December 14, 2021
Yesterday, Executive Editor Kim Iskyan detailed how China is a global hot spot that could impact U.S. markets next year in a big way… as in a 10%-plus correction, if not a 20%-plus bear market.
Today, we’ve got the conclusion to Kim’s story, with contender No. 2 revealed…
The Second Global Hot Spot Most Likely to Upend Your Portfolio in 2022
By Kim Iskyan
Russia and Its Fraternal Friend
The situation: Russia may (again) be about to invade Ukraine. As of last week, U.S. officials warned that Russia is moving up to 175,000 Russian troops to the Ukrainian border, and could be planning an offensive as soon as early next year.
On December 7, Russian President Vladimir Putin and U.S. President Joe Biden had a two-hour-long video conference on the matter, during which Biden threatened economic sanctions if Russian troops entered Ukraine. Later, in a big concession, Biden said that he’d arrange a meeting with Russia and Western military alliance NATO to discuss Russia’s concerns – the biggest of which is that Ukraine might start the process to eventually join NATO or the European Union.
As context… over the past several centuries, Ukraine has been a part of Russia on and off (through its various names). The most recent instance was when Ukraine became part of the Soviet Union in 1922. During the early years of Soviet rule in the 1930s, millions of Russians and other Soviet citizens migrated to Ukraine.
In 1954, while both countries were still part of the Soviet Union, control of the region of Crimea shifted from Russia to Ukraine… and when the music stopped for the Soviet Union in 1991, Crimea was part of Ukraine (which, as I’ll get to in a moment, is important to the story).
Fast forward to late 2013, when Ukraine was openly flirting with the European Union. Since the fall of the Iron Curtain, the economy of neighboring Poland had grown nearly three times as fast as Ukraine… And many Ukrainians longed to get some of the economic-growth pixie dust that they’d missed out on by being aligned with Russia.
But when Ukraine’s government was in talks to sign an agreement with the European Union that would put it on the path toward greater economic integration with the West, it was a bridge too far for Russia.
In the past, Russia had limited the flow of crucial natural gas to Ukraine when it didn’t do as Russia pleased… And this time, in addition to that implicit threat, Russia offered a $15 billion aid package to Ukraine. The country’s president called off the deal with the European Union and soon fled the country (for – wait for it – Russia).
Russia’s historical links to Crimea – and the threat of Ukraine “going West” – were the justification for Russia when in early 2014, it marched in and took Crimea back, in an annexation that earned Russia global condemnation and economic sanctions by the West… but not much more.
When I visited Kiev, the capital of Ukraine, a few weeks after Russian troops took Crimea, there was fear in the streets that Russian troops wouldn’t stop at Crimea. One friend complimented me on my choice of hotels in downtown Kiev because, he said, it was beyond mortar-strike distance… And one company executive told me that his family had a “go bag” at the ready in case Russian troops got any closer.
And now… Ukraine is feeling Russia’s hot breath again.
Why it matters: Much of Ukraine is culturally, geographically, linguistically, and historically tied to Russia. It’s a buffer between the rest of Europe and Russia.
That means that Ukraine matters to Russia – a lot. Since the dissolution of the Soviet Union, Russia has been trying to find a way to remain relevant on the global stage. Russia has watched its old sphere of influence shrink… as Central and Eastern Europe, along with the Baltics, have joined NATO (the Western military alliance) and the EU. From a Russian perspective, Ukraine is the last line of defense against the West’s steady geopolitical creep.
On the other side, President Biden doesn’t want to appear to be “soft on Russia” – and knows that if he gives Russia an inch, they’ll take a foot. (However… President Biden has already given an inch by agreeing to discuss Russia’s concerns.) NATO – and the U.S., most of all – is wary of Russia making demands about what it can and can’t do. And they also don’t want Russia to nibble off more bits of neighbors.
And then there’s the not-small issue of energy: Europe gets around 35% of its natural gas from Russia (the world’s second-biggest producer) – which accounts for around a quarter of all European electricity generation. Further complicating matters is that a significant portion of that gas flows through – you guessed it – Ukraine.
Europe’s dependence on Russian energy is a sharp and heavy Damoclean sword perched above Europe. Russia needs the revenue from the sale of its natural gas – though probably not quite as badly as Europe needs natural gas to keep the lights and heat on – so it’s clear who has the leverage in this equation.
What to look out for: Thirty years ago, on December 8, the USSR was formally dissolved with the signing of the Belovezh Accords. The Cold War was over, and the U.S. had won.
Since then, Russia – and Vladimir Putin – has been struggling to remain relevant. Today, Russia’s economy is big enough to be just the fourth-largest state in the U.S. – or half the size of the economy of California… which is smaller than Italy and Canada. By population, Russia is smaller than Pakistan and Nigeria. But with the world’s largest nuclear arsenal – and also because it’s the world’s biggest country by land mass – Russia is always in the conversation.
Putin’s approval ratings have been flagging because of persistently slow economic growth and the Kremlin’s mismanagement of the pandemic. Even though there is no viable political opposition – they’re either in jail or dead – like any good dictator, Putin is thoroughly paranoid about being overthrown. And as every politician knows, there’s no better way to boost domestic support than to invade another country – while fueling an us-against-the-rest-of-the-world mentality.
In coming days, Putin will get his high-profile audience with European leaders, where he’ll try to extract a promise that Ukraine will not be asked – or permitted – to join any Western alliance, ever. EU leaders and the U.S. will equivocate. The issue will be kicked down the road.
Will Russia invade Ukraine? Probably not, as political-risk consultancy GZERO explains…
The costs of an invasion, both human and material, almost certainly outweigh any conceivable benefits. It is true that annexing Crimea… in 2014 boosted Putin’s popularity at a time when his approval ratings were flagging… to invade today would mean entering an almost entirely hostile country, risking a significant amount of casualties.
But the longer the conversation continues, the better for Putin: He’s on the stage, which is where he wants to be.
How bad could it get? If you squint, Ukraine is a bit to Russia what Cuba was to the U.S. in the early 1960s… Just like the U.S. government under no circumstance could allow for Cuba to “go red,” Russia is projecting the notion that under no circumstance will it allow Ukraine to “go West.”
It’s unlikely that Russia will invade Ukraine again. But if that were a sure thing, President Biden wouldn’t be rushing to clear space in his schedule for a chat with Vladimir Putin. An invasion by Russia might this time spark more than just hot air by the West… and given heightened sensitivities, could quickly bump into the Baltics (another sore spot with Russia) or other NATO countries – which would be a far more serious matter.
What it might mean for markets: The 2014 annexation of Crimea was mostly ignored by markets. But it wouldn’t be this time. It’s true that Ukraine – unlike Taiwan – doesn’t make a critical component of the daily life of billions of people…
But conflict between the world’s two biggest nuclear powers could become something far bigger much more quickly. And that would be at least as bad as China trying to get its way with Taiwan, with similar implications for global markets.
A new system shows which stocks could soon rise 100% thanks to a Connecticut couple’s catastrophic 401(k) loss.
Argentina invading Chile… Turkey scowling at Greece… terrorists targeting American businesses in Asia… which one?
Turkish President Recep Tayyip Erdoğan, motivated by what Foreign Policy magazine calls a “toxic mix of Islamist, ultranationalist, and anti-Western ideologies,” is willing to do almost anything to divert attention from his government’s incompetence.
In October, he threatened to expel the ambassadors of 10 Western countries – after threatening to change the borders with Greece that were settled in 1923 after a war between the two countries.
In response, the U.S. and Greece – which (like Turkey) is a member of NATO – have reinforced defense cooperation deals and expanded bilateral security arrangements.
Will Turkey go to war with Greece? Most likely no.
However: Never underestimate the lengths to which a desperate dictator, like Erdoğan, will go to maintain power – or distract the population.
And the same could be said of China and Russia…
Love us? Hate us? Let us know how we’re doing at [email protected].
Executive Editor, American Consequences
With Editorial Staff
December 14, 2021