Market Thinking

making sense of the narrative

Slowly, then all at once

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The Hemmingway quote about the two ways to go bankrupt; “first slowly, then all at once” springs to mind when looking at the situation in Ukraine. The country has been falling apart slowly over the last seven years in the wake of the ‘color revolution’ in 2014 which led to the rapid re-absorption of Crimea by Russia and the civil war in the two breakaway republics of the Donbass. Over the last three months tensions have risen as Russia has continually talked about red lines to do with its security and asked for guarantees that Ukraine and the west were not willing to give. And so things have suddenly moved very fast and it looks like the western intelligence services did actually know what was going to happen. 22/02/2022 will go down as the day that the west lost its (recent) monopoly on Regime Change’

We were wrong. We thought that Russia would not invade Ukraine. “Trust but verify” was the mantra from former US President Ronald Reagan with respect to Russia and until the last few days this has been the case in reverse; US government sources have repeatedly claimed Russia was going to invade Ukraine but refused to provide the means through which any independent observers might verify that statement. Given recent history of unsubstantiated claims against Russia, we, along with the majority of short-term traders, were on the sceptical side, albeit holding long positions in energy related stocks. Meanwhile, the medium-term asset allocators (particularly in the US) were heavily buying put options just in case and the long term investors were taking a view that it was “too late to sell and too early to buy”.

The last 48 hours has changed all this as President Putin has made his move. While on the one hand this looks like the Boy Who Cried Wolf (US Intelligence) was finally proved right, we should still be extremely careful about any subsequent analysis of the situation. If we want to understand what might happen next, it is probably better to listen to what the main actor (Putin) is saying rather than any armchair general from the US or UK. In a speech on the day he signed papers recognising the breakaway republics, Putin made a number of key points about Ukraine, in particular that it was a USSR creation and now a ‘non country’ run by foreign powers rather than the Ukrainian people. He detailed the events of 2014 as a US backed Maidan coup (euphemistically referred to in the west as a Color Revolution) that has led to a government that persecutes ethnic Russians and maintained that Russia has the right to protect its security (something he has been saying consistently for months) and that the fact that Ukraine announced that it would be building nuclear weapons using the Soviet era uranium stockpiles may well have been the final straw. Finally, he acknowledged the sovereignty of the two breakaway republics in the Eastern region known as the Donbass and announced that Russia would be sending in peacekeeping troops, similar to the moves following the snap referendum in Crimea in 2014.  It is worth noting that the Donbass declared independence in 2014 as well, but  Russia did not recognise them – until now. It now means that the Ukrainian troops inside the original borders of the two breakaway republics are deemed to be ‘invading’ and the Russian troops are now moving to encircle them.

Two wrongs do not of course make a right, but Putin has consistently used techniques already used by the west – Bill Clinton for example created the so-called ‘Kosovo Doctrine’ whereby all that was needed was for a local declaration of independence and a referendum, which of course is exactly what happened in Crimea and now the Donbass. Meanwhile, the fact of a Nuclear armed Ukraine controlled by western governments and Oligarchs combined with an ever encroaching NATO  is far more of an existential threat to Russia than Saddam’s non existent WMDs ever were to the US, or for that matter events in Assad’s Syria or Gadaffi’s Libya  – where, remember, the west also sent in ‘Peacekeepers’. Indeed, in recent months, Putin has repeatedly mentioned Russian security as a central issue and the reason for his troop build up, but the west has repeatedly refused to engage, so the best guess now is that he is moving quickly to ensure this militarily.

In this sense there are echoes of the events in Georgia on 08/08/08  (clearly Putin likes palindromes) where attempts by Georgia to join NATO led Russia to recognise the breakaway republics of Abkhazia and South Ossetia and an incursion by Georgia in the latter was met with rapid response and move into Georgia then withdrawal, not occupation. It is of course difficult to use market moves around the time of the 5 day Russo-Georgian war as a template as the Lehman Crisis happened only a month  later, but it is perhaps worth noting that July 2008 was the all time high for the Euro against the $ and that under most scenarios at the moment the main loser (apart from Ukraine itself) is likely to be Europe. Also worth mentioning that the meeting with Xi last month almost certainly agreed not to move during the Beijing Winter Olympics (the Georgia fight began on the opening day of the Beijing Summer Olympics of course, while the Maidan Coup took place during the Sochi Winter Olympics).

Regime Change in Kiev and a possible breakup of the country

What next?

Now we suspect that the other aspect of western intelligence reports – a move to install a more ‘neutral’ government  – is also underway, with the prospect of Russian troops heading to Kiev with (apparently) a list of war criminals likely to lead to a rapid dispersal of oligarchs and military leaders, as well as politicians, long before they get there. Even here Putin is copying the US with its ‘playing cards‘ of members of Iraq’s regime in 2003. Putin talks about the need to de-weaponise and de-Nazifi the country (it’s an unfortunate truth that the concept of my enemy’s enemy is my friend has led to some unpleasant bedfellows in Ukraine as well as, obviously, in other areas in the Middle east), so this will take more than 5 days, but it is nevertheless credible that he does not want to occupy the country. He wants it as a buffer zone against NATO.

The importance of the Black Sea

If we look at the map, we can see the Russian speaking  regions shaded in red, with the pink areas where both languages are spoken being the regions added to Ukraine in the 1920s in the Lenin era (Crimea was added under Khrushchev in the 1950s) and thus most likely to be of longer term ‘Russian interest’ – not least because of the strategic importance of the Black Sea. It is worth noting here that the Maidan Coup of 2014 and the installation of a ‘pro NATO regime ‘ had the immediate impact of depriving Russia of its only ‘warm water’ port at the very time that it was supporting Assad in Syria, which is almost certainly why Putin used the ‘Kosovo protocol’ process of a ‘democratic referendum and subsequent deployment of peace-keeping troops’ to rapidly re-take the Crimea. Meanwhile, since late 2020, while the world was occupied with Covid, NATO has been advancing plans to build naval bases in and around Odessa as part of its long term pressure on Russia. It is difficult to see Putin allowing those to stay.

The other important point for global markets is that between them Russia and Ukraine account for 25% of global grain exports and that goes almost entirely through the Black Sea – much of it to the Middle East. A Russia controlled Black Sea region would leave ‘Rump Ukraine’ as landlocked. As previously noted, this would not be good for the US Big Ag traders like Archer Daniels and Bunge, something we will look at in more detail in another post.

Incidentally, while the Chinese are likely to be cautious about endorsing the concept of breakaway republics, they are nevertheless at least tacitly supporting the Russians, as illustrated by a comment in China’s official newspaper the day before yesterday (the 50th anniversary of Nixon’s trip to Peking), “50 years ago, the US united with China against the Soviet Union, but today, it is impossible for the US to unite anyone of China or Russia against the other.”

It looks therefore like we have truly entered a new phase in Geo Politics, Russia has established a siege economy that is relatively impervious to sanction and has now moved to protect what it sees as its own national security interests using a combination of tactics previously used exclusively by the West as part of their ‘Rules based international order; it has recognised breakaway republics (using the Kosovo protocol) and then sent in ‘Peacekeeping troops’ in the same manner as the West went into Libya. It has used aerial attack and a degree of ‘shock and awe’ in the manner of the first Gulf War and it intends to de-militarise Ukraine in the same way the US sought to de-militarise the Taliban in Afghanistan. What’s sauce for the goose, is sauce for the gander as they say. It’s a horrible, horrible situation for the people of Ukraine, but it also hopefully marks an end to the endless, unchecked, regime changing destabilisation, election interference and NATO expansion that has characterised the ‘post’ Cold War era. It is to be hoped that the, relatively simple, demands that Putin previously had – no joining NATO and no weapons on Russia’s borders as well as Kiev respecting the previous Minsk accords with respect to the Donbass can now be the basis for some common sense negotiations. Whatever else, with 22/02/2022, it is clear that the new, multi-polar, world has truly arrived.

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3 Replies to “Slowly, then all at once”

  • Or…… In amongst the competing conspiracy theories of both the Left and Right we may have a much simpler explanation. The end game of the narcissist – Putin has to invade Ukraine. It is the only way he can feed his deep seated and fatal narcissism. He has run out of things to justify his inherent superiority. This is not a State action. It’s just the end game of a deeply sick and inadequate human being. Tragic but fits the structure of the narrative. Trump sees it and has joined in. Because he’s one too. Both gave all the personality traits AND all the physical tells too. Depressing but all too familiar in history.

    • maybe, but I would like the west to have at least acknowledged his security concerns a few months ago…the neocon armchair warriors like Nuland and Kagan are clearly narcissists too

      • Yes, spot on.
        We have had “monoculture” solutions and environments across the market and political spectrum for decades. Dollar hegemony being the defining one of our investing lives. The West won’t acknowledge the security concerns, because it is living in its own monoculture. This lack of diversity breeds the narcissist elements as they don’t thrive in amongst diversity….. Throw a brick at the moment……… and you will likely hit a narcissist.We can only suspect that Putin / Ukraine is the climax? Tragic for ordinary Ukrainians. Let’s hope it isn’t for the rest of us.
        Then we will get the “all change”.
        If it is not too insensitive to speculate……that should suit your investment strategy.

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