions are seen as entirely
unjustified. Here is why: Crimea had a "democratic referendum," and
the Ukrainian conflict is believed to be not of Russia's doing but rather an
American attempt to destabilize Russia and bring Ukraine into NATO. In his
annual speech at the Valdai conference last month, Putin said America had
pushed an unwilling Europe into imposing sanctions on Russia.
America is
perceived as an imperialistic bully that, because of its economic and military
power, puts its own self-interest above everyone else's, and international law.
Putin uses
anti-Americanism as a shiny object to detract attention from the weak Russian
economy and other internal problems. In the short run, sanctions provide a
convenient excuse for the weakening Russian economy and declining ruble. They
have boosted Putin's popularity (at least so far). As the Russian economy gets
worse, anti-American sentiment will only rise.
This new version of the
cold war has little in common with the one I grew up in. There are no
ideological differences, and there is no arms race (at least not yet, and let's
be honest: Today neither country can afford one, especially Russia). At the
core of it, we don't like what Russia is doing to its neighbors, and Russia
doesn't like what we do to the rest of the (non-EU) world.
The criticisms of U.S.
foreign policy voiced by Putin in his latest Valdai speech are shared by many
Americans: The U.S. is culpable in the unresolved, open-ended Afghanistan
adventure; the Iraq War; the almost-bombing of Syria, which may have destabilized
the region further; and the creation of the Islamic State, which is in large
part a by-product of all of the above. Yet Putin's abominable Ukrainian
excursion and the thousands of lives lost were never mentioned.
But there is also
something less tangible that is influencing Russia's behavior: a bruised ego.
During the good old Soviet Union days, Russia was a superpower. It mattered.
When it spoke, the world listened. The Russian people had a great sense of
pride in their Rodina (Mother Russia). Today, if Russia did not have nuclear
weapons, we'd pay much less attention to it than we do. Pick a developing
country without oil whose president you can name. (Okay, we Americans can't
name the president of almost any other country, but you get the point.)
Anti-Americanism and
Putin's popularity will both rise as the Russian economy weakens. For instance,
Putin took his own people hostage when he imposed sanctions on imports of
European food. The impact on Europe will not be significant (the Russian
economy is not very large in comparison to the European Union), but Russia is
very dependent on these imports. In the U.S. consumers spend about 13 percent
of their earnings on food, but in Russia that number is almost three times
larger. Therefore, food inflation hurts Russians much more. Yet as food
inflation spiked, so did Putin's popularity and anti-Americanism. Even
declining oil prices will be explained as a anti-Russian manipulation by the
U.S.
Unfortunately, the only
thing Russia has going for it today is its nuclear weapons. Russia has started
to remind us of its military recently. According to NATO, the alliance
"has conducted over 100 intercepts of Russian aircraft in 2014 to date,
which is about three times more than were conducted in 2013."
Every article needs a
conclusion, but this one doesn't have one. I am not sure what this new cold war
means for the world. Will Russia start invading other neighboring countries?
Will it test NATO resolve by invading Baltic countries that are part of NATO? I
don't know. Economic instability will eventually lead to political crises. We
have plenty of economic instability going on around the world.
I'll leave you with this
thought: On March 7, 1936, the German army violated the Treaty of Versailles
and entered into the Rhineland. Here is what Hitler later said:
"The forty-eight
hours after the march into the Rhineland were the most nerve-racking in my
life. If the French had then marched into the Rhineland, we would have had to
withdraw with our tails between our legs, for the military resources at our
disposal would have been wholly inadequate for even a moderate
resistance."
Those two days
determined what Germany would do next – build out its army and start World War
II.
Comparing Putin with
Hitler, as one of my Russian friends put it, is "absolutely
abominable" because it diminishes Hitler's atrocities and overstates by a
mile what Putin has accomplished to date. Yet it feels as if we are at a
Putin-of-1936 moment. Will he turn into a Putin of 1939 and invade other countries?
I don't know. But the events of the past nine months have shown Putin's
willingness to defy international law and seize the advantage on the ground,
betting – correctly so far – that the West won't call his bluff.
As Garry Kasparov put
it, while the West is playing chess, responding tactically to each turn of
events, Putin is playing high-stakes poker. We ignore Putin at our own peril.
Vitaliy Katsenelson, CFA, is Chief Investment Officer at
Investment Management Associates in Denver, Colo. To receive Vitaliy’s future
articles by email or read his articles, click here.
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