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  • What the Crisis in Ukraine Portends

    Both literally and figuratively, Russia is dying a “death of despair.” Its shrinking, aging population suffers from low fertility and chronic alcoholism. It’s 2020 GDP per capita was estimated at $26,500 vs $60,200 for the United States. Mean average life expectancy for males in Russia is 68 years vs. 77 years in the United States. More importantly, Russia consistently falls near the bottom in world rankings for happiness; it ranked No. 80, in 2022. In terms of corruption, Russia is ranked at near the bottom at #136 compared to the United States at #27.

    Russia’s absence of a reliable “rule of law” has discouraged multi-nationals which might otherwise invest there. On the Human Freedom index, Russia ranks #126 compared to a ranking of #15 for the United States. Its economy is dominated by scale-dependent, extractive industries including mining and energy as well as large-scale agriculture which create huge barriers for entrepreneurs. And for more than a century, we watched as centralized planning has morphed into the worst form of “crony capitalism,” misallocating any available resources.

    That means Russia’s highly-educated population is perpetually frustrated by a lack of opportunities to monetize its skills.

    Furthermore, geography long ago dealt Russia a “losing hand” which seriously constrains its strategic options. Its vast natural resources are typically far from domestic population centers and global trading partners. And it lacks high quality seaports or navigable rivers needed to move these resources to where they are needed. Because of the vast distances, railways are few and highways are fewer.

    Throughout its history Russia has been invaded by Mongol, German, Swedish, Turkish, and French enemies. Unlike the United States, England, Japan and India, Russia lacks natural geographic defenses; so, it spends inordinate amounts preparing for defense. Furthermore, an historic mistrust of both ethnic minorities and foreign enemies has led to a centuries-old culture of repression which reached its pinnacle under Stalin.

    The collapse of the Warsaw Pact and the USSR extended from 1989 to 1991. Former satellites and Soviet republics including Ukraine and Georgia became independent nations and drifted toward the more affluent Western sphere of influence. Coupled with the opening of China, this transition led to the “golden age of globalization,” which peaked as we entered the Great Financial Crisis.

    But, from its marginalized position, Russia could do little to take advantage of this globalization windfall which benefited so many nations. In fact, the growing relative power of the US, EU and China made Russia seem even more irrelevant.

    In short, after 20 years in power, Putin was being left behind. Russia was still characterized as a “gas station with nuclear weapons.” Russia’s economic relevancy had nearly vanished as the United States became the world’s leading energy producer in 2019. Meanwhile, environmentalists talk of a “net-zero economy” by 2050 were even more ominous. And its vulnerability appeared to increase as former satellites were pulled into NATO. Yet, Russia had gotten away with territorial seizures in Ukraine and attacks on Georgia during the Obama years.

    This understanding of the realities facing Vladimir Putin, helps set the stage for what may be one of the greatest geopolitical miscalculations in world history.

    Russia’s invasion of Ukraine on Feb. 24 was preceded by a long meeting between Russian President Vladimir Putin and Chinese President Xi Jinping on Feb. 4. At the end of that meeting, the two men released a 5,000-word, carefully drafted document announcing a close partnership between their two countries. The document is stronger than most treaties and must have required detailed negotiations in advance.

    Having obtained Xi’s backing, Putin set about realizing his dream of reestablishing Russia’s relevance. Approaching the age of 70, Putin seems to feel that if he is going to make his mark, it is now or never.

    He expected Russian-speaking Ukrainians to welcome Russian soldiers with open arms, but they turned out to be no different from the Ukrainian-speaking population. Ukrainians have put up an incredibly brave resistance against seemingly overwhelming odds.

    Meanwhile, the Russians have put on an amazingly poor military performance in the first month of battle, assuming their goal was to secure Ukraine as a buffer from the West and demonstrate Russian power as a force to be reckoned with. So far, this war has given just the opposite impression. Except for weaponry, every feature of the Russian forces makes one think of Iraq or Syria rather than the United States or Israel: intelligence fails, truck convoys stall, soldiers panic, high ranking officers killed, supplies depleted, ammo depleted, fuel depleted, inadequate discipline and low commitment.

    So now Russia is looking for reinforcements from Syria, Belarus, and so on. To many observers, the need to recruit foreign troops indicates a failure of Russian commanders, a weakness in training and motivating troops, and logistical problems. This likely portends a long and drawn-out conflict, unless Putin can figure out a way to “save face” via a truce.

    If Russia wanted to create a sense in Europe that it could “invade at will” it has already failed. It’s hard to think of an outcome for Russia, short of using weapons of mass destruction, that leaves the West worried about Russia as a major offensive threat.

    And that’s not just because of Russia’s poor performance on the battlefield. Great power status is partly military and partly economic. Russia’s gross domestic product in 2020 was $1.7 trillion, ranked 11th in the world and #66 on a per capita basis. Since 2001, Russia has limped along through volatile energy prices, the 2008 financial crisis, the COVID-19 pandemic, and now, crippling sanctions in response to its invasion. In other words, Russia can no longer be thought of as a true economic power.

    That brings us back to the Feb 4 agreement which aligns Russia & China against the West. China sought an alliance with Russia because it needed friends in the face of the massive U.S. military & diplomatic alliance structure running from Japan to India. China has no significant allies, other than Pakistan. China knew it could not provide economic support to Russia because it has its own problems to manage. But at the very least, China needed some support, which it hoped to achieve by harnessing Russian military power to force the United States and Europe to carefully weigh threatened sanctions against it related to trade, human rights abuses, or territorial overreach in the South China Sea.

    Aside from the military aspect, Russia benefitted from the possibility of financial support from China, or at least the impression to lenders that China was backing the Russian economy. It was always obvious that Russia’s ability to contribute significant force to a Chinese battlefield was limited, as was China’s willingness to adopt a weak Russian economy. But simply creating such an alliance had the potential to instill fears in those whom they wanted to be afraid.

    Now, two months after the meeting, the alliance between Russia and China is still rhetorically there, but the possibility of actual support is not.

    Russia has already been damaged by economic actions from the United States and its allies, and China, at this economic juncture, cannot afford to be caught in the trap Russia is in. Any military support China provides would run afoul of sanctions. Put simply, Russia has already become a liability for China!

    Beijing’s willingness to announce its alliance with Russia, seems to have been based on its knowledge of Russia’s invasion. An alliance seemed attractive to China when it believed Russia was capable of a quick and easy victory, one that would, in theory, force the West to reconsider their position on a China that could replicate the Russian strategy.

    Russia’s incompetence has forced China to do everything it can to recoup, and that includes reconsidering its relationship with the U.S. It is in a severe economic downturn. Its alliance with Russia hasn’t borne any fruit, nor is it likely to. And the United States and Europe have developed a model of economic warfare that, if applied to China, would seem to be devastating. China’s short-term strategy, then, is to appear confident, maintaining its rhetorical support for Russia and criticizing the U.S., while it considers its next move.

    Other governments, businesses, NGOs, and investors are similarly faced with reassessing the suddenly unfamiliar geopolitical realities. The key is to recognize that many truths which we’ve held since the 80s or 90s may no longer be valid.

    Given this trend, we offer the following forecasts for your consideration.

    First, an invasion of Taiwan isn’t going to be China’s next move.

    China has now seen firsthand that even a “simple” war can go very wrong. Thus, they understand that an invasion of Taiwan is something to avoid for now. Their heavy-handed treatment of Hong-Hong has eliminated any doubts Taiwan’s residents may have had about China’s willingness to let them live the free and affluent lives they’ve come to know. Furthermore, China knows that while the United States had only a rhetorical commitment to an independent Ukraine, it has deep economic interests in Taiwan which are unquestionably worth fighting for.

    Second, for the immediate future, only the United States can be considered a great power, both economically and militarily.

    If we think about the great powers of the world, we normally list the United States, the EU, China and Russia. In the wake of the Ukraine debacle, Russia will have a problem claiming world power status given the weakness of its economy and the impotence of its conventional military, unless it does something startlingly effective. The EU can become a great power if it acts together militarily and economically; but that unity may disappear along with its fear of Russia. China is also a great power, but one with a troubled economy, an untested military and declining demography. That leaves only the United States vying for the roles of economic and geopolitical hegemon.

    Third, by the end of the 2020s, nationalism will supplant globalism as an organizing principle.

    This continues a trend that started during the Great Financial Crisis. - When World War II ended, globalism became a central organizing principle in international relations. The Cold War was explicitly waged between “international communism” and “democratic capitalism,” not between Russia and the United States.

    Transnational institutions like the WTO, IMF, World Bank, and United Nations received substantial deference. Yet, as we’ve learned recently in Ukraine, nationalistic identity burns stronger than ever, under the surface. And it’s already coming to the forefront in places as diverse as Finland, Taiwan, and the United States. Barack Obama’s “citizen of the world” identity will become increasingly obsolete, while Donald Trump’s “America First” perspective increasingly takes center-stage.

    Fourth, for at least the next decade, globalization will take a back-seat to national economic resiliency.

    In 2020, experts suddenly realized that monomaniacal worship of just-in-time supply-chain efficiency had left whole industries and economies vulnerable to hostile moves by their suppliers. Already, the United States is bringing home semiconductors, medical device and pharmaceutical manufacturing. The Russian invasion of Ukraine is another critical tipping point when it comes to vulnerable supply chains.

    For years the United States warned the EU to diversify against reliance on Russian natural gas. Sources in the Mediterranean as well as U.S. LNG offer that diversification and the EU will now scramble to harness those alternatives, while reconsidering fracking in the U. K. As previously forecast in Trends, Globalization is not going away, it’s just no longer the default solution which it has been since the 90s. And,

    Fifth, for the remainder of 2022, Putin will maneuver to “save face” and minimize the impact of sanctions.

    Based on game-theory and real-world considerations, such a humiliating turn-of-events should cause Putin to reassess his options and focus on rapid de-escalation. However, after disappointing his allies and sowing mistrust among all other parties, his options are limited. Whether this will eventually lead to his removal or simply to Russia’s marginalization is anybody’s guess.

    Resource List
    1. Fox News. March 23, 2022. Peter Aitken. Finland makes massive shift towards NATO, majority now support joining: Support to join NATO jumped from 26% to 60% following Russia’s invasion.

    2. MarketWatch.com. March 12, 2022. George Soros. Make no mistake, Putin and Xi are putting the world at risk of complete destruction.

    3. GeopolitcalFutures,com. March 22, 2022. George Friedman. How the Ukrainian Battlefield Redefines the World.

    4. CNBC.com. March 24, 2022. Yun Li. BlackRock’s Larry Fink, who oversees $10 trillion, says Russia-Ukraine war is ending globalization.

    5. AEI.org. March 10, 2022. Michael Barone. Ukraine shows we live in a nationalist world.

    6. Foreign Affairs. March 17, 2022. Adam S. Posen. The End of Globalization? What Russia’s War in Ukraine Means for the World Economy.

    7. Washington Examiner. March 20, 2022. Justin Dunleavey. ‘Don’t be naive’: China refuses to condemn Putin’s invasion of Ukraine.

    8. American Institute of Economic Research. March 7, 2022. James L. Caton. How Will Russia Respond to Financial Sanctions?

    9. SeekingAlpha.com. Mar. 08, 2022. Edison Investment Research. Global Strategic Insight: Putin’s Invasion – Turning Back Now.

    10.SeekingAlpha.com. Mar. 08, 2022. Brett Rodway. Russia: War, Sanctions, And Hyperinflation.

    11.The National Interest. March 18, 2022. Christopher Whyte. An Isolated Russia Will Pose New Cyber Threats.

    12.AEI.org. March 3, 2022. Michael Mazza. Taiwan and China keep eyes on Ukraine.