If someone forwarded this to you, you can sign up, here:
For those of this new to this newsletter, you can see what I am up to here. I’ll add that I started my career in Russia, speak the language and married into family with ties to both Russia and Ukraine. Below are my thoughts. Because we are in the middle of this, they will evolve and I am writing faster and with less reflection than normal.
I am aghast at the videos of Ukrainians cowering in subways, clutching their children, just as the Russians did when the Nazis attacked them.1 The parallel is 1939, when Hitler invaded Poland, only this is also being live streamed on Telegram, Twitter and TikTok. And that bizarre parallel—barbarous invasion alongside free, disorganized, observation facilitated by private companies, technology and citizens—sum up the essence of the conflict. This is the medieval versus the modern.
The medieval is a king, myth, an army stealing land and murdering neighbors. Modernity is constituencies, disruptive change, compromise, rule of law, wealth, transparency and logic. What will win out? In the short-term, barbarity wins. In the long-term, modernity wins, I hope. But sometimes the period of barbarity can last a long time, like the 1000 years between the fall of Rome and the Enlightenment or the twelve years between Hitler’s rise to power and his death.
A Former Comedian Thrown into a Horror Film
Ukraine’s President, Zelensky, is a telegenic former comedian, sort of like former Senator Al Franken for US readers. He understands technology and uses it. He is quick on his feet and is displaying remarkable bravery. He has not, in the past, been particularly strong at implementation. He has no experience fighting a war. By contrast, Putin doesn’t use email and has a twisted world view that he is now openly sharing (listen to his speeches) rooted in settling feuds based on bizarre reads of history. He has experience orchestrating military conflict in a number of regions, like Syria, Donbas and Georgia. He is corrupt (think tithes) and has a history of pathological violence from the very beginning of his rule.2
I studied what are called “personality disorders” as part of my book research on Raising a Thief. While it’s a matter of degree, for many with personality disorders, truth and conscience have no meaning. This is why Putin lies repeatedly with such ease. Why people become like this varies; you have to train yourself to recognize everything Putin says is a lie or distortion. If such people are on the fringes of society, they inflict grievous harm in a limited way, like a serial killer. If they get power, psychopaths are much more dangerous. That’s what happened in Russia.
The parallel to 1930s Germany is haunting. Putin perceives himself as mighty and the Western system and leaders as weak. He can point to erratic leadership (Brexit, Trump), financial crises (2008), expensive, largely failed foreign policy (Iraq, Afghanistan) and internal division (Fox News commentators, the type of people Stalin called “useful idiots,” supporting him). Putin doesn’t regard Zelensky or the election he won as objective facts. Putin would not have invaded if he thought Biden was strong.
How Russia’s Economy Works
Whether or not Western allies can band together to stop Putin is the question. So far their actions seem weak and tentative, in part due to the structure of Russia’s economy, in part due to constraints and limited imagination. Whether the West is more Churchill (who vowed to fight fascist Germany) than Chamberlain (who appeased), matters a lot for where and how it will be safe to live going forward. It doesn’t take much of a leap to imagine Putin trying to take down the US power grid. How scared would you feel then?
An economy is spending and spending comes from two sources, income and borrowing. Russia’s income, the money for its military, is almost entirely tied to commodities—oil and natural gas—something Europe in particular can’t do without. To hurt Putin, the West would have to find a new source for energy in Europe or radically lower prices and neither can not be done quickly. Putin knows this.
The Russian economy is set up very differently than the US. The US has high debt and high dependence on foreign capital to fund high US consumption. This is why central bank rate hikes, which hurt capital markets, are such a powerful lever in the US.
Knowing such a structure would prove a vulnerability, Putin constrained Russian economic growth and capital markets (crushing innovation) and reduced dependence on the dollar. Sanctions that cut off borrowing will damage individual companies, like the Russian bank Sberbank, but won’t dislodge Putin. He clearly doesn’t care. The Russian currency never recovered from the Crimea invasion3 and the Russian stock market has declined over 40% this year and that has not dissuaded Putin one bit.
This is one reason why the US stock market has rallied after each set of announced sanctions. In a kind of bizarre logic, the market action reflects a belief that nothing significant will change, which is a problem. What the sanctions will do is turn Russia into an international pariah, like North Korea or Turkish-occupied Cyprus, but it will remain quite dangerous.
What More Painful Sanctions Might Look Like
To constrain Putin, the West will need to do big things, like what Reagan did to the Soviets, which was engineer much lower energy prices (through cutting deals with other producers), and boost defense spending. A person of Putin’s ilk only respects superior force. Doing so would upend Democratic priorities, like investing in the domestic economy, not doing business with other tyrants and green energy. It’s a set of tough choices.
The US could pressure Russia by working closely with oil-producers like Saudi Arabia’s MBS (who murdered the Saudi journalist Khashoogi) to boost energy supply and encourage US domestic energy production, like fracking, which is bad for the environment. The US would also need to make friends with major Russia oil customers like China. But approaching China means abandoning other priorities, like boycotting Olympics due to concern over human rights abuses. Europe would need to embrace nuclear energy, which Germany abandoned, and US-exported liquefied natural gas. This all seems a long, long way from where we are now. As my ex-boss said, you can have anything you want, but not everything you want.
There will also need to be an increase in military activity. NATO will need to boost troop levels in Poland and the Baltics, though I am not a military expert. Is there scope for cooperation between Turkey, a NATO member, on the Straights of Bosphorus in a way that would pressure Russia? In combination with military activity, one way or another, the West would need to use energy against Russia, rather than avoid touching energy due to fear over domestic reaction in the US and Europe, which is what is happening now.
What’s Next
Part of what happens next depends on if Ukraine fights and how successful the fighting is. I am monitoring feeds that shows resistance, but what is actually going on? It’s hard to know.
Ukraine is large, roughly the size of Texas, but with 10 million more people. Russia is aiming for a swift attack and perhaps (this is a guess) has dispatched secret police to round up leaders and take over local administration and detain Western-leaning administrators. The playbook would then be to arrest people who support Zelensky, which is what has happened in Belarus and Russia, and snuff out opposition. The longer Ukraine holds out, the more the West can help by funneling weapons and money to attack Russians.
The Russians, for their part, say they are trying to target the military as opposed to civilians. But war is war. I just watched film which purported to show machine gun fire in downtown Kiev. There is no way to fire that many weapons and not kill civilians and the longer it goes on, the more Ukrainians die and the more this will foment hatred against Russian troops, some of them conscripted kids.
Absent containing Putin, we enter a more dangerous world. Bad behavior goes unchecked. Ukraine gave up their nukes in a 1994 treaty in return for recognition of their borders. That didn’t work out so well. We could enter a period of war on multiple fronts at once—conventional weapons, dis-information and cyber but clearly the risk of a nuclear mistake is massive. Taiwan will almost certainly come into play.
This is tragic on so many levels. I witnessed the October 1993 Moscow coup and the Georgian civil war and vividly recall the physical sense that death was very near. That’s what people in Ukraine must be feeling. I’ve also been talking with Russian contacts throughout the days and while, yes, it’s a self-selecting crowd, they loathe Putin and aspire to the same things Ukrainians do—clean government, modern jobs, freedom. When I compared today to 1939 most of my Russians contacts readily agreed. Not, however, my Russian mother-in-law, who is in her 90s and devours Russian-state TV, supported Stalin and supports Putin. This even though her sister, who cared for my son when he was an infant, lives in Ukraine. This is “all the fault of the UK and US,” she told me.
Charts below (as always powered by Rose Technology and their wonderful team). Russia is the energy exporter, Europe the importer. Cut off Russia where it hurts and you create an inflationary depression in Europe.
The US borrows a lot of money from abroad (current account) and uses it to support higher consumption and higher debt. Russia doesn’t do that, which makes them less sensitive to attacks on borrowing.
The US uses this debt of boost living standard, Putin doesn’t. Ukraine has been too dysfunctional to do so and is roughly as corrupt as Russia.
In terms of the economy and financial markets, this is how I see things. Overall, this is a very easy environment to lose money, so I am taking much less risk. I’ve lost about 1% so far this year. The US stock market is down between 10% and 14%. THIS IS NOT INVESTMENT ADVICE, MORE A WINDOW INTO MY THINKING.
Inflation, which is already high, will see additional upward pressure due to the rising cost of agricultural goods, of which Ukraine is an exporter. This will put further pressure on central banks to raise interest rates.
I had thought energy prices might go up if Russia attacked Ukraine. While the sanctions seem very careful about not interrupting supplies, many pipelines run through Ukraine, so the risk is that energy prices go yet higher, particularly if the battle is protracted, also adding to the inflation risk.
Higher interest rates should hurt bonds and stocks, particularly the most expensive ones, as the price one pays per unit of earnings falls. Earnings should improve as Covid eases, which is an off-setting pressure.
As a result, this seems like a period where both stock and bond markets do poorly, which is bad for many savers.
Note to readers: this is my second update this week (the first went to subscribers). I don’t intend to publish Sunday.
https://www.rbth.com/history/331256-moscow-metro-wwii-history
Putin’s very ascension to power was tied to a diabolical act, an act so crazy that it would not have seemed plausible until it became so consistent with his later behavior—almost certainly using the secret police to bomb apartment buildings, sow fear and blame it on the Chechens. Link to documentary about the bombings.
Oil prices collapsed at the same time, but the statement is still true.