{"id":63961,"date":"2014-11-19T21:31:15","date_gmt":"2014-11-20T02:31:15","guid":{"rendered":"http:\/\/countingpips.com\/?p=63961"},"modified":"2014-11-19T21:31:15","modified_gmt":"2014-11-20T02:31:15","slug":"outside-the-box-notes-on-russia","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2014\/11\/outside-the-box-notes-on-russia\/","title":{"rendered":"Outside the Box: Notes on Russia"},"content":{"rendered":"
November 19, 2014<\/div>
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By John Mauldin<\/span><\/h4>\n
\"\"Russia and its redoubtable president, Vladimir Putin, have been much in the news lately. The latest flurry came when Putin was taken out behind the woodshed at the G20 conference in the Philippines last weekend over his recent moves to inject more Russian troops and arms into Ukraine.<\/p>\n

For today\u2019s Outside the Box<\/em> we have two pieces that deliver deeper insights into the situation with Russia and Putin. The first is from my good friend Ian Bremmer, President of the Eurasia Group and author of Every Nation for Itself: Winners and Losers in a G-Zero World. You probably caught my mention of Ian\u2019s presentation at the <\/em>institutional fund manager conference where we both spoke last weekend. He had some unsettling things to say about Russia; and so when he followed up with an email to me on Monday, I asked if he\u2019d let me share the section on Russia with you. Understand, Ian is connected,<\/em> and so what you\u2019re about to be treated to here is analysis from way inside. <\/em>(He\u2019ll be presenting at our Strategic Investment Conference again next April, too.)<\/p>\n

Then we turn to a piece that my friend Vitaliy Katsenelson published last week in his monthly column<\/a> in Institutional Investor.<\/em> I need to preface this one by mentioning that Vitaliy was born in Murmansk, Russia, where he lived until age 18, when his family emigrated to the US. Fast-forward 23 years, and today Vitaliy is Chief Investment Officer for Investment Management Associates in Denver and author of the highly successful Active Value Investing: Making Money in Range-Bound Markets<\/em> and The Little Book of Sideways Markets<\/em>. That\u2019s quite a journey, and Vitaliy has some very strong feelings about the country he left as well as the one he came to. In his intro to today\u2019s piece he admits,<\/p>\n

[This is] one of the most emotionally taxing things I ever wrote. A few days ago my wife looked at me and said, \u201cWhen are you going to be done with it; this article is bringing you down.\u201d She was right.<\/p>\n

But I think you\u2019ll agree that when Vitaliy recently subjected himself to a 7-day news diet of nothing but Russian media, the better to comprehend current Russian attitudes, he resurfaced with some valuable insights.<\/p>\n

And I can\u2019t leave our deliberations on all things Russia and Putin without mentioning again Marin Katusa\u2019s new book, The Colder War<\/em><\/a>, <\/em>which I featured<\/a> in Outside the Box<\/em> two weeks ago. It\u2019s a compelling survey of the history and dynamics of world energy markets and the role that Putin seeks to play in them.<\/p>

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Geopolitically, the world seems to be a calmer place as we head into the Christmas season, with the significant and glaring exception of Russia. And remember, falling oil prices will seriously impact an already stressed Russian economy.<\/p>\n

But before we turn to the eye-opening if somber notes below, I want to share with you a fabulous story from my friend Art Cashin, who is one of the world\u2019s great raconteurs. I make sure to have dinner with Art whenever I\u2019m in New York. In addition to his wisdom concerning the markets, he simply has the best stories. The last dinner (also attended by Barry Ritholtz and Josh Brown) was at an establishment called Sparks, an old New York watering hole and famous steakhouse not far from Grand Central Station.<\/p>\n

Art shared the following story with us and had us in tears. Back in the day, the New York Stock Exchange was a mighty interesting place with a very curious cast of interesting and interlocking personalities. It has calmed down some over the decades, but the stories \u2026 well, let\u2019s just let Art tell it.<\/p>\n

For years, one of the communal tables at the Luncheon Club would issue a group challenge. They would all set a target for losing weight by some date a couple of months out. The one who weighed up furthest from their target had to buy dinner for the others.<\/p>\n

In 1985, the loser was Maurice (Monk) Meyer of Henderson Brothers. Among the others were Jack (Jackie D) D\u2019Alessandro, Pat McCarthy, Bill Fitzpatrick, and Roger Hochstin.<\/p>\n

They decided to turn the event into a sort of a Christmas party and scheduled the dinner for the week before Christmas. They made reservations at Sparks Steakhouse.<\/p>\n

As the day approached, there was an unexpected development. Mafia kingpin Paul Castellano was gunned down, along with his driver, on the sidewalk outside Sparks.<\/p>\n

Nevertheless, the show must go on.<\/p>\n

When the fated date arrived, the group decided to meet at the Luncheon Club bar for some rehearsal cocktails. They rehearsed for a couple of hours and then headed for Sparks.<\/p>\n

As they arrived, around 7:00, there were some early hints it might be a bumpy evening. When they walked in, the hostess asked if they had reservations. \u201cOnly about the food,\u201d snapped Pat McCarthy. That was followed by the ma\u00eetre d\u2019 asking where they\u2019d like to sit, only to hear Roger say, \u201cIn the non-shooting section, please.\u201d<\/p>\n

Once they were seated, they ignored the menu and ordered more cocktails and several bottles of wine. For the next three hours, they ignored the pleas of several waiters and the ma\u00eetre d\u2019 to order some food to go along with the wine and drinks.<\/p>\n

In the meantime, Roger may have been getting bored. He noticed another table with six Japanese men in their twenties and one older man, who looked maybe 60.<\/p>\n

Somehow, Roger found a Chinese takeout menu from Chou Lu in his pocket. He put his napkin over his arm as though he were a waiter and went over to the table of Japanese men and began reading the menu in a form of broken Chinglish that would have embarrassed even the producers of the old Charlie Chan movies. Things like \u201cPork Flied Lice.\u201d<\/p>\n

Ironically, only the older man spoke English, and he seemed to think it was a wonderful joke. He told Roger that Roger\u2019s table seemed to be having a wonderful time and asked if he might join it briefly.<\/p>\n

Roger brought him over and introduced him around. There was a pleasant exchange for about 15 minutes and then Jackie D asked him where in Japan he came from. They man replied \u2013 \u201cActually, I\u2019m from Okinawa.\u201d Bill Fitzpatrick darkened and said, pointedly, \u201cMy favorite uncle was killed on Okinawa by you people during the war.\u201d The man quickly excused himself.<\/p>\n

Pat McCarthy reminded Bill that he had not had an uncle in the war. Jack turned to Pat and said, \u201cThat doesn\u2019t matter; Bill went through the barrier about two drinks ago.\u201d<\/p>\n

Anyway, the waiter finally prevailed upon the boys to order entrees by 10:00. Meanwhile, Maurice was sinking fast. He had come out despite a bad case of the flu, since he was the designated payer. It quickly became evident that Meyer would not make it much past 10:30. He called for the check.<\/p>\n

As they were about to help Meyer to his feet, Jackie D noticed that McCarthy had had his untouched entr\u00e9e put into a doggie bag. Not wanting to be outdone, Jackie reached down and put his medium rare petite filet in his inside jacket pocket without benefit of a doggie bag.<\/p>\n

At the coatrack, Jackie attempted to help Meyer get his overcoat on. In doing so Jack lifted his own hand high and out. That swept his jacket off to the side, revealing a shirt dripping with blood from the medium rare filet in his pocket.<\/p>\n

Perhaps recalling Castellano\u2019s recent fate, one woman at a table spotted Jack\u2019s shirt and screamed, \u201cMy God! He\u2019s been shot!\u201d<\/p>\n

Everybody in the restaurant hit the deck, including the ma\u00eetre d\u2019 and our adventurous group. When everyone got back to their feet, the ma\u00eetre d\u2019 told the boys they were never allowed back \u2013 collectively or individually.<\/p>\n

In a huff, the boys headed off to the John Barleycorn.<\/p>\n

Art can go on all night with stories like that. You really should put them into a book, Art.<\/p>\n

You have a great week. I am off to the gym, where The Beast will continue to try to whip this poor old body into some similitude of shape.<\/p>\n

Your still smiling from all the great stories analyst,<\/p>\n

John Mauldin, Editor
\nOutside the Box<\/em>subscribers@mauldineconomics.com<\/a><\/p>\n

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Notes on Russia<\/span><\/h2>\n

By Ian Bremmer
\nNov. 17, 2014<\/p>\n

the russians are taking every opportunity to escalate an already plenty hostile relationship with the united states and some selected allies. the g20 summit was particularly negative on that front, with russian president putin bringing along some warships to australia, while canadian prime minister stephen harper led a rope line of western leaders calling putin a scoundrel and a liar. putin left early, claiming a need to catch up on sleep and some other business to attend to.<\/p>\n

like in ukraine.<\/p>\n

i had a chance to talk with some senior russians last week, including two advisors to the kremlin. they explained that putin expected his offer of a ceasefire in southeast ukraine would be sufficient to get the americans to tolerate a status quo, while bringing the europeans to the table with some sanctions reductions. that didn\u2019t happen: instead a coordinated harder line policy stayed in place, while the americans and germans looked set to put more sanctions in place unless the russians actively backed down. despite mounting economic pressure on the europeans, the frozen conflict\/long game the kremlin was playing didn\u2019t look like it was going to succeed.<\/p>\n

and so the kremlin moved backed to escalation, dramatically expanding their direct military presence in the region \u2013 confirmed by nato and the typically-conservative osce, denied by the russian government \u2013 and announcing plans to build up troops in crimea. they\u2019re preparing both sides to consolidate their territory, initially through taking the port city of mariupol…potentially then a land-bridge between eastern ukraine and crimea and beyond (odessa being the most obvious place). the most likely path is the kremlin now looking for provocations to \u201cgo further\u201d \u2013 they\u2019ve already expressed a level of outrage around the ukrainian government severing economic ties to the separatist region \u2013 then the fiction of ceasefire is erased and the russians\/separatists take more territory. ultimately, whatever the formalized \u201cgovernance\u201d structure, the kremlin is moving towards making crimea and southeast ukraine a single place.<\/p>\n

there\u2019s very little the ukrainians can do. the ukrainian military will remain badly outgunned, and the local populations in the region remain fairly anti-kiev, even if they\u2019re skittish about the notion of russian takeover. we\u2019ll see a pickup in international calls to provide arms for the ukrainian military, but they\u2019ll be rejected, most particularly by the united states. at best we\u2019ll see a step up in intelligence and training support, to little consequence.<\/p>\n

putin\u2019s military efforts are also stepping up outside ukraine: the \u201cunknown\u201d but clearly russian submarine off sweden, a russian nuclear armed exercise during an intelligence meeting in denmark; bomber patrols in the gulf of mexico. they\u2019re all bluster, but a clear message to america and its allies…and pose a far higher potential for accidents \u2013 one scandanavian airlines flight recently made an emergency alteration to its flight path when a russian military jet suddenly appeared in front of it.<\/p>\n

the likelihood of moscow backing down in this environment is near zero. the sanctions aren\u2019t having a meaningful impact on the russian economy (yet) and the popularity of the kremlin isn\u2019t taking a hit. the speech from former soviet general secretary mikhail gorbachev \u2013 no fan of putin, but clearly pointing the finger at the west for russia\u2019s troubles \u2013 makes that clear. and it\u2019s getting harder for the americans to find an out. german chancellor angela merkel continues to be the best opportunity for compromise, but her relationship with putin is now only barely functional (the kremlin advisors i spoke with said this was the single biggest misstep from putin to date \u2013 they believed his bilateral conversations with her were too aggressive and led merkel to feel misled; neither believed the relationship could be salvaged near-term). and so russians are now presuming the sanctions environment will be there for the long haul, and are thinking about the longer term economic implications.<\/p>\n

i\u2019d now say that\u2019s meaningful before we get to russia\u2019s 2018 elections: further sanctions causing steep recession leading to unrest in the regions, which begins to metastasize to the cities. that would spook russian elites, some of whom could split from the kremlin. the key early warning indicator would be meaningful defections of any insiders to the west. but critically, we\u2019re at least a year or two away from that. by which time ukraine has been economically devastated, while the strategic shift of russia-china is thoroughly entrenched.<\/p>\n

Putin\u2019s World: Why Russia\u2019s Showdown with the West Will Worsen<\/span><\/h2>\n

By Vitaliy Katsenelson
\nInstitutional Investor<\/em><\/a>,<\/em> Nov. 17, 2014<\/p>\n

My father, Naum Katsenelson, painted this watercolor, \u201cDolls Become Humans,\u201d two years after we came to the United States in 1993. This is the only \u201cthematic\u201d picture my father ever painted.<\/em><\/p>\n

\"\"<\/p>\n

If you look at the picture carefully you\u2019ll see the silhouette of Lenin in the clouds (representing the past). On the far left there is a Stalin doll and a line of people going to prison. Across from Stalin on the right there is a doll of Brezhnev (you\u2019ll recognize him by his large, distinct eyebrows). On the building on the right there is an image of Gorbachev. Look carefully at the faces in the foreground (representing the present and the future): as they get closer to you they become more humanized \u2013 transforming from dolls into humans. The man in front of the woman draped in the American flag is my father; the boy with the Star of David on his chest is me.<\/em><\/p>\n

This was an aspirational picture. In 1993 the Soviet Union fell apart. Russia\u2019s future looked bright \u2013 although it was in chaos, it was a democracy. The dolls here are an analogy for robots, suggesting uniformity of thought. As I was composing this I called my father and asked him if he\u2019d paint the same picture today. He said, \u201cNo. Today\u2019s picture would look very different.\u201d<\/em><\/p>\n

I spent three months aggravating over the following article. It was one of the most emotionally taxing things I ever wrote. A few days ago my wife looked at me and said, \u201cWhen are you going to be done with it; this article is bringing you down.\u201d She was right<\/em>.<\/p>\n

I grew up hating America. I lived in the Soviet Union and was a child of the cold war. That hate went away in 1989, though, when the Berlin Wall fell and the cold war ended. By the time I left Russia in 1991, the year the Soviet Union collapsed, America was a country that Russians looked up to and wanted to emulate.<\/p>\n

Twenty-three years later, a new version of cold war is back, though we Americans haven’t realized it yet. But I am getting ahead of myself.<\/p>\n

After Russia invaded Crimea and staged its referendum, I thought Vladimir Putin’s foreign excursions were over. Taking back Crimea violated plenty of international laws, but let’s be honest. Though major powers like the U.S. and Russia write the international laws, they are not really expected to abide by those laws if they find them not to be in their best interests. Those laws are for everyone else. I am not condoning such behavior, but I can clearly see how Russians could justify taking Crimea back \u2013 after all, it used to belong to Russia.<\/p>\n

I was perplexed by how the Russian people could possibly support and not be outraged by Russia’s invasion of Ukraine. But I live in Denver, and I read mostly U.S. and European newspapers. I wanted to see what was going on in Russia and Ukraine from the Russian perspective, so I went on a seven-day news diet: I watched only Russian TV \u2013 Channel One Russia, the state-owned broadcaster, which I hadn’t seen in more than 20 years \u2013 and read Pravda, the Russian newspaper whose name means “Truth.” Here is what I learned:<\/p>\n

If Russia did not reclaim Crimea, once the new, illegitimate government came to power in Ukraine, the Russian navy would have been kicked out and the U.S. navy would have started using Crimean ports as navy bases. There are no Russian troops in Ukraine, nor were there ever any there. If any Russian soldiers were found there (and there were), those soldiers were on leave. They went to Ukraine to support their Russian brothers and sisters who are being abused by Ukrainian nationalists. (They may have borrowed a tank or two, or a highly specialized Russian-made missile system that is capable of shooting down planes, but for some reason those details are not mentioned much in the Russian media.) On November 12, NATO reported that Russian tanks had entered Ukraine. The Russian government vehemently denied it, blaming NATO for being anti-Russian.<\/p>\n

Malaysia Airlines Flight MH17 was not downed by Russia or separatists. It was shot down by an air-to-air missile fired by Ukraine or a NATO plane engaged in military exercises in Ukraine at the time. The U.S. has the satellite imagery but is afraid of the truth and chooses not to share it with the world.<\/p>\n

Ukraine was destabilized by the U.S., which spent $5 billion on this project. As proof, TV news showed a video of Senator John McCain giving a speech to antigovernment protesters in Kiev’s Maidan Square. It was followed by a video of Vice President Joe Biden visiting Ukraine during the tumult. I wasn’t sure what his role was, but it was implied that he had something to do with the unrest.<\/p>\n

Speaking of Joe Biden, I learned that his son just joined the board of Ukraine’s largest natural gas company, which will benefit significantly from a destabilized Ukraine.<\/p>\n

Ukraine is a zoo of a country, deeply corrupt and overrun by Russian-haters and neo-Nazis (Banderovtsi \u2013 Ukrainian nationalists who were responsible for killing Russians and Jews during World War II).<\/p>\n

Candidates for the recent parliamentary election in Ukraine included Darth Vader (not kidding), as well as a gay ex-prostitute who claims to be a working man’s man but lives in a multimillion-dollar mansion.<\/p>\n

I have to confess, it is hard not to develop a lot of self-doubt about your previously held views when you watch Russian TV for a week. But then you have to remind yourself that Putin’s Russia doesn’t have a free press. The free press that briefly existed after the Soviet Union collapsed is gone \u2013 Putin killed it. The government controls most TV channels, radio and newspapers. What Russians see on TV, read in print and listen to on the radio is direct propaganda from the Kremlin.<\/p>\n

Before I go further, let’s visit the definition of propaganda with the help of the Oxford English Dictionary: “The systematic dissemination of information, especially in a biased or misleading way, in order to promote a political cause or point of view.”<\/p>\n

I always thought of the Internet as an unstoppable democratic force that would always let the truth slip out through the cracks in even the most determined wall of propaganda. I was wrong. After watching Russian TV, you would not want to read the Western press, because you’d be convinced it was lying. More important, Russian TV is so potent that you would not even want to watch anything else, because you would be convinced that you were in possession of indisputable facts.<\/p>\n

Russian’s propaganda works by forcing your right brain (the emotional one) to overpower your left brain (the logical one), while clogging all your logical filters. Here is an example: Russian TV shows footage of schools in eastern Ukraine bombed by the Ukrainian army. Anyone’s heart would bleed, seeing these gruesome images. It is impossible not to feel hatred toward people who would perpetrate such an atrocity on their own population. It was explained to viewers that the Ukrainian army continued its offensive despite a cease-fire agreement.<\/p>\n

Of course if you watched Ukrainian TV, you would have seen similar images of death and despair on the other side. In fact, if you read Ukrainian newspapers, you will learn that the Ukrainian army is fighting a well-armed army, not rebels with Molotovs and handguns, but an organized force fully armed by the Russian army.<\/p>\n

What viewers were not shown was that the cease-fire had been broken before the fighting resumed. The fact that Putin helped to instigate this war was never mentioned. Facts are not something Russian TV is concerned about. As emotional images and a lot of disinformation pump up your right brain, it overpowers the left, which capitulates and stops questioning the information presented.<\/p>\n

What I also learned is that you don’t have to lie to lie. Let me give you an example. I could not figure out how the Russian media came up with the $5 billion that “America spent destabilizing Ukraine.” But then I found a video<\/a> of a U.S. undersecretary of State giving an 8.5-minute speech; at the 7.5-minute mark, she said, “Since Ukrainian independence in 1991 \u2026 [the U.S. has] invested more than $5 billion to help Ukraine.” The $5 billion figure was correct. However, it was not given to Ukraine in three months to destabilize a democratically elected, corrupt pro-Russian government but over the course of 23 years. Yes, you don’t have to lie to lie; you just have to omit important facts \u2013 something Russian TV is very good at.<\/p>\n

Another example of a right-brain attack on the left brain is “the rise of neo-Nazism in Ukraine.” Most lies are built around kernels of truth, and this one is no different. Ukraine was home to the Banderovtsi, Ukrainian nationalists who were responsible for killing tens of thousands of Jews and Russians during World War II.<\/p>\n

Putin justified the invasion of Crimea by claiming that he was protecting the Russian population from neo-Nazis. Russian TV creates the impression that the whole of Ukraine is overrun by Nazis. As my father puts it, “Ukrainians who lived side by side with Russians did not just become Nazis overnight.”<\/p>\n

Though there may be some neo-Nazis in Ukraine, the current government is liberal and pro-Western. Svoboda \u2013 the party whose members are known for their neo-Nazi and anti-Semitic rhetoric \u2013 did not get even 5 percent of the votes in the October election, the minimum needed to gain a significant presence in parliament. Meanwhile the TV goes on showing images of Nazis killing Russians and Jews during World War II and drawing parallels between Nazi Germany and Ukraine today.<\/p>\n

What also makes things more difficult in Russia is that, unlike Americans, who by default don’t trust their politicians \u2013 yes, even their presidents \u2013 Russians still have the czarist mentality that idolizes its leaders. Stalin was able to cultivate this to an enormous degree \u2013 most Russians thought of him as a father figure. My father was 20 when Stalin died in 1953, and he told me that he, like everyone around him, cried.<\/p>\n

I keep thinking about what Lord Acton said: “Power corrupts, and absolute power corrupts absolutely.” The Putin we scorn today was not always like this; he did a lot of good things during his first term. The two that stand out the most are getting rid of the organized crime that was killing Russia and instituting a pro-business flat tax system. The amount of power Russians give their presidents, however, will, with time, change the blood flow to anyone’s head. Come to think of it, even Mother Teresa would not have stood a chance in Russia.<\/p>\n

A few weeks ago Putin turned 62, and thousands of people took to the streets to celebrate his birthday. (Most Americans, including this one, don’t even know the month of Barack Obama’s birthday.)<\/p>\n

In my misspent youth, I took a marketing class at the University of Colorado. I remember very little from that class except this: For your message to be remembered, a consumer has to hear it at least six times. Putin’s propaganda folks must have taken the same class, because Russian citizens get to hear how great their president is at least six times a day.<\/p>\n

We Americans look at Putin and see an evil KGB guy who roams around the country without a shirt on. Russians are shown a very different picture. They see a hard-working president who cares deeply about them. Every news program dedicates at least one fifth of its airtime to showcasing Putin’s greatness, not in your face but in subtle ways. A typical clip would have him meeting with a cabinet minister. The minister would give his report, and Putin, looking very serious indeed, would lecture the minister on what needed to be done. Putin is always candid, direct and tough with his ministers.<\/p>\n

I’ve listened to a few of Putin’s speeches, and I have to admit that his oratory skills are excellent, of a J.F.K. or Reagan caliber. He doesn’t give a speech; he talks. His language is accessible and full of zingers. He is very calm and logical.<\/p>\n

Russians look at the Putin presidency and ask themselves a very pragmatic question: Am I better off now, with him, than I was before he came into power? For most the answer is yes. What most Russians don’t see is that oil prices over the past 14 years went from $14 to more than $100 a barrel. They are completely responsible for the revival of Russia’s one-trick petrochemical economy. In other words, they should consider why their economy has done better the past decade, and why it may not do as well going forward. Unless Putin was the one who jump-started China’s insatiable demand for oil and other commodities that drove prices higher, he has had very little to do with Russia’s recent “prosperity.”<\/p>\n

I place prosperity in quotes because if you take oil and gas riches away from Russia (lower prices can do that with ease), it is in a worse place today than it was 14 years ago. High oil prices have ruined Russia. They have driven its currency up, making its other products less competitive in international markets. Also, capital gravitates toward higher returns; thus oil has sucked capital from other industries, hollowing out the economy. After the Soviet Union collapsed, Russia had a chance to broaden its economy; it had one of the most educated workforces in the world. Sadly, it squandered that opportunity. Name one noncommodity product that is exported from Russia. There aren’t many; I can think only of vodka and military equipment.<\/p>\n

But most Russians don’t look at things that way. For most of them, their lives are better now: No more lines for toilet paper, and the stores are full of food. Their personal liberties (such as freedom of speech and freedom of the press) have been taken away from them, but many have so much trust in their president that they don’t mind, whereas others are simply complacent.<\/p>\n

Today we see three factors that influence oil prices and are working against Russia: Supply is going up with U.S. shale drilling; demand growth will likely decline if the Chinese economy continues to cool; and the dollar is getting stronger, not because the U.S. doing great but just because the rest of the world is doing worse. If oil prices continue to decline, this will expose the true state of the Russian economy.<\/p>\n

When I visited Russia in 2008, I sensed an anti-American sentiment. NATO \u2013 which in Russia is perceived as a predominantly American entity \u2013 had expanded too close to Russian borders. Georgia tried to join NATO, but Russia put a quick end to that. Russians felt they extended a friendly hand to the U.S. after 9\/11, but in response America was arraying missiles around its borders. (The U.S. says they are defensive, not offensive; Russians don’t see the distinction. They are probably right.)<\/p>\n

The true colors of this new cold war came to light recently. In August 2008, according to Henry Paulson, the U.S. Treasury secretary at the time, “top level” Russian officials approached the Chinese during the Olympics in Beijing and proposed “that together they might sell big chunks of their GSE (Fannie Mae and Freddie Mac) holdings to force the U.S. to use its emergency authorities to prop up these companies.”<\/p>\n

This incident took place just weeks before the collapse of Lehman Brothers. The U.S. economy was inches from revisiting the Stone Age. The proposed Russian-Chinese maneuver could have made such an outcome more likely. The Federal Reserve would have had to step in and buy Fannie’s and Freddie’s debt, and the dollar would have taken a dive, worsening the plunge in the U.S. economy. Our friend Putin wanted to bring the U.S. economy down without firing a single shot, just as he annexed Crimea from Ukraine.<\/p>\n

Today anti-American sentiment is much greater in Russia. European sanctions are seen as entirely unjustified. Here is why: Crimea had a “democratic referendum,” and the Ukrainian conflict is believed to be not of Russia’s doing but rather an American attempt to destabilize Russia and bring Ukraine into NATO. In his annual speech at the Valdai conference last month, Putin said America had pushed an unwilling Europe into imposing sanctions on Russia. America is perceived as an imperialistic bully that, because of its economic and military power, puts its own self-interest above everyone else’s, and international law.<\/p>\n

Putin uses anti-Americanism as a shiny object to detract attention from the weak Russian economy and other internal problems. In the short run, sanctions provide a convenient excuse for the weakening Russian economy and declining ruble. They have boosted Putin’s popularity (at least so far). As the Russian economy gets worse, anti-American sentiment will only rise.<\/p>\n

This new version of the cold war has little in common with the one I grew up in. There are no ideological differences, and there is no arms race (at least not yet, and let’s be honest: Today neither country can afford one, especially Russia). At the core of it, we don’t like what Russia is doing to its neighbors, and Russia doesn’t like what we do to the rest of the (non-EU) world.<\/p>\n

The criticisms of U.S. foreign policy voiced by Putin in his latest Valdai speech are shared by many Americans: The U.S. is culpable in the unresolved, open-ended Afghanistan adventure; the Iraq War; the almost-bombing of Syria, which may have destabilized the region further; and the creation of the Islamic State, which is in large part a by-product of all of the above. Yet Putin’s abominable Ukrainian excursion and the thousands of lives lost were never mentioned.<\/p>\n

But there is also something less tangible that is influencing Russia’s behavior: a bruised ego. During the good old Soviet Union days, Russia was a superpower. It mattered. When it spoke, the world listened. The Russian people had a great sense of pride in their Rodina (Mother Russia). Today, if Russia did not have nuclear weapons, we’d pay much less attention to it than we do. Pick a developing country without oil whose president you can name. (Okay, we Americans can’t name the president of almost any other country, but you get the point.)<\/p>\n

Anti-Americanism and Putin’s popularity will both rise as the Russian economy weakens. For instance, Putin took his own people hostage when he imposed sanctions on imports of European food. The impact on Europe will not be significant (the Russian economy is not very large in comparison to the European Union), but Russia is very dependent on these imports. In the U.S. consumers spend about 13 percent of their earnings on food, but in Russia that number is almost three times larger. Therefore, food inflation hurts Russians much more. Yet as food inflation spiked, so did Putin’s popularity and anti-Americanism. Even declining oil prices will be explained as a anti-Russian manipulation by the U.S.<\/p>\n

Unfortunately, the only thing Russia has going for it today is its nuclear weapons. Russia has started to remind us of its military recently. According to NATO, the alliance “has conducted over 100 intercepts of Russian aircraft in 2014 to date, which is about three times more than were conducted in 2013.”<\/p>\n

Every article needs a conclusion, but this one doesn’t have one. I am not sure what this new cold war means for the world. Will Russia start invading other neighboring countries? Will it test NATO resolve by invading Baltic countries that are part of NATO? I don’t know. Economic instability will eventually lead to political crises. We have plenty of economic instability going on around the world.<\/p>\n

I’ll leave you with this thought: On March 7, 1936, the German army violated the Treaty of Versailles and entered into the Rhineland. Here is what Hitler later said:<\/p>\n

“The forty-eight hours after the march into the Rhineland were the most nerve-racking in my life. If the French had then marched into the Rhineland, we would have had to withdraw with our tails between our legs, for the military resources at our disposal would have been wholly inadequate for even a moderate resistance.”<\/p>\n

Those two days determined what Germany would do next \u2013 build out its army and start World War II.<\/p>\n

Comparing Putin with Hitler, as one of my Russian friends put it, is “absolutely abominable” because it diminishes Hitler’s atrocities and overstates by a mile what Putin has accomplished to date. Yet it feels as if we are at a Putin-of-1936 moment. Will he turn into a Putin of 1939 and invade other countries? I don’t know. But the events of the past nine months have shown Putin’s willingness to defy international law and seize the advantage on the ground, betting \u2013 correctly so far \u2013 that the West won’t call his bluff.<\/p>\n

As Garry Kasparov put it, while the West is playing chess, responding tactically to each turn of events, Putin is playing high-stakes poker. We ignore Putin at our own peril.<\/p>\n

Vitaliy Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. To receive Vitaliy\u2019s future articles by email or read his articles, <\/em>click here<\/em><\/a>.<\/em><\/p>\n

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The article Outside the Box: Notes on Russia<\/a> was originally published at mauldineconomics.com<\/a>.<\/div>\n
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By John Mauldin Russia and its redoubtable president, Vladimir Putin, have been much in the news lately. The latest flurry came when Putin was taken out behind the woodshed at the G20 conference in the Philippines last weekend over his recent moves to inject more Russian troops and arms into Ukraine. For today\u2019s Outside the […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-63961","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/63961","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=63961"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/63961\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=63961"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=63961"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=63961"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}