Part I – Thoughts on the Ukraine Crisis
Thoughts & Observations
Q4 2021 hedge fund letters, conferences and more
If Rocky IX was made today, he would be wearing an Ukrainian trunk.
There’s been six days of fighting and Russia has made a serious mistake. Russia severely underestimated the capability and fighting spirit of the brave Ukrainian people. The Ukrainians have the heart of a lion. This war is a heartbreaking study about what people will sacrifice in the name of their country.
Russia also didn’t expect the massive display of solidarity behind Ukraine. There’s a real coming together of the global community that we haven’t seen in decades.
Seven days ago felt like a different world. The world has turned on its axis. Since the invasion started there’s been a massive global paradigm shift:
- We forgot about Covid. Two weeks ago I was watching people cry and protest over having to wear a mask. Now I’m watching husbands and fathers say goodbye to their loved ones, their children, not knowing if they will ever see them again.
- Putin killed Swedish and Finland neutrality and German pacifism in a single weekend.
- Russia has moved from a sullen, revisionist state to a clear and present danger to its neighbors, and has directly threatened countries beyond Ukraine.
- Governments have no trust in or tolerance for the Putin regime. They tolerated Putin as a nuisance to live with. That’s over.
- Switzerland announced they will join the EU sanctions against Russia. They are banning entry to five oligarchs close to Putin. Significant, considering Switzerland’s traditionally neutral stance.
- The world’s major economies, save China, have combined to foment a financial crisis in Russia, casting aside the previous worries about systemic economic risk. That, in turn, may provoke domestic unrest with unknown implications.
- The sanctions response has been global.
- Economic and geopolitical implications stretch well beyond Europe.
- The EU is providing weapons to a country at war. A first in its history.
- Denmark becomes the first European country to let volunteers join foreign brigade in Ukraine.
- Various multinationals are cutting ties to Russia. Shell and BP are dumping their Russian assets. BP is taking a $25 billion hit as it is offloading its 20% stake in Rosneft.
- Germany is making a u-turn on nuclear energy. Germany mulls extending nuclear plants’ life.
- The Russian central bank was hit with sanctions. Limiting the use of some of their foreignreserves.
The swift response from the global community is way beyond what Putin or anyone could have predicted. Yes, sanctions were being discussed. But practically destroying the Russian economy overnight? I didn’t see that coming.
Ukraine Identity
If there were any doubts about Ukrainian identity as a people, they are forging one now. War does that. Standing together in the trenches does that. Fighting and sacrificing for a cause that’s much bigger than you does that. They are fighting for their land, the people before them, their family, their values, for their children and their children’s children.
Despite being founded in 1867, it’s been said that being a Canadian wasn’t really a thing until the Battle of Vimy Ridge (1917), during the First World War, when strangers from across Canada with not much in common stood and fought together in France. A Canadian sense of pride was born in that battle.
For the Ukrainians, win or lose, they are forming an identity hammered out of fire. There’s not a single passport that can replace that.
But that sense of Ukrainian pride was not born last week. The seeds were planted a while ago.
- In 1991 an overwhelming majority of 92% of voters approved the declaration of independence from the Soviet Union.
- In 2004 there was the Orange Revolution.
- Late 2013-Feb 2014, the Maidan Revolution followed by a civil war
If there’s a takeaway here, it’s that the Ukrainians will fight for what they believe in. What do they believe in now? Ukraine as a democratic sovereign country. How do I know it’s democratic? They elected a comedian that played piano with his private parts in front of a live audience as their President.
Volodymyr Zelenskyy – The Hero
Win or lose, he’s going down as a legend.
The President of Ukraine is a real leader. A President of the people. The world needs more of him and he has the world behind him. Can’t recall the last time I complimented a politician.
Watch this speech. Even with English subtitles, it’s hard not to be moved.
Zelensky decided to stay with his people and fight instead of being evacuated. His people and the world have rallied behind him.
It’s hard not to take a shot at Trudeau. The contrast with the Ukrainian leader is astounding. One is risking his life to fight and while the other disappears when a bunch of trucks roll up honking. Ukraine is lucky that Trudeau is not Ukrainian.
Vladimir Putin – The Beginning of the End
This is the beginning of the end for Putin. I believe his days are numbered. He wanted to play Czar (or is it Tsar?) and it’s leading to the collapse of Russia. He miscalculated and the Russian people are going to suffer. Because this is Putin’s war, he’s exposing himself to personal blame.
Russian history is not on his side.
In September 1915, with the Russian Empire losing World War 1, the hapless Tsar overruled his cabinet; demoted his cousin, sending him to Transcaucasia; and took supreme command. That suddenly, and rightly, exposed the Tsar to personal blame for Russian war performance, which worsened. In March 1917 a republican revolution deposed the Tsar, who abdicated, which did not save him or his family some time after a second, communist revolution in November. (Thanks to Brian Erskine for the info)
Putin looks like a one man ruler surrounded by “yes men”. The video captures it. It’s basically Putin destroying his spy chief on television for his failure to “speak directly”. The chief spy demeanor says everything. The whole thing is uncomfortable and terrifying.
Putin looks isolated and out of touch. What’s with these strange meetings where Putin sits at one end and the others seated far down the table. Putin is always a healthy twenty feet away from anybody. Is that paranoia or just playing it safe with Covid?
Putin meeting with his advisors. All the meetings are like that lately.
With much of the world moving against him, economic sanctions piling up and a military campaign less successful than he expected. He miscalculated the economic cost, the political cost, and the challenge of invading Ukraine.
Putin also enters a special club. He gets to join a small number of leaders to be hit by personal sanctions. That club includes Mr. al-Assad of Syria, North Korea’s Kim Jong Un and Venezuela’s Nicolás Maduro. I wonder if these guys get their own special section at the U.N.
Miscalculation
By pilling up troops on the border and having a show of force, Putin was hoping to take Ukraine without firing a shot. But hoping is bad planning. This was a mistake. Kiev is not Kabul where the Taliban just rolled in. Putin underestimated the capability and fighting spirit of the brave Ukrainian people. I don’t know if Putin expected to be welcomed as a liberators meeting scant resistance from the Ukrainian, but he made a serious miscalculation.
It’s understandable. This happens all the time. The US has made the same mistake in Vietnam, Afghanistan, and Iraq. These mistakes led to drawn out conflicts that depleted finance, resources, materiel and the most precious resource of all: lives.
Russia’s plan clearly is to reach Kyiv as quickly as possible and force Zelensky to surrender, including Ukrainian forces across the country. If Russia can’t take Kyiv quickly or if Zelensky refuses and resistance continues across Ukraine, Russia’s costs and problems multiply.
Putin wanted a weaker NATO, it will be stronger.
Putin wanted a weaker EU, he made it stronger.
Putin wanted to rebuild the Russian empire, it’s now weaker.
Miscalculation Part II
I think the West miscalculated too. With Afghanistan fresh in people’s minds, I think the West didn’t want another foreign policy disaster. The common narrative was that if Russia invaded, this would be a quick war, and Putin would force everyone to the negotiating table. This probably explains the lack of weapons and support provided to Ukraine. They didn’t want the equipment to fall into the enemy’s hand. The US looked ridiculous after the Afghanistan fiasco. They didn’t want a repeat, especially against Russia. Imagine the humiliation of videos of Russians parading around US military equipment.
Ukrainians rallied by Zelensky, have displayed unexpected resilience in their defense of the capital. They might not have the numbers, the military equipment, or the weapons but they do have more heart. After six days of fighting, the narrative is changing. Recognizing the will of the Ukrainian people to fight for their land, the US, the EU and NATO have been shoring up their support and providing weapons.
What For?
Hypothetically speaking, even if Putin conquers Ukraine, I don’t know how that works out for him. First he’s going to meet heavy resistance, insurgency/guerilla warfare. Second, the international community will never recognize the conquest.
So what will Putin achieve? He will temporarily own the regime in the Ukraine, something reversible since it’s not recognized by other countries. And he impoverished his population.
I don’t know how Putin wins. The more this drags on, the more the higher the cost to Putin. What do you tell the mothers of dead soldiers?
There won’t be peace with Putin in power. The world is done. One country can’t take on Putin because the cost is too high. Together Putin has no chance.
The US and allies need to approach Russia the same way the US approached Germany and Japan after WWII. Rebuild and invest in your former enemies to make them partners and better nations. The world benefited and still does today. Japan and Germany are strong allies.
Economic Fallout
When Putin came to power in 1998, Russia was at its lowest point. The country was falling apart. He rebuilt Russia. It’s far from perfect, but compared to where it was when he took over, it’s much better.
Then in four days he destroyed it.
He had a social contract with his people: Back me as your ruler and in exchange I will make your life better. Putin predicated his entire rule domestically on bringing ‘stability’ and ending ‘the chaos of the 90s’, and in the space of four days he’s managed to completely destroy the Russian economy. It’s insane. I’m still trying to wrap my head around that.
Here’s Putin legacy:
The Wiped Out of the Middle Class
What’s the difference between a Ruble and a Dollar? Answer: A Dollar. The value of the ruble against the US dollar is worth less than a cent (1 ruble = 0.0087 USD).
Most headlines are focusing on the oligarchs getting hit. But nobody expected sanctions that hard and that fast. The people that will suffer the most are the Russian middle class. They are about to get crushed. The ruble is falling like a rock. It took a 40% hit while I’m writing this. As the ruble is crashing, crippling hyperinflation could be on its way. I know that the Russian people have a great capacity to suffer. They understand sacrifice. But they didn’t ask for this, are pitchforks next?
The run on banks for rubles has led to a run on expensive high-end goods. Expecting their currency to be worthless, Russians have converted their cash into high quality hard goods. Maybe that will absorb the inflation shock.
Organic Sanctions
When the Moscow Stock Exchange crashed 70% on the first day of the war, combined with the collapse of the ruble, you don’t need sanctions to cause economic damage. The massive wealth destruction is emporishing the Russians.
This week the Russian stock market didn’t open. Russian ADRs fell 70%+. So much wealth has evaporated. Nobody wants to hold Russian assets. There’s a run on banks to get cash.
In a desperate attempt to stop the bleeding the Russian central bank is trying to save their currency by raising interest rates from 9.5% to 20%. That won’t do much. Nobody wants rubles.
Central Bank Asset Freeze
A very targeted and clean sanction says I cannot do business with you. The sanction that hurt the most is Western powers hitting the Russian central bank with sanctions. The US and other powers cut off Russia’s central bank from US dollar transactions. This will prevent Russia from accessing their “rainy day” fund that they were expecting to rely on for the invasion of Ukraine. The reserves were supposed to buffer the plummeting ruble. The $630 billion in reserves only matters if you can use it to defend his currency, specifically by selling those reserves in exchange for buying the ruble. Much of the reserves are deposited with foreign institutions in the form of euros, US dollars and government securities. Fortress Russia no more.
Since the country cannot access its forex reserves abroad, the government will have no choice but to seize all the deposits in order to get out of the situation.
Energy Non-Sanctions
Russia is the world’s second-largest exporter of oil and natural gas. Russia and Ukraine are also called the world’s breadbasket, as together they represent more than a quarter of the global wheat export and a significant slice of the world’s corn market. A commodity price spike would mean that we will likely have to pay more at the pump and for groceries.
Gazprom and Rosneft are not targeted by major Western sanctions, a sign of their importance in the global energy markets.
The message is clear. The world needs Russia’s energy and Russia needs the cash.
China – It’s Better to Stick with the Devil You Know
I don’t buy the Russia-China “friendship”. China and Russia have forged close ties in recent years, often aligning to oppose what they view as interference by the US and its allies. The two leaders met earlier this month and declared that friendship between their countries had “no limits”. No limits friendship? That status is about to be changed from “friends” to “it’s complicated”.
China and Russia might have common enemies, but they are not natural allies (Sino-Soviet border conflict). China has been quietly distancing themselves from Russia’s beleaguered economy. That “friendship” is more a transactional relationship. They are partners. China is a manufacturer and Russia has the resources. China needs the commodity and Russia needs the cash. And both countries can do business together without addressing human rights issues and ESG concerns.
China is rational about this. They don’t want to anchor themselves to a weaker power, especially one that’s sinking. Yes, China and the US have their differences. They don’t see eye to eye on many subjects. They are rivals. Their issues are not about to be solved anytime soon. But China needs the US and Europe. And China cares about one thing: China. So it’s better to stick with the devil you know best.
There are hint of China distancing itself from Russia. China state-owned enterprises restricted financing for purchases of Russian commodities. It’s a balancing act. China’s attempts to comply with US sanctions while continuing to support the Russian economy through the Chinese financial system (transactions in Yuan). China’s future is in engaging and competing with advanced countries, not with sinking Russia.
And with Russia in a tough spot, wouldn’t China take advantage of that to squeeze them out?
Nuclear
Putin invoked Russia’s deadly nuclear capability. He’s trying to take down the entire world order. It’s scary to think about.
For the moment we just need to relax. It’s postering.
Yes, Putin is crazy. Yes there’s been many “he can’t be doing this” moments. I don’t know what it’s in his head.
But I know he also wants to live.
Why Does It Matter?
Yes, Ukraine is far away. But sometimes your national security depends on the national security of your neighbor. Ask Poland, what happens once Ukraine falls? And the Russia shares a border with Canada at the North and the US with Alaska.
Ukraine has become the front line in a struggle, not just between democracies and autocracies but in a struggle for maintaining a rules-based system in which the things that countries want are not taken by force. We should be paying close attention to this.
The defense of Ukraine is not about oil. It’s not about money. It’s not about religion. It’s about right and wrong and those are the wars that we should fight. I’m not advocating for boots on the ground but there’s a lot we can do to help Ukraine. The whole world is behind Ukraine. If that’s not enough to win, I don’t know what does.
We need to stand up for what is right. Sitting back and watching what will transpire is not enough. I don’t want the Ukrainian and Russian people consumed by the devastation of war. This madness needs to be stopped. We needs to find a way to negotiate a peaceful agreement between Ukraine and Russia that also addresses both country’s concerns. We also need to support action that will rebuild their economy and infrastructure like we did with Germany and Japan after the Second World War.
The world and Russia can work together. It’s possible. The US and Russia stood side by side to defeat the Third Reich.
We need to focus on an agreement that brings peace and prosperity to the world. There’s a real coming together of the global community that we haven’t seen in decades. This gives me hope of a better, safer, more stable future.
We stand united in seeing Putin defeated.
Article by Brian Langis
