I post mainly photographs with a bit of narrative. Sometimes I post narrative with a photograph or two thrown in. Generally I try to do so with some humour in the mix. Less frequently still I try to write about current affairs. That is dangerous in the sense that I may well express views that run contrary to those of the reader. Offence may be taken. Today is such an occasion.
I often counsel people, in my capacity as a coach or NED, that the biggest threats rarely come from the direction in which we are all looking. It is usually something seemingly innocuous that flares and catches us unawares. Whilst the world looks at the inexorably escalating tensions in the East few people have been looking seriously at the events in the Ukraine as a potential seismic geopolitical event.
Now perhaps the feeling has changed. I have been thinking a lot about the situation. For two reasons. Pure curiosity and to reflect on what an unexpectedly adverse outcome might mean for the financial markets and my pension fund.
I hear echoes of two crises past. Cuba 1962. and the Arab oil embargo 1973/74.
Ukraine is not on America’s doorstep but there is still an expectation, rightly or wrongly, that the USA will step in. There is perhaps some irony that the man who sparked the Cuban missile crisis, Nikita Khrushchev is the same man who gave Crimea to the Ukraine in Soviet times.
The oil crisis was in my mind because of the energy links that run from Russia to and through the Ukraine into Europe. As recently as 2006 Russia cut supplies to Europe, a clear sign that they can and may do so again. However, as with the crisis in the 70s it would be a double-edged sword. Following America’s backing of Israel in the Yom Kippur war OAPEC raised prices by 70% to over US$5 per barrel (yes, 5!). Production was cut by 5% and oil prices rose to US$12 per barrel. The impact was said to be a 2.5% reduction in US GDP. However it crystallized in Western minds the importance and urgency of energy self-sufficiency, energy efficiency and the need to find alternatives to fossil fuels. We are still on the quest. And of course if a supplier delivers less then they receive less income although much may be offset by higher prices. In Russia’s case I suspect they cannot afford to cut off supplies for long. Not only would they receive no payments but they would also be hit through their stock market and currency. The last week or so has provided ample evidence of that. In the meantime a potential domestic benefit of a financial bailout of Ukraine would almost certainly be that Gazprom will be paid the US$2bn of arrears it is owed. This is perhaps a case where Russia has someone literally over a barrel (of oil).
Putin’s nationalism and his political strength rest to a degree on Russia’s status as a petrostate. Economic hardships are rarely popular with the populace. People will worry about restoring the Soviet Union only if they are safe and have full bellies and warm beds. Putin will be acutely conscious of domestic risks as well as external threats. He will want to balance the achievement of his geopolitical goals with ensuring his personal security. He clearly likes to be the focus of attention but he will want to be so for the right reasons and not because the Russian people are suffering in the wake of his annexation of Crimea.
But to return to Cuba. Obama is cast in the role of weak president. I do not judge him. I read yesterday the memorandum written post the Cuba crisis by one Robert F. Kennedy. Thirteen Days: A memoir of the Cuban Missile Crisis. There are some interesting themes and quotes that might stand well today:
Keep strong, if possible. In any case, keep cool. Have unlimited patience. Never corner an opponent and always assist him to save his face. Put yourself in his shoes – so as to see things through his eyes.
On the military hawks:
These brass hats have one great advantage in their favor. If we do what they want us to do, none of us will be alive later to tell them they were wrong.
What guided all his (JFK’s) deliberations was an effort not to disgrace Khrushchev, not to humiliate the Soviet Union, not to have them feel they would have to escalate their response because their national security or national interests so committed them.
[Robert McNamara] The Secretary of Defense testified to Congress in 1964: “in the first hour [of all-out nuclear war] one hundred million Americans and one hundred million Russians would be killed.
Tellingly, when Kennedy told his allies what he was proposing to do and why, Macmillan, Adenauer and de Gaulle ….. accepted our recitation of the facts without question and publicly supported our position without reservation. Had our relationship of trust and mutual respect not been present, had our NATO allies been skeptical …….our position would have been seriously undermined.
I pause here to reflect on the status of the relationships today. It strikes me as inconceivable that such a statement could hold up now. The statesmen in Europe are long gone. Macmillan and John F. Kennedy were close friends despite the age gap. And Obama continues to preside over one of the most iniquitous surveillance regimes in the world. There is little trust in or goodwill towards him in Europe, I suspect.
Kennedy also had uppermost in his mind the lives at stake as McNamara alluded to. He examined his conscience, scrutinizing whether there existed a moral and ethical case for a military response. Robert Kennedy stated:
With some trepidation, I argued that, whatever validity the military and political arguments were for an attack in preference to a blockade, America’s traditions and history would not permit such a course of action. ……. They were nevertheless, in the last analysis, advocating a surprise attack by a very large nation against a very small one (Cuba). This I said, could not be undertaken by the U.S. if we were to maintain our moral position at home and around the globe.
Now Crimea is not Cuba by any stretch of the imagination but the thought processes of the Kennedy brothers are remarkable for their integrity and courage. Even if JFK did go to Berlin and announce that he was a doughnut (Ich bin ein Berliner), I can’t hold that against him. And he was acutely aware that Berlin and Turkey were both pawns in the Khrushchev game over Cuba. If he had struck against Cuba either or both of West Berlin and Turkey would have been ‘in play’.
The glaring difference between Cuba and Ukraine is this question: does the USA have a dog in the fight? The United States is not under direct threat. Ukraine is not part of NATO. It is not a member of the EU. What is the role of the USA in this conflict? Perhaps as STRATFOR believes the Russians are fearful that the USA will try to bring Ukraine into NATO and then Russia has another border, where it feels increased vulnerability.
Is Ukraine so geopolitically important to the USA that it should hold itself out as the great protector? The protector of whom? Historically Crimea was part of Russia from 1783 until Khrushchev handed it over in 1954. 58% of the population is ethnically Russian. Why does Putin want Crimea back? Russia already has a lease over the Sevastopol base there until 2042. Putin it seems fears closer links between the EU and Ukraine. He does not want an EU ally, partner or member on its doorstep. This appears to me as a flexing of nationalist muscles, an effort to take back what is, in his view, rightly Russian, gifted away by Khrushchev. A stepping-stone on the road to clawing back what he can of the Soviet Union? Does the USA fear that the Western borders will be next? Poland and the Baltic states, perhaps.
It is hard to see how sanctions will work. Possession is 9/10 of the law and it is difficult to see Russia withdrawing. What purpose will they serve? Well better to do something than nothing and in any negotiations of this nature it is natural to try and make life as uncomfortable as possible for your antagonist. Travel bans, assets freezes, visa restrictions are individually modest steps but they buy time and keep the conflict in the arena of diplomacy and economic wrangling rather than leaping directly to a military solution. Jaw, jaw not war, war. Sanctions can be ratcheted up over time.
John F. Kennedy went to extraordinary lengths to avoid giving Russia an excuse to escalate the Cuban crisis. Obama may be best served doing the same. Robert Kennedy was all too aware that it was unsafe to assume that the man on the other side was rational – think North Korea today. Buying time gives European countries breathing space to put in place contingency plans if energy supplies are cut. It certainly would not be easy and the impact would be devastating on the back of the continuing financial train crash, the wreckage of which is still strewn all over the place. If the Arab oil embargo caused a 2.5% GDP hit in 1973/74 then the shock waves that would ripple out across Europe today would be far worse. In some respects that is a good thing. The world is so interconnected economically that Russia would suffer along with the rest. Slowly but surely we are seeing globalization unwind. A return to autarky [national economic self-sufficiency and independence]. The global financial system remains unstable, fragile and vulnerable. Nobody would be immune.
I write this to help my own thinking rather than to offer it up as a flawless analysis of the current situation. I make no judgment on whether Obama is weak or strong. You can only play the hand you have and frankly Russia holds most of the cards. Sanctions, yes but ousting Putin is beyond my vision at the moment. Who will go to war over Crimea? Better perhaps to belatedly think about what Putin might do next. South Ossetia, Crimea……. ? I open this up to debate.