Last Sunday I warned in a blog post that the Ukraine situation would heat up after the Olympics as Vladimir Putin would not wish to draw attention away from his beloved event as he did during the Beijing Olympics by maneuvering against Georgia. Right on cue the Russians moved against the Crimea in an effort to protect its geographic and strategic interests. The Crimea has been extremely important to the Russians for 300 years as the tsars desired a warm-water port to allow Russian commerce and imperial designs to proceed even when the Northern waters were frozen during the winter months. The Russians will defend their interests just like any other world power and it is in their immediate backyard. The Europeans and U.S. can threaten sanctions and other such nonsense but as Churchill noted long ago, “I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest.” (October 1939)
If those pundits who rely on CNN for their facts fail to read history, all financial action will be determined by the model builders and number crunchers. But I warn that investors and traders need to be armed with the knowledge of politics so as to measure the risk they face on a daily basis. The attitudes of the European policy makers and the Obama administration are based on making headlines and devoid of any meaning. Secretary of State John Kerry has warned about sanctions being imposed on Russia for their aggressive actions in the Ukraine but these threats are empty. Do policy makers believe that Germany would approve sanctions against Russia while 45% of Berlin’s energy needs are met by Russian supplies?
If the Western leaders want to break up the EU and drive Germany to closer ties with Russia, apply economic sanctions and watch the “games begin.” German chemical corporations are heavily dependent upon Russian gas as the feedstock for so much of its business. Besides, most fossil fuel is fungible and Asian demand would surely absorb a great deal of Russian supply. The EU has no military ability to support any threats as the U.S. had to supply France in its military engagement with Libya. The European leaders want to become recognized as a significant player but that ended at Dien Bien Phu and the Suez in 1956. The talking heads assume that it is Putin who has overextended himself and is looking for a way out of the Crimean invasion, but it is Europe and the U.S. that have overreached. The Ukraine is not a member of NATO so the West will be hard-pressed to have motives. A Europe on the verge of a deflationary spiral can’t afford to push the world’s financial markets to a possible renewed slowdown due to political uncertainty.
In a wonderful weekend Financial Times piece by John Authers, “Ziggy Stardust Fears Haunt Investors’ Psyche,” he cites a Bank of New York Mellon study that said large institutions have upgraded their risk management abilities and are therefore more comfortable with their risk profiles. The BoNY survey found that the greatest perceived risks are due to Fed and other central banks interest rate actions. “But it is alarming that investors show no great concern about politics. More than a third said they did not measure political risk at all. Political risk is imponderable and markets are collectively unable to measure it.” The readers of NOTES FROM UNDERGROUND may not have sophisticated measures of risk but we are aware of the impact of FEAR on the pricing of assets and we tend to rely on charts and other technical indicators to make rational choices during times of chaos.
***A note to European and American leaders: Before you start throwing Molotov cocktails at the Russians over their actions in the Crimea, you might want to question the Monroe Doctrine and its implied design on the U.S. and its efforts to define its national self-interest. Then, the New York Times and other periodicals may want to raise the current issue of Guantanamo Bay. I don’t mean the issue of GITMO and the retention of its facilities, but the entire issue of the U.S. maintaining a naval base on the island of an enemy it has failed to recognize for more than 50 years. In 1903 the U.S. forced Cuba to lease Guantanamo Bay to the U.S. “for as long as necessary” for a measly rate of $2000 in GOLD COIN annually. The U.S. has been sending Castro checks, which have gone uncashed for 50-plus years. Before pointing the finger at Russia over Crimea, the U.S. may wish to examine its own behavior in maintaining the colonial status of a sovereign nation. Yes, 2+2=5. In the world of high risk, you do the math.