It’s War – ValueWalk Premium
Ukraine

It’s War

Today feels like history is being made. When a day makes history, it’s usually never for a good reason. It’s official. Russia is invading Ukraine. A war that many considered unthinkable has begun. Conditions in Ukraine are rapidly deteriorating. It will reshape European security. This is a very concerning situation. How the international community responds is crucial. Ukraine cannot succeed alone against Russia. The U.S. and Europe must find ways to come to Ukraine’s defense.

Q4 2021 hedge fund letters, conferences and more

Ukraine

  • Russia’s actions have brought the world to the brink of a new war on a scale we haven’t seen since WWII.
  • Russia was not threatened by NATO or Ukraine. NATO is a defense pact.
  • After years of wondering if NATO still had a purpose, it had found one now.
  • The invasion of a sovereign state is a war of choice. Conjured by Putin.
  • NATO and the West have failed to put forth a single, uniform position since the crisis began escalating.
  • The West’s inability and ineffectiveness works in Russia’s advantage.
  • Ukraine is not part of NATO. It’s intention to join NATO is written in its constitution but that won’t happen. On paper, NATO has no obligation to Ukraine. But it’s bigger than.
  • The conflict has planted the seeds to re-shape the world order. What it means for Europe. What it means for the rest of the world.
  • What if Putin succeeds in Ukraine?
  • We need to ask serious questions. Do we have a moral obligation to help weaker countries under attack from a dictator? Don’t we have a higher purpose to answer to? Do we just stand by and watch this?
  • If Western countries impose heavy economic sanctions, as they have promised, Russia may hit back in ways that further raise the temperature. An eye for an eye type of thing.
  • Biden has the domestic and international support to act against Russia. In a rare show of unity among Republicans and Democrats, Biden has broad support in Congress for tough action.
  • Expect a wave of Ukrainian refugees.
  • Also expect higher inflation.
  • It’s hard to have accurate news of the situation. The Russian propaganda machine is on full throttle.
  • By looking at Russian news, they are working hard at changing the narrative in their favor (they are the victim, acting in self-defense, they are protecting the people from Ukrainian genocide ethic Russians, the West wouldn’t engage in diplomacy, accusing the U.S. of crossing its “red line” by expanding NATO).
  • Putin doesn’t care about international law. Putin’s actions are based on some sort of concept of rebuilding the Soviet Union. In his eyes Ukraine is part of Russia.
  • The short-term goal is to “demilitarize” Ukraine, make it capitulate and replace it with a pro-Russia government.
  • Ukraine’s confidence in the West, which dragged it into the conflict and then abandoned it, is shaken.
  • Russia doesn’t care about sanctions. They are used to them and don’t fear them. They also took the last few years to sanction proof their economy.
  • It’s hard to measure the exact effect of the sanctions, even the most severe ones. The wild card is China. If nobody is allowed to buy natural gas, China will buy it. So there’s a market.
  • Russia has over $600 billion foreign reserves.They are built to take a hit.
  • Gaz: It’s still flowing into Europe. It has not been disrupted. But once they see the sanctions we can expect the energy situation to change.
  • Russia holds Europe by the balls because they are so dependent on Russian energy.
  • In normal times Russia supplies 30-40% of Europe’s gas. It’s higher in Germany. Although that share has fallen in recent months as Europe has increased LNG imports.
  • It’s mind-blogging how Germany bungle their energy security to be so dependent on Russia’s gas. Germany’s decision to phase out nuclear power is a historic strategic error. Even former German Chancellor Gerhard Schroeder sits on the board of Gazprom and Rosneft. Is it any surprise that he initially sought to exclude energy explicitly from any sanctions on Russia if it invaded Ukraine?
  • The pipelines between Germany and Russia started in the late 60s. The idea was that energy interdependence would produce peace. Instead it empowered Russia.
  • Energy: America and its allies need and can wean Europe off its dependence on energy imported from Russia.
  • High energy prices hurt Europe and help Russia. The higher the oil price, the more it helps Russia and makes them stronger.
  • High energy prices fund Russia’s foreign policy, including its armed forces. Energy is the foundation of Russia’s power.
  • Energy: It’s the long-term source of Putin’s power. Sanctions need to hit that. But that might come at a tremendous cost to Americans and Europeans.
  • Reducing reliance on Russian gas will require substantial investment and political will.
  • European gas currently trades at around $26 per MMBtu. The price of American gas is a little over $4.
  • Right now there’s no war between Russia and NATO. But NATO members and former Soviet republics like Estonia, Latvia and Lithuania are on high alert. I would also include non-NATO members like Finland, a former Russian possession.
  • Neutral Finland is arming up. They bought 64 U.S. F-35 jet fighters in December. They are close to NATO.
  • Russian absorption of Belarus, puts considerable Russian firepower on the border of Poland and Lithuania.
  • If a single NATO serviceman is killed, Article 5 is invoked. War against one member of NATO is a war against all NATO members.
  • NATO outmatch Russia in terms of forces and military equipment. But…Russia has a massive nuclear arsenal and has not ruled out using them. But I don’t think he wants to start a war with NATO.
  • Now the war has begun and it is no longer just about whether Russia will receive a guarantee from NATO anymore.
  • NATO will need to make clear to Russia that such moves to reinforce eastern Europe are not a prelude to NATO military intervention in Ukraine.
  • China: China is not 100% in Russia’s camp. Yes China has beef with the US. But I’m not sure China really wants this. I don’t think China wants to further deteriorate their relationship with the US and Europe. I also don’t think they want to anchor themselves to Russia, a weaker power.
  • China: Citing concerns over questions of territorial integrity has shied away from endorsing Putin’s invasion.
  • China: Sometimes it’s better to stay with the devil you know best.
  • Taiwan: This could be the first chess move in re-organizing the world order established after WWII. If the West (mostly the US) doesn’t do anything, what is stopping China from taking Taiwan?
  • Taiwan: The Ministry of National Defense of Taiwan tweeted that 9 Chinese fighter jets entered Taiwan airspace. I don’t want to read too much into this because China does this all the time, but considering the timing and the geopolitical situation, I wouldn’t discount anything.
  • 90s History: In the 90s, under the Budapest Memorandum of 1994 Ukraine gave up its nuclear weapons in return for security assurances. So much for that. Some 1,800 nuclear weapons returned to Russia.

This is the beginning. The beginning of a situation that could get very ugly. I’ve no clue on it will play out. We are talking about confronting a nuclear power with Putin at its head. But we do know that Ukraine cannot succeed alone against Russia. This is an opportunity for the world to forget about its little problems and come together for a greater cause.

Article by Brian Langis


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