Some Thoughts on the War in Ukraine

Given that he is a world class investor we always pay special heed to the words of Jim Rogers. It is always worth the trouble to listen to people who are directly involved in the investing world. Surely, it beats listening to politicians and pundits-- people who have far less, if any skin in the game.

So, Rogers recently pointed out that the war in Ukraine derives from an action taken by the Obama State Department in 2014. Then, under the aegis of one Victoria Nuland, we overthrew the elected government of Ukraine, because the prime minister was an ally of Russia. The State Department official who was in charge was named Victoria Nuland. Sound familiar?

To call Ukraine a democracy stretches credulity. 

And then, American leaders started toying around with the idea of having Ukraine join NATO. Most recently, the singularly inept Kamala Harris floated the idea at a Munich Security Conference. The Russian response-- an invasion of Ukraine..

Rogers opens with these thoughts:

Rogers argues that the current geopolitical crisis stems from 2014, when the U.S. State Department instigated a coup in Kiev. U.S. elected leaders are seeing their actions be paid for gravely, "now we're all paying a gigantic price for it," he says.

Rogers details his argument to me on why the increasing prospects of Georgia and Ukraine joining NATO aggravated Russia... and how the threshold of tolerance was breached from Russia's point of view years later.

So, let’s see, from Victoria Nuland to Kamala Harris, and why not mention the current Energy Secretary, one Jennifer Granholm, our foreign policy has been run by strong, empowered women. Or, should we say, by a gaggle of giggling schoolgirls.

Now, considering how abysmally she has failed each of her assignments the Biden administration sent Kamala to Poland to make a fool of herself and, by the by, to make America look like a third rate backwater.

Why, Kamala cannot even read from note cards. Yesterday, she said this:

I am here, standing here on the northern flank, on the eastern flank, talking about what we have in terms of the eastern flank and our NATO allies, and what is at stake at this very moment.

Kamala never misses a chance to embarrass the nation.

Anyway, Jim Rogers suggest that our economic sanctions, which are apparently a sign of great strength, are actually undermining the reserve status of the dollar:

Rogers emphasizes a critical stance against economic sanctions, and how financial warfare directed from the U.S. will crush the dollar sooner than expected.

Frantically, other sovereign nations are trying to, "come up with something to compete with the U.S. dollar," the legendary investor told me. "We're [the U.S.] shooting ourselves in the foot every day," he says….

Rogers parallels a turning point in monetary history to the current state of the United States and the dollar saying, "it certainly was not good for Britain which used to be the world's international currency... when they lost that status, they lost a lot of things."

"No currency has lasted forever, and no #1 currency has lasted forever," Rogers told me.

Rogers says that governments are already working on their own digital currencies, but holds firm when detailing that he, "cannot see the world having 100% computer money Rogers predicts that sovereign nations will explain to citizens how government-issued digital coins will be secure and safe for the good of the people, and most will believe it.

And now, while we are at it, I will share some analysis from the eminent economic historian, Niall Ferguson. Being a historian, Ferguson looks to the past while assessing future possibilities. He bases his analysis on the assumption that history repeats itself. It would be a cosmic irony, however, if history did not repeat itself. 

So, here is his assessment. Time will tell if history is repeating itself in Ukraine.

He begins thusly:

Clearly, the Ukrainians are doing real damage to Russian infantry and armor and shooting down an impressive number of low-flying helicopters and planes. They will certainly be able to make any Russian advance into central Kyiv very costly to the invaders.

And yet,

But the Ukrainians have no real answers to higher-altitude bombardment and missile attacks. The fate of an independent Ukraine will be decided in the coming weeks or days. If cities continue to fall to the Russians, as Kherson has and Mariupol may, we may look back and say that Western arms shipments to President Volodymyr Zelenskiy’s government were too little, too late.

As for the sanctions which we are visiting on Russia, he believes that they are causing significant damage. Strangely, recent polls have shown that Russians are more, not less, approving of the performance of Vladimir Putin. So we should not be so quick to pat ourselves on the back:

To my eyes, the most striking feature of the sanctions against Russia is the way that Western corporations have gone well beyond the letter of government requirements. No one ordered the big U.S. technology companies to turn off or restrict most of their services in Russia, but they did so. Unlike Soviet citizens, who were accustomed to a state monopoly on communications, today’s Russians have come to rely as much as we do on Big Tech. Being cut off from the metaverse may prove a more psychologically painful deprivation than shortages of imported foods.

Russia’s economy now faces as severe a blow as it suffered in the early 1990s, when the Soviet Union fell apart and the planned economy collapsed. It is teetering on the brink of a financial crisis that will see bank runs, soaring inflation and default on at least some sovereign debt. But even a 35% quarterly decline in gross domestic product does not condemn a country to military defeat if its planes can still fly and its tanks still fire rounds.

But, Ferguson, ever the optimist, thinks that it’s possible that Putin will be removed from power by someone from his inner circle. This feels like wishful thinking, but everyone has a right to a bit of wishful thinking:

On the other hand, it was obvious even during the somewhat farcical broadcast of the Russian Security Council meeting two weeks ago that not everyone inside the Kremlin was wholly comfortable with Putin’s invasion plan. More plausible than a popular revolt or an oligarchs’ mutiny is a palace coup led by one or more of Russia’s security service chiefs. The people with the power to arrest Putin are the people he counts on to execute his arrest orders: Nikolai Patrushev, the head of the Security Council and, like Putin, a long-serving KGB officer; Sergei Naryshkin, the head of foreign intelligence; and Alexander Bortnikov, who heads the Federal Security Service, the successor to the KGB.

Yet, Ferguson remarks a point that your humble blogger has already made. The war with Ukraine would not have happened without the agreement of Chinese president Xi Jinping:

Putin’s war would not have gone ahead without a green light from the Chinese leader, Xi Jinping, who was able to specify that the Russians wait until the Beijing Winter Olympics were over. The Chinese now have the option to assist Russia economically. The question is whether this leverage would give Xi the role of intermediary played by Theodore Roosevelt in 1905, when it was Japan that Russia was fighting.

We know from a number of reports that Chinese peace-making is a possibility. On Tuesday it was reported that China, France and Germany were “coordinating to end the conflict.” We can assume that the messiness of the war is not pleasing the leadership of the Chinese Communist Party, who have their hands full with Covid (remember that?), a slowing economy and their upcoming Party Congress, and wanted a quiet world in 2022.

On the other hand, we should not underestimate the closeness of the Xi-Putin relationship and the extent to which Xi’s preference must be for a Russian victory, given his own ambitions to bring Taiwan under Beijing’s control. My guess is that the Chinese make no serious diplomatic move until they are convinced Putin’s invasion is thoroughly bogged down in Ukraine’s spring mud.

One suspects that Xi would be happy to have Putin do the fighting for him, just as America is happy to see the Ukrainians fight for its interests.

Ferguson is less than optimistic about the damage that sanctions can do. In that he joins a number of serious thinkers. Moral outrage counts for little on the world stage:

However, spasms of moral outrage tend to contribute very little of practical use to those intent on building nation-states. That was Prussian Prime Minister Otto von Bismarck’s point in 1862, when he declared: “Not through speeches and majority decisions will the great questions of the day be decided … but by iron and blood.”

The only real significance of Western public outrage at Putin’s actions is the political pressure it exerts on Biden and other leaders to take a tougher line with Russia.

The Ukraine war is going to damage Joe Biden, because it is going to produce more inflation. Hmmm.

The problem for Biden — and it will soon be a problem for his European counterparts, too — is the economic damage this war will cause. Inflation expectations had already shifted upward sharply as a result of the excessive fiscal and monetary stimulus administered early last year in the form of the American Rescue Plan and the Federal Reserve’s continued asset purchases. History shows that wars (much more than pandemics) are the most common cause of jumps in inflation.

Even if the Russians fail to scupper the scramble to resuscitate the Iran nuclear agreement, the return of Iranian oil to the world market is unlikely to offset the shock of Western sanctions on Russia. What’s more, these price spikes are not confined to oil and gas but involve a host of other commodities. The prospect of this year’s Ukrainian grain harvest being disrupted means a significant surge in food prices, with all kinds of consequences, especially in developing countries.

And then there are the repercussions for the world financial system, none of which are very good:

Nor can we ignore the risks that may be lurking within the international financial system. A great many institutions blithely ignored the approach of war and have been left holding large quantities of Russian assets that have plunged in value. Losses on this scale — and with more to come if the Russian state defaults on some of its debt — almost always have repercussions. The Russian default on local-currency bonds in 1998 was an important element in the Long-Term Capital Management blowup that year.

Ferguson concludes that this is the first military action of Cold War II, between the rising authoritarian nations of the East and the decadent democracies of the West. Then again, it might not be. As I said, sometimes history does not repeat itself.

Add these seven imponderables together and you see how profoundly important the next few weeks will be. This is the first big crisis of Cold War II, which is in many ways like a mirror image of Cold War I, with China the senior partner, Russia the junior, and a hot war in Eastern Europe rather than East Asia (it was Korea’s turn in 1950). I do not know how the crisis will turn out, but I do know it will have profound consequences for the course of the superpower contest.