Politics are struggling to contain geopolitics = disruption
• In the ‘90s, Zbigniew Brzezinski (former National Security adviser, and one of the best known experts on Eastern Europe), said – ‘Without Ukraine, Russia ceases to be an empire, but with Ukraine suborned and then subordinated, Russia automatically becomes an empire’. He also argued that ‘Russia can be either an empire or democracy, but it cannot be both’. Since then, Russia has decided to become an empire, and as Brzezinski observed, without Ukraine, it cannot be one. Even Solzhenitsyn (Soviet dissident and the author of Gulag) advocated establishment of what he called ‘historic Rus’ or union of Russians, Belarus and Ukrainians. It echoes Putin’s recent essay. One can debate the validity of these views, and while Russians are weary of commitment and casualties, they regard Ukrainians & Belarussians as brothers who should be friends, and part of the family. Whether in the Tsarist or Soviet days, Central Asia and the Caucuses were treated as colonies while Baltics were akin to an alien window to the West. But Ukraine and Belarus were and are different.
• What does this historical detour imply? 1. Sanctions are unlikely to yield useful results. This is not about pain in the pocketbook or GDP, and besides, after Crimea, Russia has essentially disconnected itself. It has repaid most of its foreign debts and rebuilt FX reserves. Russia has internalized its economy, making strides towards self-sufficiency, especially in agriculture. It has also reoriented towards China, and both countries are now developing alternatives to SWIFT. At the same time, Russia remains a key supplier of commodities (oil, gas, aluminium, titanium, etc), with EU being especially vulnerable. The lever
that could hurt is to block Russia from any product containing US technology, but this would hit countries from Germany and Sweden to Korea and China. 2. A credible Western military response could make a difference, but there is currently none. EU and NATO are divided, and the US has already ruled out ‘boots on the ground’ and is only supplying limited defensive equipment. While the Ukrainian army is now much stronger, it is not a match for Russia, and its East-West geographic and cultural cleavage still persists. 3. From Russia’s perspective, arguably the best outcome is to replace the current Ukrainian government, and the latest news suggests that Russia might be contemplating this option. While reducing damage, it could provoke a civil war that might still require a significant Russian commitment. 4. West offers little. Democracies tend to over-negotiate in search of a win-win compromise. But in geopolitics (as practiced by Russia and practitioners of realpolitik), there are no win-wins.
• Bottom line: we think sanctions are unlikely to make much difference and while many of Russia’s demands are (in our view) unrealistic, questions of Ukraine, Belarus and Kazakhstan will not go away as these are integral to the way Russia perceives itself. Investors are bad at assessing geopolitics, explaining why German equities boomed all the way to Stalingrad or failure to anticipate World War I. Politics are supposed to look after geopolitics and 8 or 9 times out of 10 this is the right answer. But tail risks (e.g., Ukraine, Middle East, or tensions in the South China sea) are becoming highly disruptive, and politics might no longer control geopolitics. This might even overshadow the Fed.
The full text of this article is available to MacroBusiness subscribers
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
