For those of you new to these posts, you can find out more about what I am up to and who I am on my website. Frederik Gieschen was kind enough to have me on his podcast to discuss Master, Minion. You can hear the episode here.
Gaze not too long into the abyss, lest the abyss gaze back at you.—Nietzsche.
Bullies are vicious but not often stupid. Typically, they select a weak target, which is why Putin’s Ukraine gambit is such a glaring miscalculation. The day-to-day headlines obscure a simple fact—the West could crush Putin. It’s fear of third and fourth-order consequences that keep US bombers on the tarmac.
When it comes to war, individual stories are more compelling than economic calculations and rubrics. Like the story of the banker who warned Kyiv ahead of the invasion and was then assassinated by corrupt Ukraine forces.1 Or the story that identified the specific Russians who pulled the trigger on the missiles that landed in Donbas, murdering women and children, a few dozen among thousands of murdered innocents.2
Yet conflict comes down to the will to fight, money, and logistics. In this case, a place with a bit less than $2 trillion of GDP (Russia), attacked a place with about $200 billion of GDP (Ukraine), which stirred to action countries with about $40 trillion of GDP (NATO). If the West uses these resources, Putin doesn’t stand a chance.
Second, Third and Fourth-Order Consequences
Recently I had Dmitry Bykov, a Russian writer of over 80 books and someone who survived a Kremlin poisoning attempt, on my podcast.
“Putin doesn’t understand he is surrounded by the future,” Bykov said.
The future will eventually crush Putin, but what future exactly? Does Russia become a nuclear-tipped Afghanistan, a terrorist, drug dealing haven? Maybe Putin is Gaddafi and civil war follows? Or perhaps this is Serbia and well-targeted NATO airstrikes end the carnage? The people with the power to decide have little experience making such judgments both because of their skill set (coalition building) and because such situations only come about rarely.
From Biden and Schultz’s standpoint, the cost of inaction is more Ukrainian deaths but no direct threat to German and US civilians. A globally warmed European winter means that even the energy bill wasn’t that bad. The West provides enough weapons to make sure Russia loses. Tens of thousands of Russian boys are marched to slaughter.
From an investment standpoint, the big point is governments can veer wildly off course and take your money. February 24, 2022, will become a date like 1959 in Cuba, 1949 in China, 1921 in Germany, and 1917 in Russia. Just previous to the invasion, Russian stocks, bonds, and currency were “cheap” by traditional metrics, a trap. More on this in the paid section.
Russia’s Economy
Russia is a vast land with few people. It exports oil and minerals and beyond that has little to offer. Russia’s economy lacks the financial and tech-savvy of the US, China’s production capabilities, or Europe’s manufacturing prowess. The only Russian export people regularly run into are their former citizens who, like my own family, have fled in waves.
Chronic corruption (see my podcast with the founder of Transparency International) and administrative incompetence strangled potential growth. This took different forms under the Czars, Soviets, and Putin, but the theme is the same—a struggle to adapt to a competitive global economy. The result is collapsing economic relevance, as the chart from Rose Technology illustrates. Note the chart goes back 300 years. From that perspective, the Soviet Union was a blip.
While Russia’s energy exports continue to flow (the Indias are buying Russia’s oil at a discount and re-selling and China continues to buy direct from Siberia) this obscures the fact that Russia’s war resources are indeed limited. Most major economies spend 2% to 3% of GDP on the military. For Russia, that equates to about $50 billion a year. Third-party estimates suggest that Russia has spent about $80 billion so far in this war.3 The US spends about $1 trillion each year on the military.
Moreover, now Russia’s economy is shrinking. Sanctions were not the weapon of mass destruction Washington and Brussels hoped for but did cause a sharp fall in the ruble, which boosted inflation, which then forced the central bank to jack up interest rates, asphyxiating growth. Russian inflation is currently around 12%, down from 18%. That means there is even less money for the military.
NATO Makes Guns, Ukraine Pulls the Trigger
What is big money for Russia—$50 or $80 billion—is a pork barrel project in the US or European Union.
My team did a quick tabulation of the money spent on Ukraine from 2014 to now. This is not forensic accounting. It’s possible we missed a program. Still, it gives perspective on programs to date.
The key thing is the figure on the lower right. How big is this assistance relative to the total GDP of NATO countries? The answer: tiny. What matters is both the dollar amount (close to Russia’s defense spending) and placing this number in the context of Western economic activity. Said differently, the West can keep supplying Ukraine with weapons for a long time.
This money gets routed through major defense contractors, like Raytheon and General Dynamics. While this boosts their profits and stock prices, it’s important to note that someone needs to produce the weapons. The alternative is the government takes over production, which creates another set of problems. Think of bureaucratic NASA vs. entrepreneurial SpaceX. Stocks like Northrup Grumman fell almost 20% in recent days and I wonder if this is due to fears the Republican-controlled US House will constrain Ukraine funding.
Kremlin As Victim
Given tens of thousands of dead Ukrainians, Kyiv understandably wants NATO to pull the trigger, or give Ukraine the right weapons so that they can pull the trigger. If you had a vicious Rottweiler loose on your property, you call animal control or kill it yourself.
But it’s not that easy. My podcast with Congressman Jim Himes, a Rhodes Scholar who sits on the House Intelligence Committee, indicated the risks of doing so. I asked why NATO could not impose a no-fly zone. He explained that Step #1 in doing so is taking out Russia’s air defense, which means the US directly bombs Russia. That’s a scary thought.
Empires do not admit strategic mistakes easily. Think of the US in Vietnam or Iraq 2. Failing empires like Russia are even more unpredictable.
So far, the Russians are showing no signs of shifting their thinking.
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