March 2, 2022

Vol. 22, Issue 3.5

Russian Roulette

            Vladimir Putin should have made sure all of the chambers of his gun weren’t loaded before playing Russian roulette.  But it turns out he was playing with a loaded weapon aimed at his own head. 

Putin’s invasion of Ukraine is inflicting irreparable damage on Russia’s economy and global standing.  Unless the war ends very quickly and the West terminates sanctions as part of any cease fire (which would be a mistake), Russia is likely to be isolated from large parts of the global economy for an extended period of time.  Watching the decimation of the ruble and the stock prices of many large Russian companies, it is difficult to see how Russian markets quickly recover from this Putin-inflicted wound.  The damage looks structural, not cyclical.  Even gaps in sanctions permitting the flow of some Russian energy are being plugged by the reluctance of banks and other financial intermediaries to transact with Russian counterparties.  Russia is now an economic leper because Putin turned his country into a moral leper. 

            From an analytical standpoint, it is important to think about how the Ukraine invasion will change the geopolitical map.  Unlike earlier Russian invasions of Georgia (2008) and Crimea (2014), this invasion is different in scale and human horror.  It is a larger version of the genocidal war Russia sponsored in Syria a few years ago.  The world is not accustomed to seeing war waged in Western cities against Western civilian populations and is reacting not merely with moral outrage but tangible actions designed to inflict real harm on Russia and its supporters. 

This brings us to all-important China.  While China is staying relatively quiet, it can’t be happy with what Russia is doing.  I take news stories that China is standing side-by-side with Russia with a grain of salt.  China will take a cold-blooded look at the world and do what is in its own interest – period, full stop.  And China’s ability to triangulate with Russia against the United States is severely compromised by Russian economic distress.  China is much better served by an economically stable Russia that can collaborate with it against American interests.  Rather than a co-equal partner in an alliance against the United States, however, Russia is turning itself into a needy dependent that will burden China economically, diplomatically and strategically in any anti-American alliance.  Rather than accelerate any assault on Taiwan as some suggest, this Ukraine debacle may cause China to reevaluate its plans in view of the new geopolitical landscape.  An attack on Taiwan could place China next to Russia in the global isolation ward regardless of China’s greater importance to the global economy than Russia.  The West is already actively seeking alternative sources for semiconductors and other China-sourced goods.  The West has had its fill of fascism in the first two decades of this young century.

            The question is no longer whether Putin will take Ukraine.  If Putin won’t stop his assault, Ukraine is going to fall sooner or later (for the sake of the Ukrainian people, hopefully sooner).  The question is what cost he will pay to take Ukraine.  He already lost more than he can possibly gain.  Putin unleashed chaos that he can’t reverse.  In one fell swoop, he united a fractured NATO, revived Germany’s military spending and potentially its nuclear energy industry, alienated Turkey (which was trying to play both sides of the fence with Russia and the U.S. and whose geopolitical importance can’t be exaggerated), and shattered Russia’s economy.  The longer the war goes on, the worse matters will turn out for Russia.  

In the long arc of history, Ukraine is paying the price for what may prove the final collapse of the Russian empire that Putin desperately wants to reassemble.  But that empire failed the first time because of precisely the types of destructive and inhumane behavior Putin is now repeating.  We may be witnessing the end of Russia as a significant world power.  If the country was more than a gas station with nuclear weapons before, it won’t be much more than that after this crime against humanity is over.  But its actions leave China weaker, not stronger, and America stronger, not weaker, as long as America sees clearly the opportunity presented to step up and lead the world again.

Michael E. Lewitt

mlewitt@thecreditstrategist.com