Many in the West have mocked Putin given the ineptitude of Russia’s military forays against Ukraine so far. Financial markets have quickly adjusted to the new norm of war in Ukraine and moved on. However, we should not be so quick to dismiss the apparent lack of Russian success as failure nor become complacent and underestimate a dangerous foe.
“Appear weak when you are strong, and strong when you are weak” Sun Tzu, The Art of War
From a strategic perspective, Putin is in a far stronger position than is portrayed by both the western media and its leaders. Sanctions are having little real impact. Russia is selling its oil to India and China and its currency has recovered from the initial shocks. Reports of massive bond defaults make the news and are well timed for the current G7 meeting but are effectively inconsequential at this stage. It is not an issue for Russia, it is an issue for the investors who are unlikely to ever get their money back.
It is clear that the Chinese and Russian governments are working closely together strategically. This is not a short-term strategy based on a few months. This is the early phase of a multi-decade alliance along with other emerging nations to rise against their common enemies. When we consider the situation from that paradigm it becomes easier to understand the next steps coming and how the future may play out.
“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” Winston Churchill
I see 2 strategic objectives unfolding for Putin. Neither have anything to do with Ukraine. I have come to believe that the war on Ukraine is simply to start the process, it is a convenient smoke screen for Putin to set the narrative at home. The first objective is to break up Europe. The second is for Russia and China to align and dethrone the US as the economic power of the next 50 years.
It is critical to understand the timeline when considering the possible bigger picture strategy at play. The next couple of years are where Russia has its strongest leverage over Europe with shortages in energy and food. Critically, now that this conflict has been set in motion, Putin knows this advantage exists for only 1-3 years until Germany and the rest of Europe find alternative sources of energy.
“The supreme art of war is to subdue the enemy without fighting” Sun Tzu, The Art of War
Regardless of how it came to be, Putin finds himself in the position of controlling the energy supply to Germany and much of Europe. If he limits or turns off the supply of gas to these countries who are dependent on Russia for their energy, he will bring those countries to their knees. From manufacturers to industrials, they simply won’t have the supply of energy to function, their economies will be decimated. The social and political consequences will be disastrous.
With rising inflation in Europe and increasing instability from the growing economic downturn, it will be difficult to stop Europe from fragmenting around the edges as the weakest nations deteriorate. Combine that with a dagger to the heart of the German economy and Europe will be in a very precarious position in every way.
“Our strategy is to destroy the enemy from within, to conquer him through himself” Adolf Hitler
The part that I think is being dramatically underestimated by financial markets and world leaders here is Putin’s willingness to use this advantage to the fullest extent of his powers. I do not believe he will hesitate to do so at the most advantageous time for Russia. It is not a negotiation, it is war. The next 2 winters in Europe will be critical. I would expect Russia to significantly escalate during this period either covertly with extended ‘maintenance’ of the critical gas pipelines or overtly by claiming a ‘justifiable’ retaliation.
Either way, everyone needs to understand that the economic and political stability of Germany and the rest of Europe is at the mercy of Putin. We cannot think like reasonable and kind people to understand what an authoritarian dictator will do to his enemies during a war. That is a mistake that has been made since the beginning of civilization. We must put ourselves in his shoes in order to understand what comes next. While many wish for Putin’s demise, there is no guarantee his replacement will be better. In fact, they may be worse.
“Divide et impera” Julius Cesar
Simultaneously, that will be a critical time for China. A month into the Ukraine war I considered a Chinese attack on Taiwan to be off the table in the short term given the apparent blunder by Russia and the subsequent sanctions. However, if Russia moves to weaken the European economy over the European winter, I think it becomes more likely that China moves on Taiwan too. It makes too much strategic sense to launch these attacks simultaneously while the US and Europe are at their weakest. Simple divide and conquer strategies.
Nothing I see from the leaders of the G7 nations tells me they are prepared for what’s coming. All I see are carefully orchestrated PR announcements designed to placate their own. The reality is they are all so preoccupied at home with the economic and social stress of inflation that they are all struggling to hold onto power domestically. That is not a situation conducive to unity when economic factors deteriorate the situation into an ‘every country for themselves’ situation.
The events I have outlined above may eventuate or may not happen at all, but from an investment perspective, I am more cautious to ensure we protect the downside risk. Often that simply means being aware of the possibility so that when you invest you are placing sufficient weight on the probability of an event occurring. Currently, there is little realistic big picture consideration by markets of how the war progresses from here. It is worth being prepared.
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