Putin Will Never Back Down | Institutional Investor’s Alpha

Excellent analysis of the situation in Eastern Europe by Bill Browder, founder of London-based Hermitage Capital Management:

I’m afraid that, based on the reasons behind Putin’s motivations for invading Ukraine in the first place, there is no chance that he will back down. To understand this, all it takes is a simple analysis of how this crisis unfolded.

First, Putin didn’t start this war because of NATO enlargement or historical ties to Crimea, as many analysts have stated. Putin started this war out of fear of being overthrown like Ukrainian president Yanukovych in February 2014. Yanukovych had been stealing billions from the state over many years, and the Ukrainian people finally snapped and overthrew him. Compared with Putin, Yanukovych was a junior varsity player in the field of kleptocracy. For every dollar Yanukovych stole, Putin and his cronies probably stole 50. Putin understands that if he loses power in Russia, he and his underlings will lose all the money they stole; he will lose his freedom and possibly even his life.

I believe that Bill is right. Putin was not reacting to EU or NATO encroachment (they were never a threat), but to Maidan. Especially when we read Michael McFaul’s (former ambassador to Russia) summation of Putin: “He is obsessed with the CIA…..With respect Ukraine he believes the US led the coup in the Ukraine. The Ukrainians had nothing to do with it. It was all the CIA.”

….. Putin has never dealt with economic chaos before. Though some may argue that this will bring him to the table to negotiate with the West, in my opinion any negotiation would be seen as a sign of weakness and is therefore the last thing Putin would want to do.

Putin’s only likely response is to escalate in Ukraine and possibly open up new fronts in other countries where there are “Russians to protect.” But doing so will only harden the sanctions, leading to further economic pain in Russia — and further military adventures to distract Russia’s people from that pain.

I cannot imagine a scenario in which there is any compromise, because for Putin compromise means being overthrown. Judging from all of his actions to date, he is ready to destroy his country for his own self-preservation.

We should start preparing ourselves for a war in Europe that may spread well beyond the borders of Ukraine. The only Western response to this has to be containment. This all may sound alarmist, but I’ve spent the past eight years in my own war with Putin, and I have a few insights about him that are worth knowing.

In Putin’s mind, he is fighting for survival. The US/EU/Nato and Ukraine are just a convenient scapegoat. His real enemy is the Russian people. This 1945 image of Benito Mussolini, his mistress Clara Petacci, and three others hanging outside a petrol station in Milan must haunt his dreams.

When they realize they have been duped, the anger of the Russian people will be palpable.

Read the full article at Unhedged Commentary: Putin Will Never Back Down | Institutional Investor's Alpha.

Ukraine: An opposing point of view

I received this from a long-time subscriber and requested permission to publish in the interest of presenting both points of view:

Dear Colin,
Being a subscriber to Incredible charts for many years and liking it very much, for some external reasons I was not reading articles for a long time, but when I happened to read the latest “Europe leads markets lower” article I was completely taken aback how it is politically charged and how it seems to be based on mass media propaganda, not on unbiased facts and analysis… It does not leave a good impression at all. I don’t mind other people having their own opinion, but I think that it should not be imposed on others in supposedly non-political, business articles, so may we respectfully ask your editors to refrain from politically motivated language and argumentation in the business articles and leave it to politicians and political forums instead ? I am talking about the anti-Russian bias and rhetoric – I am a Ukrainian citizen and lived in Ukraine for 30 years before moving to Australia 20+ years ago and I still have friends living in Ukraine, so I think that I am a bit more qualified on this topic than Mr. Abbott’s speeches or Mr. Murdoch’s newspapers. The plain fact is that neo-nazi thugs came to power in Ukraine as the result of coup-de-tat in February (supported and sponsored by some Western countries) and once the Constitution was thrown out of window, the law and order does not exist any more there (so called theory of “controlled chaos” is in full swing), all power ministry heads and many personnel were replaced with ultra-nationalists, civil war was started and atrocious war crimes are committed as we speak – anyone with the different view to people in power at the moment is declared an enemy, people are disappearing, burned alive (in Odessa on 2nd of May), etc. Ukrainian army and semi-legal “national guards” battalions are bombarding south-east regions after they declared that they are not recognising Kiev’s neo-nazi government and everyone who knows a little bit of history would understand why that was their choice voted in referendum by majority of these regions population. This has nothing to do with Russia, but has everything to do with the people in power in Ukraine and their western supporters. In fact, Russia’s showed and still showing a great deal of patience for so many years and seems to be the only country that tries to find some peaceful solution without depriving people of their basic rights to choose the way of living. As for Crimea, this was Russian people/territory for hundreds of years until year 1954 when it was given (read stolen) by decree from the then General Secretary of USSR communist party of Ukrainian nationality and that decree was not legal even by laws of that time – no one raised strong objections at the time simply because it was the same country anyway. Later, when breaking apart Soviet Union (again not legally and against the will of people who spoke on referendum), no one cared about sorting this out properly and for 23 years Ukraine was ruling in Crimea while Russia and people of Crimea were somewhat patient about it until the February coup-de-tat in Kiev and neo-nazi coming to power. Parliament and people of Crimea made their choice very clear in law and referendum where 97% of people voted to become independent state (not unlike Kosovo so cherished by Western countries) and their natural choice and only protection would be to ask Russia to join it which Russia accepted and why it should not ? People of Crimea were saying at the time that “we may not be joining the Heaven in Russia, but definitely we are escaping the Hell” which is exactly what happens now in the former south-east region of Ukraine. If anything, Mr. Obama and other western leaders should stop baseless and counter-productive aggression against Russia and tell their buddies in Kiev to stop this violence and start diplomatic efforts. My apologies for such a long email, but I am just very saddened by the way how it is portrayed in Western media – brainwashing people who are not multilingual and cannot access alternative points of view.
Regards,
Name Withheld

Dear Name Withheld,
I appreciate you taking the time to write and express your views.

I am very concerned about the state of affairs in Eastern Europe. It is, and always has been, a tinder box. And one unintentional spark can start a fire that none of the parties intended. Respect for borders and for the rights of other countries and their citizens is one of the fundamental safeguards to prevent such outbreaks of war. Russia, no matter how strong a regional power, does not have the right to simply take territory by force because it once belonged to them or because they need the territory as a “buffer” to protect themselves from “encirclement” or outright aggression. If all states acted like that we would be in a constant state of war. They have to respect the conventions designed to safeguard the world from future wars and pursue the matter through negotiation or the international courts.

If history serves me correctly, the territory is neither Russian or Ukrainian, but Crimean. It should be up to the people who reside in the region and those who originate from there, like the Tartars, to negotiate its future and not be subjected to a ballot at the point of a gun.

Please can I post your letter on my blog in the interests of giving both points of view — with your name withheld if you wish.

Regards,
Colin

Vladimir Putin’s irrational behavior: Why the Russian president wins if we think he is crazy.

Scott Radnitz suggests that Vladimir Putin is not crazy — just deliberately acting that way.

….consider strategic theorist Thomas Schelling’s concept of the “rationality of irrationality.” This can be illustrated through the game of chicken, in which two drivers are heading for each other at full speed, and the first to swerve is the chicken. A driver who appears crazy enough to prefer dying over chickening out will always have the advantage. It is therefore rational for a player to convince his opponent that he is actually irrational.

Read more at Vladimir Putin’s irrational behavior: Why the Russian president wins if we think he is crazy..

How Ukraine Can Move Forward | Cato Institute

Dalibor Rohac at the Cato Institute suggest the Ukraine should focus on getting its economy back on track:

….to really understand where Ukraine is headed, it’s important to understand the roots of the unrest that led to the ousting of President Viktor Yanukovych.

First, the country’s oligarchic elite, which ruled the country for the past two decades, cared little about the prosperity of ordinary Ukrainians. The evidence is not just in the tacky mansions of President Yanukovych and his men, but also in the fact that the average income in Ukraine is roughly one third of that in Poland even though both countries started from around the same point in 1990.

Second, the change of government in Ukraine follows a miscalculation on the part of the Kremlin, which long considered Ukraine as its client state, dependent on imports of natural gas from Russia. Ukrainians simply lost patience after their government effectively followed instructions from Moscow and canceled the broadly popular association agreement with the EU. Now that the plan to bully Ukrainians into submission has backfired, Russian President Vladimir Putin is likely to leverage the situation to push claims to parts of Russian-speaking Eastern Ukraine — most prominently Crimea and the port of Sevastopol.

Regardless of whether such territorial concessions become a reality, with an interim cabinet in place and a new presidential election scheduled for late May, it is time for Ukraine to reckon with the massive governance failure of the past twenty years.

The best response to Putin’s land grab would be to turn Ukraine into an economic success story and example to its large neighbor to the East.

Read more at How Ukraine Can Move Forward | Cato Institute.

Sanctions nerves ripple through Moscow | FT.com

The Financial Times quotes Igor Yurgens, a former Kremlin adviser:

He added that capital flight was likely to soar. He said his bank had received “a huge number of calls” into his bank’s Swiss offices from Russian clients over the past two weeks and a number of wire transfers into Swiss bank accounts out of Russia. Clients, he said, would prefer to keep money outside the country despite the risk of asset freezes.

Read more at Sanctions nerves ripple through Moscow – FT.com.

Europe’s Five Deadly Sins on Ukraine | Carnegie Europe

Jan Techau of Carnegie Europe writes:

….In recent years, Russian President Vladimir Putin has talked about the Kremlin’s fears of Western encirclement. He has declared that EU and NATO enlargement are part of a conspiracy to destroy Russia, that Ukraine is not really a sovereign nation, and that Western agents provocateurs were behind Ukraine’s 2004–2005 Orange Revolution.

Amid all that rhetoric, the West failed to recognize that Putin was deadly serious. Such talk was dismissed either as cheap propaganda or as the mild lunacy of a handful of overideologized true believers. Nobody imagined that Putin himself really believed his own bluster.

But for the Russian president, the fight over Ukraine is not an imperialistic adventure, it is a fight for survival against a mortal Western enemy. Just because observers in the West know that’s nonsense, that doesn’t mean that others think the same. Such Western projections were finally debunked when German Chancellor Angela Merkel remarked to U.S. President Barack Obama on March 2 that Putin was “in another world.”

Read more at Europe’s Five Deadly Sins on Ukraine – Carnegie Europe.

Recession time for Russia | The Market Monetarist

Lars Christensen at The Market Monetarist writes:

….. sharply increased geo-political tensions in relationship to Putin’s military intervention on the peninsula of Crimea has clearly shocked foreign investors who are now dumping Russian assets on large scale. Just Monday this week the Russian stock market fell in excess of 10% and some of the major bank stocks lost 20% of their value on a single day.

In response to this massive outflow the Russian central bank – foolishly in my view – hiked its key policy rate by 150bp and intervened heavily in the currency market to prop up the rouble on Monday. Some commentators have suggested that the CBR might have spent more than USD 10bn of the foreign currency reserve just on Monday. Thereby inflicting greater harm to the Russian economy than any of the planned sanctions by EU and the US against Russia.

By definition a drop in foreign currency reserve translates directly into a contraction in the money base combined with the CBR’s rate hike we this week has seen a very significant tightening of monetary conditions in Russia – something which is likely to send the Russian economy into recession (understood as one or two quarters of negative real GDP growth).

Read more at Recession time for Russia – the ultra wonkish version | The Market Monetarist.

The Crimean principle

The Crimean regional government in the Ukraine plans to hold a referendum, to leave Ukraine and join the Russian Federation, amongst its predominantly Russian-speaking population. The Russian parliament has voiced its over-whelming support for the idea.

Gary Kasparov, former world chess champion and member of the Russian opposition, points out that the same principle could apply to Kaliningrad.

Germany should adopt this law & offer referendum to Kaliningrad (Königsberg!) to rejoin Germany. I'd bet on result!

— Garry Kasparov (@Kasparov63) March 7, 2014

Geographically isolated from the rest of Russia, Kaliningrad — formerly known as Königsberg — was part of Germany (East Prussia) until annexed by Josef Stalin at the end of WWII.

Putin invaded Ukraine because he had to | Foreign Policy

Leon Aron at Foreign Policy writes:

The right foreign-policy move at the right time can boost a leader’s ratings and the regime’s popularity. This is doubly true for authoritarian regimes that lack democratic legitimacy, and it is true for Russia today.

In Vladimir Putin’s Russia, as one top pollster told me in Moscow a few weeks ago, “foreign policy is pretty much the only thing that works.” What he meant was that, with the country’s economy slowed to a crawl, and with the regime facing near-universal revulsion over the corruption, thievery, and incompetence of officials at every level, racking up foreign-policy successes has become vital to maintaining Putin’s popularity — which, in turn, is key to the legitimacy of the whole enterprise.

Read more at The Front Lines on Russia's Home Front.

China Sides With Russia on Ukraine | The Diplomat

Shannon Tiezzi writes:

China’s ambiguous position reveals its dilemma. Beijing’s instinct is to back Moscow, both to uphold the fruitful cooperation between these two nations and to stand firm against pressure from the West. However, vocally supporting Russia would violate China’s principle of non-interference. More importantly, it could arguably set a precedent of Chinese support for military intervention to protect separatists unhappy with their government—which goes against all China’s instincts, given its own issues with Tibet and Xinjiang provinces. Yet as the Global Times put it, at the end of the day power calculations mean more than principles. China’s geopolitical strategy requires Beijing to at least tacitly support Russia, and at the end of the day that argument outweighs more abstract philosophical concerns.

Read more at China Backs Russia on Ukraine | The Diplomat.

As China looks on, Putin poses risky dilemma for the West | Reuters

David Rohde at Reuters quotes James Jeffrey, a retired career U.S. diplomat:

Jeffrey said the days and months ahead will be vital. If Putin faces few long-term consequences for seizing Crimea, it will set a precedent for China and other regional powers who may be considering establishing 19th century-style spheres of influence of their own.

“The Chinese,” Jeffrey said, “are in the same position.”

Read more at As China looks on, Putin poses risky dilemma for the West | Reuters.

E-mini jumps on Putin order

E-mini jumps on Putin order for troops to return to bases (Reuters).

Breakout above 1850 is a bullish sign. S&P 500 follow-through above 1860 would signal an advance to 1950.

Realpolitik In Ukraine | Anatole Kaletsky , Gavekal

Quote from Anatole Kaletsky, Gavekal, in John Mauldin’s Outside the Box newsletter:

…..it is literally inconceivable that Putin will ever withdraw from Crimea. To give up Crimea now would mean the end of Putin’s presidency, since the Russian public, not to mention the military and security apparatus, believe almost unanimously that Crimea still belongs to Russia, since it was only administratively transferred to Ukraine, almost by accident, in 1954. In fact, many Russians believe, rightly or wrongly, that most of Ukraine “belongs” to them. (The very name of the country in Russian means “at the border” and certainly not “beyond the border”). Under these circumstances, the idea that Putin would respond to Western diplomatic or economic sanctions, no matter how stringent, by giving up his newly gained territory is pure wishful thinking.

Read more at John Mauldin: Outside the Box.