The crisis in Ukraine is
serious, and Putin’s renewed confidence will affect our future in profound
ways. Let’s discuss the most important ones.
Consider this an
appetizer—I’ll have much more to say in the upcoming Casey Report.
Political Brinksmanship
Putin’s takeover of
Crimea was predictable. The US’s strategy of encircling Russia finally
compelled him to take action to maintain Russia’s long-standing control over
and access to its only warm-water port. I think this confrontation between
Russia and Western powers is the beginning of a new Cold War.
Russia made a power move, and the US responded by slapping Russia on the
wrist with a few minor sanctions—a response so meek that Russia need not even
respond.
There’s debate about
whether Putin will now move against other regions. I think he will, and he’ll
start by making Crimea a showplace to advance the image of Russian takeover.
Because Putin succeeded so easily at asserting his position, he may continue
doing so until he meets resistance. I don’t expect NATO or the EU to do much
since Europe is dependent on Russian energy. So the question is, “Who’s
next?”
We got one clue
yesterday, when Reuters reported that Russia signaled concern over Estonia’s
treatment of its large ethnic Russian minority. Russian officials compared
the Estonian government’s language policy to certain Ukrainian calls to
prevent the use of Russian in that country.
China has offered mild
support for Russia’s actions in Crimea, announcing that it will deal with
Crimea after the vote. China also abstained from the US-sponsored UN
condemnation of the Crimea vote. This suggests Russia and China may be
forming closer ties.
All of these recent
events follow on the heels of Putin’s first win in Syria, when
he was able to dissuade the Obama administration from turning the country
into a bomb crater. Putin feels he just won another important round.
Energy Drives Many Political Decisions
Energy resources are not in short supply, but
distribution of those resources is complex. Russia’s recovery is due in large
part to its energy resources, as it ranks with Saudi Arabia and the US as one
of the top three energy producers in the world. Europe gets 30% of its
natural gas from Russia, and most of it comes via pipelines that cross the
Ukraine. As a result, Europe has to toe the line with Russia for fear of
seeing its energy supply severely curtailed.
Unfortunately for Europe,
the US exporting its excess natural gas via LNG tankers is still a dream and
several years away at best. Even then, shipping LNG across the ocean could
very well prove to be uneconomical. In other words, Europe needs Russia’s
energy.
Financial Wars Could Be Dangerous
Kremlin aide Sergei
Glazyev announced that if the US were to impose sanctions on Russia, Moscow
may drop the dollar as a reserve currency and refuse to pay off any loans to
US banks. He went on to say that Moscow might recommend that all holders of
US Treasuries sell them if Washington froze the US accounts of Russian
businesses and individuals. He added, “An attempt to announce sanctions would
end in a crash for the financial system of the United States, which would
cause the end of the domination of the United States in the global financial
system.”
Them’s fightin’ words.
The discussion of financial warfare brings up some basic questions about
the petrodollar, which was given special status when
Kissinger convinced the Saudis and others to accept only US dollars for oil.
Anything that calls the petrodollar arrangement into question could introduce
dramatic economic upheaval.
The worst case-scenario
would be a coordinated bond sell-off by China and Russia. The effects of such
action would be earth shattering. So Russia isn’t bluffing by pointing out
that the US could be shooting itself in the foot with financial attacks on a
big oil exporter.
So far, US and European
sanctions have been so limited that derision was the only response from
Russian commentators. But as I write, Obama just issued new sanctions,
including ones on Bank Rossiya (the 5th largest in Russia), and 20
more individuals. As with any conflict, the risk is that responses may keep
escalating until they get out of hand.
Some Data to Gauge the Landscape for Russia
Russians like Putin, as a
survey by the Russian Public Opinion Research Center reported on March 16.
His general approval rating is high, as is the approval rating of his actions
in Crimea.
The fear of an unknown
outcome in Crimea has weighed on the Russian ruble, which in the past few
days has managed a small recovery. That suggests the short-term resolution in
Crimea restored a bit of confidence in the Ruble. Going forward, the path of
the ruble will depend on confidence in Russian policies.
Even more interesting is
the Russian stock market’s steep decline of about 30%... followed by its
retracement of about a third of that collapse.
In conclusion, we’ve just
witnessed some major shifts in the balance of power on the Grand Chessboard
of international politics. So far, Russia looks to have emerged stronger,
while the US seems weaker, and its strategy looks flawed. But this story is far from over.
I have much more to say about potential investment opportunities
around this crisis, which I look forward to presenting in the upcoming April
issue of the Casey Report.
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