Inflation and War in the Ukraine

• 25-Feb-22
• admin

Photo by Matti from Pexels

 

Inflation continues to increase around the world, except in China, and financial markets are feeling the pressure of likely interest rate hikes, except in China…

 

And interest rates in the US, which will lead rate hikes around the western world, especially in Europe, have not actually been increased by Fed policy action yet.   Bond markets have already been declining, almost fully discounting at least a 1 percent increase in short term interest rates, even before it happens.  In other words, market participants in global financial markets are so sure that short term interest rates that are impinged by Fed policy will skyrocket in the months ahead that they are already putting their money where their mouths are.

 

And then, the War in Ukraine began last week…

 

I don’t mean tanks are rolling, fighter jets are screaming across the sky or missiles are flying.  

Granted, there are a few mortar shells lobbed by both sides facing down each other in the Donbas region, but hey, that’s been going on for years.  It is nothing new.   So no, no hostilities yet, west of the River Dneiper.

 

What I mean is that there is a propaganda war being fought there in earnest.   When the claims and counterclaims started to fly out of the mouths of the politicians on every side from last weekend, we can almost believe that a war has been started.   We were even given a specific date – the 16th of Feb – in which 150,00 heavily armed Russian troops would surely cross the border and capture Kiev (or Kviv), the Ukrainian capital.   That didn’t happen.   Now we are told by the same folks who said in May 2021 that the US-backed Afghan army was strong enough to take on the Taliban for at least a year, but instead we saw it all crumble away in just five weeks when US troops pulled out frantically in July.   And we are supposed to believe these same folks?  

 

Granted, spy satellites in the sky flying at high speeds that can circumnavigate the planet from a zillion kilometers away can count Russian troops down to their battle groups, and tell us when each of these guys is pissing or shitting.   They can tell you that tanks which drive around in the mud on exercise, are heading to Kiev when Liz Truss, UK Foreign Minister, could not even tell if Kiev is in the same country as Rostov or Voronezh.       

 

If a UK Foreign Minister, the number two country trying to speak on behalf of the

Ukrainians, got her geography lessons re-taught by her opposite number, Sergei Lavarov, Russian Foreign Minister, how can the rest of us in the world believe the dudes predicting an outcome in Afghanistan will get it right in the Ukraine?   Come on, tanks churning mud in either direction, tell us nothing about their intention.   

 

There are even some over-enthusiastic Western media reports that Russian missile carriers were raising their firing tubes from horizontal to vertical positions as a sign of final war preparations.   And how do we know that these threatening missiles were not lowered back to horizontal (ie peaceful conditions) five minutes later?    

 

We can therefore discount the satellites in the skies.  At least for the moment.  All they can tell us is that there are about 15 percent of Russia’s military in the Western part of their own country facing Nato countries, instead of being in the rest of the country, like Siberia, which is completely free from military threat.   150,000 troops, 15% of the total of 1 million soldiers in the Russian military.   Not 50 percent.   Is that really a cogent indication of war preparations against Nato or invading Ukraine?   Not yet, in my book.

 

And by the way, don’t read too much into those TV images of tanks moving around menacingly.  These are all file photos/videos.   The Russian soldiers, for all we know, may be having barbeques behind the tanks, drinking vodka and laughing at our expense.  My own reading is that we know nothing, while watching this rather entertaining Hollywood war movie on CNN or other news media wishing to increase sales on yet another “war story”.

 

While this is happening, the stock markets in the US continue to slide.   The Nasdaq is now down about 15 percent from their peak in Dec 2021.   All technology stocks are down.  The most speculative of such technology stocks, euphemistically called “growth stocks” held in an ETF by this supernova of a fund manager, Katy Woods, is down 60 percent from its high, losing, in other words, all the gains in the portfolio since April 2020 when the bull market in tech stocks began.    Hold a fund for two years, and your gain is net zero.   Brilliant.   All the billionaires who saw their net worth gain by trillions, have basically given it all back.  

 

Bond yields which were rising sharply in the week before, with the ten year reaching 2 percent, are also topping out.  Financial bubbles, not artillery shells, are all that are bursting outside of the Donbas…  

 

So we know nothing about when a war in Ukraine will actually start.  President Biden is not more informed than any of us.  For all the imagery captured by his satellites, the only thing that is important is what Putin thinks and when, or if, he will act.   Neither we, nor the President of the United States, know that.  

 

But ignorance is never going to deter investors from acting, whether buying or selling.   Herds of fools still behave in the same way, as in days before satellites fly in the skies.

 

The recent performance of the US stock market speaks volume of this investor behaviour.   The market is a reflection of how investors think will be the most likely economic scenario that will prevail when inflation rises and a war in Ukraine ensues.  

 

The key concern is a rise in crude oil prices.   

 

Right now, from the bottom of the cycle at the worst point in the pandemic recession, oil prices were at about $30-something per barrel, with one futures contract hitting a fleetingly temporary negative price.   Since then, the oil price has reached nearly US$100.   This is a very serious bout of energy inflation.   And this energy inflation is behind all manufacturing costs, as well as personal expenditures in all forms of travel including daily commutes.   If it happens, it will over-shadow all other causes of inflation, including the real demand coming back on account of the lifting of pandemic lockdowns, real wages rising, and supply chain blockages, even as Canadian police use guns, pepper spray and so on, to dispense crowds and arrest truckers protesting in Ottawa to end one particular supply chain blockage.   (I thought that this congenial country was totally aggrieved when the same crowd control tactics were used by Hong Kong police in 2019 and now they are doing exactly the same thing…sigh, such are these times of double talk!)    

 

If indeed there is an invasion of Ukraine by Putin, oil prices will jump above $100 per barrel.  How high it will go is anybody’s guess, but it will be significant.  The global economy will tank on the basis of energy inflation.  As will risk assets that are dependent on low inflation, low interest rates that will in turn drive rising earnings, which was the consensus scenario before 2022 began.   Risk assets will be pummelled.  

 

If Russian tanks cross the Ukrainian border, we will revisit a scenario of rising inflation and a slowing economy.   It will be the worst of all possible economic scenarios.        

 

In other words, even as we are yet to see that a Russian invasion is inevitable, that Putin has already “decided” in the words of President Biden, and that such would happen in the next “few days”, the outcome of such a decision by Mr Putin will surely adversely impact the world economy and financial assets.  In particular, we think that :

 

1. Stocks, especially those that are dependent on quick gains in earnings, like tech stocks and small caps, will collapse.   But given that they have already come down by 13.5% from the peak if measured by the Nasdaq index, I would expect them to drop further to -20 percent.   After that, strong support will start to appear around the -20 percent level.  Should it drop further to -25%, it would be time to buy aggressively.   However, on highly speculative darling stocks of the pandemic era, it’s still not too late to get out because some will go to zero.
2. Stocks like the DIA ETF (tracking the Dow Jones Industrial Index), based on less vulnerable companies in a stagflation scenario, would be a less risky investment on the outbreak of hostilities, should that happen.  Crashes are good when you are not too heavily invested.  But there is a good chance indices like the DIA will just struggle sideways for a while because the entire Biden program based on Build Back Better stimuli will crash, as new stimulus packages are not receiving support from his political enemies and even domestic allies.  Forget about the much-vaunted infrastructure programs outside the US that would match China’s Belt and Road Initiatives, as we have always doubted would ever get funded.  
3. I am not a gold bug, and should the metal continue its recent minor rally, will not shoot to the stars.  Not much upside potential at current levels but also not much risk.  Hohum.
4. Bonds may have gone down too far, too fast.   If you fear inflation, the interest rate hikes expected from the Fed may be delayed if a European war breaks out.  Stay on the side-lines.
5. Crypto currencies are likely to crash to near US$20,000 to US$25,000, basis bitcoin.  Every other crypto will follow.   This is an asset class that has no real use, and grew from below $10,000 to a high of $65,000 on the basis of abundant liquidity during pandemic paralysis.  When that liquidity ends and supervised work-at-the-office economic activity resumes, what role will bitcoin and its 8,000 other crypto currencies play when mass speculation ends?    In the long term, only those crypto currencies that can evolve into products that can support real world transactions will survive.  Bitcoin won’t.  It has been a tulip market for the last two years.  Actually, if you ask me, it’s too late to bail.  Don’t say I didn’t warn about this.   At this time of writing, Bitcoin is going lower, now at $38,000.
6. China’s markets are likely to be bottoming out, as its stocks and bonds absorb the new government policies on technology, common prosperity and the government controls on excessive leverage in the property market.   It is time to buy.
7. European markets?  Probably down until Putin has decided what to do with Zelensky (Ukraine’s President).  
8. The best anti-inflation and now safe-haven asset class remains real estate in the little red dots that are Asia’s top cities.

 

Everything really depends on the outlook for crude oil.

     

Given the investment outlook above, it would be nice to bet with the most accurate forecast of whether there would be war among the former members of the USSR.

 

In this regard, it would be appropriate to analyse what is really going on along the borders of the Ukraine.  Who the hell is bluffing the most, since all of them are bluffing.  

 

The fact is that the Ukrainian problem is not new.   Many people however don’t even know where Ukraine is.  Why is this threatening the stability of the global economy?  

 

As the matter of fact, it is not like there is a foreign country invading a neighbour.   These are two countries with the same ethnic and religious backgrounds, and which have been part of the same Russian Empire for hundreds of years.  If war breaks out, it would be internecine war, and in another sense, a civil war of sorts.  

 

During the early Stalinist era, Russia rule in Ukraine was not very popular.   So much so that when Hitler’s army conquered Ukraine and much of the Western Soviet Union, its people actually welcomed the arrival of the German troops to liberate them from Stalin.   At first.  But within months, the Nazis treated the Ukrainians so badly as an inferior race, that the latter went back to support the Russian government to kick the Nazis out.   That was the history of the WW2 on the Eastern Front.

 

Much of Ukraine during the German Ost Front campaign was bitterly fought over.  The current Donbas region was the ground over which the German army sent its best troops to capture Stalingrad on the Volga River.   When the Germans retreated back west, their “scorched earth” policies devastated much of Ukraine. 

 

In the Cold War of the 50’s and 60’s, Ukraine disappeared from international view.   They were all just Soviets and Commies, indistinguishable from the Russians.   

 

When the Iron Curtain fell in 1989, Ukraine soon became independent and emerged as a new nation.  Over the next thirty years, it tried to assert its new-found nationhood in spite of the fact that it lies next to the Russian bear, and would inevitably fall under the influence of the equivalent of Russia’s “Monroe Doctrine”.  

 

To this day, it is in the same situation.  Militarily, there is no possibility of the Ukrainian army being able to resist the much stronger Russia army.    Even the countries of Nato and the US know that, which is why nobody is willing to get into a fight with the Russians over Ukraine.  

 

A war, if and when it breaks out, will end in the Russians winning hands down.   Whether it is the Ukrainian army, Nato’s combined forces or the Americans’ mighty military, there is no possibility of any favourable outcome against the Russian army in this region, especially when the Russians have nearly as many nuclear weapons as all of Nato and the US combined.   Even a conventional war is impossible to contemplate, as nobody would forget the lessons of the Wehrmacht’s war on their Eastern Front.    So why is there even a consideration by the Ukrainians and the West that an unwinnable war might break out?   

 

In line with brutal reality, Biden has already said that he would not put American troops into Ukraine.   Neither would the two largest Nato members, Germany and France, commit to any military confrontation with Russia.   But nobody wants to look weak, and to appear like that would let the Russia Bear walk all over them.

 

If you ask me, everybody in this dilemma is caught up in their own propaganda and basically cannot back down without losing face and therefore power.   If we go back to recent developments in the Ukraine, there have been a number of problems all associated with Ukraine trying to break free from Russian influence and dominance.  The Ukrainians jolly well know they cannot do it on their own, and have tried to seek support from the West.   

 

And the Western countries have tried to dodge it, so as not to offend Putin.   The last straw was when there was talk of Ukraine seeking Nato membership.    The Ukrainians lost Crimea, one of its provinces, in 2014 without as much as a word of protest being uttered by Western countries although that  may have been considered a fait accompli since Crimea has long been regarded as Russian territory (remember the Crimea War in the mid 19th Century fought between the Russians and the British – made famous by Lord Tennyson, in his poem “The Charge of the Light Brigade”?).   

 

But non-interference could have been justified by the West because during the days of the USSR, the Crimea was part of that country, and when that broke up in 1989, the Russians “gave” it to Ukraine, not expecting that the Ukrainians would try to strike out on our own.  With a major naval base for the Russian navy in the Crimea on the Black Sea, the Russians lost no time to take it back once their economy was back on the mend.  

 

Then more recently, there are two eastern Ukraine provinces along the Dneiper River, in Donetsk and Luhansk, collectively known as the Donbas, which are trying to breakaway.  This region consists largely of ethnic Russians, which gave Putin the excuse to support them and provided military support of various kinds to fight the Ukrainian government.   

 

Over the ten or fifteen years when the Ukrainians tried to assert its independence from

Russia, and began losing ground, literally, in this effort, they tried to get the Europeans on

their side.   Obviously, none of the European powers are crazy enough to take on Russia right on its doorstep, and the effort to use a Nato approach, where an attack on one of its members would necessitate all to resist together an aggressor, is something the Ukrainians tried to engineer.   

 

No West European is stupid enough to get involved.  When asked for military aid, the Germans sent 8000 helmets.  I would have thought only the Brits are capable of such humour but the message to the Ukrainians seems clear – good luck, protect yourselves, but we ain’t going back to the Ukraine with soldiers in another thousand years.   The French are still the supreme diplomats they have always been and Macron, with a view on his own re-election in April, flew around to keep impossible talks from failing.   All he got was a chat at the end of a very long table, across from Putin, but it would appear that Putin wanted Macron to owe him one,  agreed to continue diplomacy, giving Macron the opportunity to claim success to his domestic audience.    

 

But the Americans want to support the Ukrainians in more cogent ways, and therein lies the problem leading to the current stand-off.  

 

The way I understand the situation is along the analysis above.   Russia has stated that its red lines include no eastward expansion of Nato, and that Ukraine cannot join Nato.   The Germans and the French are ready to agree but the Americans, who drive Nato, are not willing to make the no eastward expansion commitment.  Not because of Ukraine but they just cannot look weak by accepting this condition.  This is what is bringing these countries to the brink of war.  

 

The Western countries therefore are at odds over this.   

 

There is a minimalist effort at solidarity where France and Germany are talking like they will join the US to impose economic sanctions on Russia, including the limitation on Russian banks to use the Swift currency transaction system and a ban on Russian technology imports.  

 

Biden also tried to get the Germans to drop the NordStream 2 gas pipeline from Russia to

Germany, an important collaborative energy program between the two countries, but the new Chancellor Schultz apparently did not agree with his much-noticed “roll of his eyes” when asked about this at a recent Washington press conference.  That gas is important to the German economy.  

 

Both France and Germany are keeping silent on what they would do in the event of hostilities, but it is clear that nobody will send soldiers.  Not even the Americans will commit to military action.  Yes, they did send 8,000 paratroopers of the finest breed – the 82nd Airborne – to Poland and Romania, like a thousand kilometers away from the 150,000 troops in the armoured battalions of the Russian army.  The fight will be over before the airborne troops take off.  Answer to the Ukrainian cry for help clear enough? 

 

Putin knows all this.   He calling the bluff on the Western leaders because he has just come back from Beijing where he has intensify his collaboration with Chinese President Xi Jinping, who has stated in no uncertain terms that China will support Russia.   Putin is now not even concerned about economic sanctions, which don’t work in the first place and will work even less well when the Bear and the Dragon work together.    He is now talking tough.

 

At the same time, Biden needs to act tough, coming off a badly-botched Afghan withdrawal.   He is now all sound and fury, saying he is “convinced” that Russia will invade at any time, on the back of intelligence that the Russian military is doing this or that.   But satellites may be able to count the number of Russian solders and see the equipment they have in their hands but these satellites are in no position to tell if the soldiers have been ordered to move to take Kiev.   Those orders have apparently not yet been issued, and the only one who can give those orders, Putin, is keeping that timing close to his chest.  Satellites and the CIA tell us nothing about that.  

 

As it stands now, the world knows the positions of France, Germany (wisely doing nothing), and the US (unwisely only promising economic actions that won’t work).   There will certainly be no “war”.   There may however be a “conquest”.   (We should get the terminology right.)  Nobody knows how or when Putin will act.  Putin keeps denying he plans to invade, and Biden is trying hard to interpret if this is just a bluff.  

 

Biden is not in a good position.   Putin, a crafty old fox, can just do nothing, for the time being, and make Biden look wrong (again) and bad.   Biden cannot afford to get his intelligence all screwed up again, because if he does, he will become a lame duck just one year into his presidency.  Nothing will move on his domestic agenda.   He will lose the midterms.   To look like he has control of the situation, he is trying his best to scare Putin with economic sanctions, but since Putin believes that Xi has got his back, he is playing punk with Biden, without any risk of a direct military confrontation with the US.

 

Putin has got things where he wants them.  One American analyst, B Kean, describes the whole situation to be entirely due to Putin’s personality, in a thought-provoking article, on Feb 17, as follows:

 

“Putin Does Not Want War, But We Really Seem to Want to Give it To Him

When I first met Putin, he was a nobody but today he is Russia and this is something we just can’t seem to understand

Vladimir Putin is not playing. Faced with the very uncomplicated reality that he is an aging man whose physical powers are escaping him, as the ultimate alpha male he now needs to show Russians — and really doesn’t care about international opinion — that he is still fully in charge.

He needs to reinforce the idea that he still is Russia.

The following article is one of the most accurate analyses of Vladimir Putin in the English language. Before it is said that I may be a bit self-congratulating in my assessment of my Russia expertise, let me tell you briefly about my background.

After learning Russian in the US army, I served four years and then was commissioned in the Army Reserve. I earned an undergraduate degree and then a master’s in international affairs.

Having first traveled to the Soviet Union in 1990, I ended up moving over there for a couple of years to work in 1994 — those two years turned into twenty-six.

I have built companies, brands and raised hundreds of millions of dollars for those companies. One of my last successful projects before deciding it was time to leave was to create the Russia House in Davos, Switzerland.

The “house,” located just a few hundred yards from the Davos Congress Hall where the World Economic Forum holds its Annual Meeting, was the place of action for all thing Russia for four years while Putin refused to send official delegations to Davos. He was offended by the first round of sanctions against Russia, imposed after the 2014 invasion of Ukraine.

I speak Russian like a Russian and most importantly, I am culturally fluent in the mindset of the postSoviet Russian. Few foreigners, and I have met a lot of them over there, get Russia the way I do; I am not boasting, it’s a fact.

Here is what Putin wants and this is why we, once again, seem to be so eager to stumble into a crisis that need not happen.

Putin

When I first met Vladimir Putin, it was 1994. I was meeting with the then mayor of St. Petersburg, Anatoly Sobchak. Putin was at the meeting and sat quietly fidgeting in the chair next to his mentor.

When it was learned that I was there not for commercial reasons, but that the organization I had created was a non-governmental/non-profit one, the young assistant in charge of foreign business outreach for the city, just sort of slipped out of the room unnoticed. At first I thought he was going for a cup of tea but then after making a wide detour around the mayor’s desk, he stopped, looked back and offered up a warm smile and — I still don’t recall how— but vanished from the room.

“That was so odd,” I later recalled to my partner who was in the room with me. She laughed, “oh, that is Vladimir Putin. He is most likely KGB. I think he is foreign business outreach. They are always fake nice but very strange. Always need to be careful with them.”

The next time I really paid attention to him he was Russia’s president.

Here are the facts about Putin’s twenty-one years of ruling Russia: When he took office, Russia was bouncing from one economic crisis to the next. The mafia was everywhere and the oligarchs seemed to own everything. Corruption was the tax everyone paid when dealing with the post-Soviet bureaucracy as well as the police. When the police and mafia weren’t warring, they were allies. The average citizen suffered from all of this.

Enter Putin in 2000: By 2005, oil prices were breaking records, Russia was booming and the mafia had been broken. The oligarchs were in jail or cowered before Putin and corruption, while still in existence, had been greatly reduced. The police were reformed a little but never fully — and that was done on purpose, really.

In a nutshell, the presidency of Vladimir Putin has been one where not only a semblance of law and order were restored, but Russians were finally able to start living. Apartments were bought and homes built. The stores were filled with everything one could find in any western country. Salaries were on the rise and Russians were traveling all over the world.

It was heady times, indeed. Few had time to bother themselves about fewer personal freedoms than their counterparts in the west because they were too busy building lives, fortunes and families. Most Russians, regardless of how they feel about Putin, will almost hands down say that all of the material well-being was made possible, and Russia returned to greatness, thanks to him.

The Yeltsin years had been for many an extreme embarrassment and so Putin is, like or not, a savior for many.

Fact: Vladimir Putin is one of the richest people in the world. It is hard for us to understand but nothing happens without Putin’s knowledge. Millions and billions cannot be earned without his fair share being neatly packaged up and delivered to him. If a wealthy person gets too much power, they will be reminded of their place.

We might as well just consider Gazprom his personal piggy bank. It is the wealth of Russia that he uses to ensure undying loyalty to him. His hold on power is unrivaled in the world and the only thing that will remove him from being fully in power is death or sickness.

Fact: Russians may not like that he is the overseer of all of Russia’s wealth but they accept it, and even expect, that this is the case. Russians have never in their history known a different power-structure and so Putin’s “czar-like” position is, for many, completely normal. So normal, that even I accept it and can’t even imagine a different scenario. Russia is culturally not a country where democracy stands a chance of taking root.

Russians view state power as the ultimate form of power and so it always right and even when at fault, it just is what it is. Russians, before they become part of the governing power structure, might talk about wanting a more liberal-democratic form of government, but the moment any of them get power, they immediate begin taking their cut of the wealth. The justification being that everyone did before them and everyone is now, so only a fool would not be on the take. The head of this corporation, “Government Inc.”, is the boss and czar, Putin.

The Russian State

Russian fascism is a uniquely Russian creation. The leader of Russia does not want to empower the people of Russia with a sense of “uber alles” like supremacy; but he does want people to accept that the Russian State, as the all-powerful and even divine entity is supreme and uber alles. Given the unwieldiness, however, of Russia, it’s difficult to point to the supremacy of the state so Russians look to their leader.

Vladimir Putin is the Russian State. The state is Putin. Vladimir Putin is Russia.

As the sole embodiment of Russia, the moral dilemmas, the suffering, the sacrifices of the individual are completely and utterly irrelevant. If Putin declares that victory at the Sochi Olympics must be attained by any means necessary, then switching out urine samples through a hole in the wall is just a well-conceived path to making Putin, and all of Russia, look strong.

If blowing up an apartment building in Moscow or, say, a blowing up a plane returning from Egypt with tourists is necessary for making Putin, and Russia, look strong then the damage is merely collateral. Everything that is done is done to maintain the image of a strong, virile and ubiquitous Putin.

Ukraine: Consider now the issue with Ukraine. An older, and surely crankier, Vladimir Putin is beginning to feel his own physical strength waning. He is in his early seventies. The man, like many of us, but even more so probably, has been in extreme isolation since the very beginning of the epidemic.

Typical of authoritarian leaders like Putin, fear and paranoia drive many of their decisions. Putin, a former KGB agent, in days past would have happily used the coronavirus to have taken out his enemies. He surely thinks that maybe even some of his closest allies could be plotting such a demise for him and so he hides out in his billion-dollar palace in the city of Sochi on the Black Sea.

Alone, battling fits of paranoia, he looks out onto a shrinking horizon and sees a lot of nations that are inherently inimical to him, not Russia, but to his person, and as we have seen above: Russia is Putin and Putin is Russia. The “security crowding” of Russia that is being hinted at by Russian officials is actually the fear of an aging man whose physical power is on the wane.

Russia, the nation as separated from Putin, is stronger than ever for the most part. The economy is not in a shambles and the previous round of sanctions imposed after the first invasion of Ukraine actually worked to benefit Russia. A massive program of import substitution was implemented which greatly strengthened the foundation of the overall economy.

The same goes for the strategic look around the borders of Russia, very little has changed. Neither is Ukraine nor any Eastern European country seeking to “invade” or harm Russia. What is happening, however, is that other shit-head authoritarian leaders, like the Belarus leader Lukashenko, are less awed by virility of the ultimate, macho alpha male from Moscow.

Imagine how it must make the ultimate tough guy feel when kids all across the country express no fear let alone respect for this man who is still the most powerful president in the world. Putin must be outraged watching these tattooed kids at times actually fight back and beat up the vicious police sent in to crush peaceful protests. Each smack in the face of a police officer, is a smack in the face of Putin himself.

Putin’s End-of-Life Crisis

In a sense, Putin is suffering from not so much a mid-life crisis but an end-of-life crisis. Feeling his physical power slip away, and aware that others both domestically and internationally are imagining a world without him, Putin — Russia — is forced to push back. It’s like his last big hurrah. Remember, the greatest geopolitical tragedy of the 20th century, in his eyes, was the collapse of the Soviet Union.

Like a true authoritarian, and in ways that Trump also tried to mimic, his only real concerns are for how he is perceived domestically. Everything Putin does is for internal consumption. The school-yard posturing the world saw, an angry, Putin slouching during G7 and G20 meetings as if to show how truly meaningless those meetings were to him, has reached a limit. No one is impressed anymore by the bad boy and Putin senses this.

He can only go so far in his repression of the Russian people. They are a people notoriously capable of being abused endlessly by the powers-that-be, but once finally fed up they have an unique ability at collapsing things with flash-paper like speed. Putin knows this and fears that his hold on power could melt in a split second; and so, his only option is to not just talk tough with rest of the world but to once and for all be tough — something that is feared the most by authoritarian leaders.

Putin has created a crisis that he cannot back out of. He complains about how Russia is threatened by the alignment of nuclear missiles in Europe and NATO troops in Eastern Europe but really the only thing that has changed in the last twenty years is his age and his clarity that his time on this earth is nearing an end.

Limited as he may be by his own rhetoric, the cyber options he has are both unknown and potentially unlimited thanks the criminal incompetence, if not outright treason, of Trump’s tenure. The repercussions of the Solar Winds hack of December 2020, when Trump was working day and night at overturning the election, will only truly be felt when Putin flips the switch in the coming weeks and months.

There is very little the west can do to avoid a flare up of the tensions conceived by Moscow. While many around Putin probably don’t agree with his views that things are so precarious, there is nothing any of them will do to stop him; to convince him that he is wrong.

Bob Menendez is a Dummy

And so, when the misinformed, and clearly not-so-bright Senator Bob Menendez put forth the Defending Ukraine Sovereignty Act of 2022 which would personally sanction Putin in case of an invasion, the New Jersey Democrat did the worst thing that could be done. He took a stick and he began to beat on the wasp’s nest expecting that when it burst out would fly candy and other treats and not angry and incensed wasps.

Putin is an infuriated wasp and by threatening to embarrass him with sanctions, regardless of whether they are deserved or not, serves only one purpose: It embarrasses Russia and suddenly, all of those people in who were hating on Putin, now feel obligated to side with him lest they feel that they are turning their backs on their homeland.

The Biden administration was, and is, against the Menendez-sponsored act but we are in an age when too many dumb people are trying to hard to get extend their fifteen minutes of fame.

Putin might not have wanted war but we are bending over backwards to give it to him.”

 

From the above analysis, we probably have reached an understanding what each of the major personalities are faced with.   We are left with understanding what the last of them want.   This is Volodymyr Yelensky, President of Ukraine.   

His country is somewhere in the middle of the GDP per capita ranks among all countries in the world, around 120th and therefore it is not a rich country.  By comparison, Russia is much better off, at 74th in the world.   Russia is resource rich especially in oil and gas, and with crude oil at nearly $100 per bbl, can sustain a war much better than Ukraine can.   Ukraine is essentially an agricultural country, with its industry located largely in the Donbas, therefore unavailable to bolster its finances.  A military invasion by the Russians with a very sophisticated and modern armoured force across open steppes will mean a disastrous outcome for Yelensky.   Backed by China, Putin can also take on the US and Nato in an economic war of attrition.    

The military forces of Russia are also technologically advanced, matching the US and China.   It has a million men in arms, lots of nuclear bombs and the latest missile technology.   There will therefore not be a direct confrontation between the powers based on the doctrine of mutual destruction.  Nobody is in a position to take on the Russian bear in its backyard.  Ukraine will be conquered without a fight if that’s what Putin wants.   That’s just how it is.      

 

Yelensky must know it.   He is not just facing off Russia but also Belarus, who have integrated their military into Russia’s.   And Kiev is just a short distance from the Russian border.

 

So why is he courting seeming disaster?   I suppose again it is all domestic politics.  He became president in 2019, after a profession as a TV comedian (imagine that, same as Trump!) acting in TV dramas as president of the country and this made him popular.   So Ukrainians made him the real president, on the basis that he would fight corruption and make a stand against the Russians after “losing” the Crimea, the brief hostilities in 2015 and then the possibility of also losing the Donbas entirely soon.   Yelensky is a populist (Make Ukraine Great Again??)   He cannot do wiser things and survive in his presidency.    

 

Taking on Russia is likely to be an impossible task and this will end badly for him.   He will not be able to succeed given the geopolitical circumstances.

 

All in all, Ukraine will again fall under Russian rule, as in Czarist and USSR days.   Nobody can help them in avoiding that, given that it is an internecine struggle in the Bear’s sphere of influence.   Nobody is able or interested to get involved.  Not the Europeans, who have shown all the body language they don’t care.   And I really don’t think Biden is altruistic, but he is trying to find every opportunity to show leadership in global affairs, given that he and his weak foreign policy team, has failed in everything else so far.   

 

If and when the conquest of Ukraine happens, and Zelensky is made to sign the “no Nato membership” surrender document, the rules of engagement in all of Europe will change for the West.   A new era of Cold War will emerge.

 

If Mr Biden gets tied up in the Ukraine, he will have no bandwidth in the Indo Pacific to deal with China.  He is in over his head in a sophisticated game of Go, where the combined Russian and Chinese players are calling his bluff on every count and leaving him to head into a lame duck presidency for the rest of his term.    

 

Tighten your seat belts, folks, we are in for some volatility in the financial markets.   And the only guy calling the shots, for the moment, is Vladimir Putin.  

 

 

Wai Cheong

Investment Committee

The writer has been in financial services for more than forty years. He graduated with First Class Honours in Economics and Statistics, winning a prize in 1976 for being top student for the whole university in his year. He also holds an MBA with Honors from the University of Chicago. He is a Chartered Financial Analyst.