I’ve been asked for my thoughts on the Russia-Ukraine conflict. Don’t let my Slavic first name or my Russian accent deceive you, my crystal ball on this topic is as clear as if my name was John and I spoke with a Texas drawl. I have spent the bulk of my life in the US, and any insights I have about what is going on in Ukraine have been acquired through simple curiosity about what is happening there. I will now offer analysis that I know may end up being completely wrong.
To understand the situation, we have to at least attempt to understand the Russian perspective. After the collapse of the Soviet Union, the US and Western allies made a promise to Russia that NATO would not expand its membership to countries that had borders with Russia. We bluntly broke this promise as Estonia, Latvia, and a dozen other countries in the vicinity joined NATO. In the US we are spoiled by our geography – we have two friendly neighbors on the north and south and two oceans on the east and west. We feel secure. Russia has a huge land border, which is very difficult to protect. Russia sees Ukraine joining NATO as a clear and present danger to its national security.
Russia’s annexation of Crimea and meddling in the Donbass region were instigated by the talk of Ukraine joining the EU. Though the EU is an economic union and not a military union, NATO seemed like a natural next step. Before you, dear reader, hasten to point out that Ukraine is an independent country and can do whatever it desires, just remember that Cuba was an independent country as well. The US, for understandable reasons, did not like Russian missiles staged 30 miles off its shores. It was ready and willing to invade Cuba for the sake of US national interests. Powerful countries put their interests above fairness. Yes, some countries are more equal than others. That is not right or fair, but it is a fact of life.
Despite everything I just said about Ukraine joining NATO, even if it was marginally on the table a decade ago, it has been off the table since the Crimea and Donbass disputes put Ukraine in violation of NATO Article 6, which states that before joining, countries have to settle their ethnic and territorial disputes. If joining NATO is off the table now, why is Putin threatening war with Ukraine? Because it is now or never. Oil prices are high. The world is distracted by the coronavirus. European dependence on Russian natural gas is at an all-time high. Putin may be thinking Biden is a weak opponent. It is now or never. Also, Putin’s popularity rating is far off its highs.
The only thing Russia has going for it is natural resources and its military. It doesn’t have many bargaining chips. That is what Ukraine is – a bargaining chip. Putin’s demands of the West are simply unattainable – he wants NATO to revert back to its 1997 borders, which basically means kicking Poland, Bulgaria, Hungary, the Baltic countries and a dozen others out. I am trying to get into the head of the great dictator here, and I think he knows this will not happen. Maybe he is thinking about asking for too much and then settling for less – perhaps the lifting of sanctions imposed after the annexation of Crimea, along with NATO signing a document promising not to ever allow Ukraine to join.
I think Putin is bluffing – Russia doesn’t want a full-blown invasion of Ukraine. It would result in endless guerilla warfare in Ukraine. The Russian army is superior to Ukraine’s, but there would be no victory in that war. Russia occupies Ukraine, and then what? Remember, there was not a single shot fired when Crimea was annexed. I’m not sure there is much support in Russia for this war, with images of the caskets of dead Russian soldiers paraded on television and social media.
What I am about to say is coming completely from the Russian perspective. (Ukrainians won’t agree with it, but I am sharing the Russian, not Ukrainian, point of view in this instance.) There is very little cultural difference between Russians and Ukrainians. They speak the same language (Ukrainians also speak Ukrainian, but they are as fluent in Russian as the Russians themselves). They have similar cultures. They even look the same.
It is unlikely that Russia will invade Ukraine, but not because of Western intervention. There is very little the West can do to Russia. Despite America making a promise to Ukraine after the Soviet Union collapsed to protect it if it relinquishes its nuclear weapons to Russia, Americans won’t go to war with Russia – a nuclear power – over Ukraine. Another promise lands in the pile called “broken”.
Europe is too dependent on Russian gas. Germany, in an act that is now almost universally considered as “idiotic brilliance,” shut down its nuclear power plants and thus became more dependent on Russian natural gas (I wrote about it here). This is why Germany is not sending weapons to Ukraine but 5,000 helmets instead.
The West has threatened to take Russia out of its SWIFT system, basically relegating the Russian banking system to the financial stone age. The Russian response was brilliant. Instead of responding with a threat, Russia countered with the following: Since the West is using SWIFT to pay for metals, gas and oil, if they turn it off, Russia simply won’t be able to deliver its natural resources to the West.
No, we are not on the foothill of World War III in Europe. My gut feeling is that a full invasion of Ukraine is unlikely. The West and Russia will reach a compromise, NATO will agree to not accept Ukraine, and the West will lift sanctions over time as Russia removes its troops from the border with Ukraine. The worst case is probably that Russia continues to conduct cyber attacks against Ukraine and conducts minor excursions into Ukrainian territory.
From an investment perspective, any armed conflict will likely send commodity prices higher. If this doesn’t push Europe to beef up its military, I don’t know what will. This is why we own US and European defense companies. (I wrote about that here). We also have some exposure to oil; I wrote before the pandemic our thinking on this topic, which hasn’t changed since then.
John Field Nocturne No. 2
Today I would like to introduce you to a composer who is very new to me (though he is anything but new): John Field (1782-1837). Arguably the most famous Irish composer, John Field was a talented pianist and that is how he earned his living. He loved women and booze and thus he moved to Russia, where he ended up spending 29 years of his life fathering legitimate and illegitimate children. (This “thus” is very unfair to Russia; you can love women and booze if live in any country, but somehow it felt natural). He once said, “I play better when I am drunk than anyone in Russia when they are sober.”
Field’s music was popular while he was alive but vanished into obscurity after his death. Just like Chopin and Liszt, he wrote music mostly for piano. He wrote seven (!) piano concertos, which I had never heard of and cannot wait to listen to (and if I fall in love with them I will share with you).
I discovered Field while reading about Frederic Chopin’s nocturnes. Nocturnes are short solo piano pieces full of melancholy. Nocturnes are nocturnal: A nocturne is light evening music. Chopin popularized nocturnes, but he did not invent them; they were invented by John Field, who was born 28 years before Chopin. By the time Chopin came along, Field was already an established composer. Chopin was an admirer of John Field and was influenced by Field’s nocturnes.
When I think of nocturnes I think of light watercolor. My father painted with watercolor from the time he was seven years old. I think it was a choice born of necessity. He grew up in Soviet Russia, where watercolor paint was cheap, oil anything but. He only stumbled into oils much later in life, in his 50s. I remember my father explaining to me that watercolor is the most difficult medium because it is unforgiving. You only have one shot to get the color right. Unlike oil, which you can repaint over and over endlessly, watercolor captures every decision. If you start painting a second and third layer in watercolor, the color gets “dirtier” and the painting loses its lightness. Nocturnes have this lightness – there is only one coat of notes and you can hear every note and see every stroke of the brush.
Think of this when you listen to Nocturne 2 by John Field. See if you hear Chopin while you listen to it. Next time you’ll hear John Field when you listen to Chopin, too. Enjoy.
Vitaliy Katsenelson is the CEO at IMA, a value investing firm in Denver. He has written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. Soul in the Game: The Art of a Meaningful Life (Harriman House, 2022) is his first non-investing book. You can get unpublished bonus chapters by forwarding your purchase receipt to bonus@soulinthegame.net.
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