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  • Blue Oak Counsel

Lines are Drawn

"I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma”

Winston Churchill 1939

What a mess, what a bloody mess. The great strategist, the master geopolitical tactician Vladimir Putin, lauded by the hard right and hard left in the West, is in the middle of an almighty strategic blunder. Up to his country’s neck in a war it cannot win. Woolly objectives, overconfidence, emotive reactions, poor communication and terrible planning. Textbook on what not to do and how not to do it, how not to execute a military operation, how not to execute anything.

The Russian invasion is a big problem for Europeans, especially countries who rely on cheap fuel from the East to power their economy and heat their homes. It’s a problem for food prices, or more accurately people who for whom food is a big part of their budget. One quarter of global wheat comes from Russia and Ukraine, mostly through the Black Sea. Spiralling food costs impact the deprived much more than the wealthy. Restless and angry, after years of populist nonsense. Now hungry and cold next winter too? Not good.

Let’s take a step back. How did it happen? Putin was just another former KGB spy, nursing a deep sense of national loss after the collapse of the Soviet Union. He got into politics and became the Mayor of St Petersburg, then entered national politics. He was moved to bold action after the shambolic mismanagement of his beloved Russia by onetime Western darling and drunkard president Boris Yeltsin. Putin outmanoeuvred Yevgeny Primakov, the most obvious successor, persuading Yeltsin to anoint him as president. In return, there would be no investigations into Yeltsin or his family’s dubious dealings. Yeltsin sold his country’s assets to oligarchs and foreign vultures for cents on the dollar. Society was collapsing, chronic alcoholism was dramatically reducing life expectancy, unemployment was rampant. National dignity along with standards of living were on the floor. Society was free, chaotic and poor.

At first Putin was considered the right man to fix things by the West. In 2001, George W Bush, anxious to recruit Putin for the ‘war on terror’, famously told the world he looked into Putin’s eyes, thought he was a straight shooter, trustworthy and was “able to get a sense of his soul”. Putin had very different ideas. He was going to restore Russia to be a great power and he needed a secure power structure to help him do it. The Siloviki were an inner circle of former KGB intelligence officers, deeply nationalistic and ruthless. They were handpicked by Putin to deliver his new agenda and ran the security services, the army, the intelligence services and the justice system. The Silovki carefully managed elections, giving the electorate just enough rope to give the impression of democracy but not so much that seriously questioning Putin would be tolerated without consequence. (Although it must be noted, and is often ignored in the West, that Putin was wildly popular in Russia and that has not changed so far).

The first thing Putin did was force the kleptocratic business class to kneel to his will, or face repercussions. Repercussions included unfortunate falls from fifth floors, poisonings in London, or for those too careful for such random misfortune, the return of Stalinesque ‘show trials’, where famous business leaders such as Yukos oil owner Mikhail Khodorkovsky, were charged with fraud or corruption or both. The trials had the same result every time. Prison and ownership of the country’s assets restored to Russia, or, to a close circle whose loyalty to Russia and to Putin personally was beyond reproach. The oligarchs in Putin’s Russia could own the world’s biggest yachts and premiership clubs but they came to understand such privileges were subject to the pleasure of the President.

Having consolidated power and wealth domestically, Putin then began to cast his gaze at some of the old Soviet states and beyond. Putin had burnished his reputation in the second Chechen war. Using mysterious explosions in a Moscow tower block as a pretext, Putin pursued a scorched earth policy to subjugate the Chechens, who had broken away from Russia. The victory was notable for a tactical master stroke. Putin managed to recruit former Chechen rebel leader Akhmad Kadryov to the Russian side. Putin repeatedly surprised his opponents by finding common cause with unlikely allies. Hence his reputation as a 4D geopolitical chess player began to grow. (Kadrvov’s son, current regional leader of Chechnya, now fights with Russia in Ukraine).

Then Georgia was dismembered. Belarus was firmly brought under Russia’s orbit. The Moldovan breakaway region of Tranistria became a Russian military base. The nasty Syrian regime was saved from certain death through Russian intervention and Russia secured its Mediterranean port in Tartus.

By 2014 Ukraine was next. The West had long since learned the true nature of the man. But the plan to overthrow a troublesome government and put in place a puppet regime came a cropper and Putin had to make do with the de facto annexation of the East of Ukraine, followed up by swallowing Crimea. The Crimean invasion was so easy, it is clear, in hindsight that Putin would come back for the rest, when he was ready. And so Russia invaded the rest of the Ukraine this year.

There is nothing to add that you don’t already know. It is not going to plan for Russia. The war in Ukraine looks set for a long winded stalemate. There is no Russian victory possible, even now with more modest goals and some possible tactical wins. There is little chance of Ukraine expelling the Russians either, no matter how great their national pride. It appears politically impossible for either leader to compromise. Much like Churchill’s take in 1939, there are few clues as to how the war will end.

Investors must understand one thing, and know it well. The Ukraine invasion is part of a broader, bigger deglobalisation to polarisation movement, now well underway. That means supply chains that we have become used to, and that have improved the supply of goods and labour for consumers and commerce, will increasingly become blocked. Cooperation will be replaced by a growing tension and competition. That tension risks becoming ‘hot’ through proxy wars, not just in Ukraine.

The war in Ukraine will intensify the deglobalisation process, separating the world into three spheres, two of which, the US and EU are interconnected. In a previous post, this column urged the need for enterprise to carefully examine their supply chains, to domesticate within the EU or US markets where possible. The upfront costs might be higher but the long-term savings will be worth it. In the years to come, supply chain resilience will command a premium price.

The front line of a new Cold War is becoming clearer. It looks pretty much like the last one, with some changes. A large part of Ukraine, like the industrial East, where there are globally important supplies of important commodities like Lithium needed for batteries in electric vehicles, will be the wrong side. However, much of the rest of the Ukraine will firmly sit in the EU sphere of influence, including a massive part of global wheat supplies.

In the East, China is nervously monitoring the situation in Ukraine. As we sit here the US is building out a South Pacific grand alliance, based around Australia, South Korea and Japan, to counter China. Those markets will be part of extended and secure US supply chains. The rest of Asia is less clear. China has created its own enormous supply chains. It has landed countries with financial obligations that must be met through its Belt and Road project. As an example, Sri Lanka is collapsing into an economic and social abyss, in part because of debts owed to China for corrupt public projects like mega Airports that will lie empty or underused. Sri Lanka’s fate awaits other nations. The US is weaving a line across Asia. One side or the other, but not both. The only country big enough to play footsie with both sides is India.

Your assets, including stocks or bonds you own through your pensions or other vehicles and your business’s supply chains need to be the right side of the line. The US and its more timid partner the EU will make it more difficult for you to do business the far side of the line.

Take action now.


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