Western leaders are struggling with their response to Putin’s latest challenge. They agree that it should look like a unified position. In this respect, they are mainly writing down measures that the United States and Western Europe are prepared to take if Russia takes the next step. In this context the combination of French boasting and German passivity is not a happy one.
Germany is closing Nordstream 2, a pipeline that has never been open. Macron’s hours of talks in Moscow have achieved nothing. France has called for a Security Council meeting, knowing that, thanks to a veto by Russia and China, it will be without consequences.
The Americans are denying the Russians access to Western capital markets, something the Russians do not need anyway. Boris Johnson has threatened to do more in the future, but without making it clear what. Putin himself is not on any sanctions list, only trade with Donetsk and Lugansk is frozen. Fortunately, the Netherlands is happy with these sanctions because they do not affect the Dutch economy, but they can be described as anything but aggressive. It is rather an encouragement to Putin to take another step.
There is no serious Russia policy
Europe’s reactive attitude means that we only start thinking when Russia does something. There is no serious and consistent Russia policy; time and again Putin keeps surprising us. The reason is that we do not want a confrontation with Russia at all. Every response is aimed at calming things down, which keeps us from thinking proactively. Furthermore, we still see Putin as a colourless apparatchik, but one who looks back nostalgically to the bygone days of tsarist Russia and the Soviet Union. Putin is now 69 years old.
The average life expectancy for men in Russia is 66. He is probably thinking about his legacy. He wants to go down in history as someone who returned Russia to its historical position. It is all the more heroic when this comes with bloodshed. An internal war is not so strange then. Abraham Lincoln once won the elections by shooting down Atlanta. Bismarck went to war no less than three times to achieve German unification. That is the list he wants to be in: Lincoln, Bismark and Putin.
A gambler with a cool KGB head
Apart from this nineteenth-century nostalgia, Putin is a gambler who, with a cool KGB head, dares to take big risks. This allows him to surprise and outwit his opponents, because he takes risks his opponents do not even think of. Furthermore, his Russian reality fits perfectly into the era of Fake News.
In Russia, the truth has always been determined by the state. Thanks to Comrade Stalin, conspiracy theories are a central theme. Like Stalin, Putin is not frightened by the accusation that the army commits atrocities. The reputation for utter ruthlessness only gives him more power. Biden even invoked God to answer the question of who gave Putin the right to invade an independent country just like that.
The answer is as simple as it is painful. It is the West, which does not want to impose sanctions that hurt at home. For example, Biden came up with the sanction that investors may no longer buy Russian government bonds, but the small print states that this only concerns Russian government bonds issued after 1 March this year. The oligarchs in Londongrad and the Côte d’Azur are not being hindered in any way.
The Western world has long tried to elevate Putin to the status of one of the men of Davos, the world elite where rational consultation always produces a suitable solution. But Vladimir does not want to be part of that elite. The result is that the second Cold War has now begun.
The autocratic China-Russia duo
Ukraine will continue to fill the newspapers for some time to come. The advantage of risks that are widely reported in the press is that at a certain point they become an opportunity for investors. Then everything is included in the price. A new cold war is structurally less good news for investors, certainly not with the now autocratic combination China-Russia.
After the collapse of the Berlin Wall and the demise of the Soviet Union in 1990, the peace dividend was collected on the stock markets in the form of higher valuations and lower interest rates. Lower interest rates made possible by the hyper globalisation of the 1990s, which went into overdrive when China joined the World Trade Organisation in 2001.
That time is over. Not only does it mean higher risk premiums and lower valuations, de-globalisation and regionalisation are depressing growth and creating an environment with higher inflation. Not every portfolio is yet positioned for an environment with rising energy prices, a weaker dollar and a US central bank that is way behind the curve.
Han Dieperink is chief investment strategist at Auréus Asset Management. Earlier in his career, he was chief investment officer at Rabobank and Schretlen & Co.