Ukraine crisis leaves no room for wishful thinking

Putin with the head of the Russian army’s main department of combat preparation in early March 2014

At time of writing, Russia is mobilizing for war and may be poised for a springtime invasion of the Ukrainina heartland, after having annexed the Crimea Black Seat peninsular.

Reports of tens of thousands of Russian troops and military hardware, including artillery, tanks, warplanes and helicopters are massing and carrying out war “games” on all sides of already partially dismembered Ukraine.

President Barack Obama warned that the Russian troops massing along the border “may simply be an effort to intimidate Ukraine – or it may be that they’ve got additional plans.”

Conservative American assessments, based on satellite data, say Russia has massed between 40,000 and 50,000 troops within quick striking distance of Ukraine, including those stationed in Crimea.

If President Vladimir Putin gives his troops the order to march, the outcome will be much bloodier than Crimea’s near peaceful seizure.

Assuming a continuation of that reliable template, any invasion would most likely be aimed at seizing so-called “friendly” portions of eastern Ukraine where there are concentrations of ethnic Russians or Russian-speakers.

The goal would be to redraw frontiers, and daring Ukraine’s new government and the NATO Alliance to react.

The Ukrainian army only numbers 65,000 troops, compared with nearly 300,000 in Russia’s western and southern military districts.

As a spring invasion of Ukraine looms large, Yevhen Marchuk, a retired Ukrainian general and former defence minister, warned on late last month that the crisis is intensifying.

According to his calculations Russia has now moved to the “second phase” of its plan “to eliminate” the Ukraine nation.

“There are many signs of an imminent attack,” Marchuk told journalists at the Ukrainian Crisis Media Centre.

NATO’s senior commander and U.S. Air Force General Philip Breedlove, warned several days earlier that Russian forces massing on the Ukrainian border are “very, very sizable and very, very ready, and that is very worrisome.”

Russia’s huge troop deployments along Ukraine’s borders, combined with others on alert and mobilized, give Putin the ability to move quickly into attack mode without the U.S. being able to predict when this will occur.

What makes this confrontation so dangerous is that US and EU policy appears to be motivated by wishful thinking that Putin is likely to be deterred by threats of sanctions to his economic interests and the personal wealth of his oligarch clique.

Unfortunately financial markets cannot afford to be so sentimental.

While we should always recall in times like these the famous advice of Nathan Rothschild to “buy at the sound of gunfire”, Russia’s Crimea annexation and war footing form the most ominous geopolitical post-Cold War era’s emergency.

Anatole Kaletsky, co-chairman of GaveKal Research, and a leading global investment researcher, says “the key question investors must consider in deciding whether the Ukraine crisis is a Rothschild-style buying opportunity, or a last chance to bail out of risk-assets before it is too late”.

The balance of probabilities in such situations is usually tilted towards a peaceful outcome; in this case, Western acceptance of the Russian annexation of Crimea and the creation of a new national unity government in Kiev acceptable to Putin.

However, Kaletsky is recommending standing back and preparing portfolios for either eventuality.

Looking back to a comparable episode like, for example, the 1962 Cuban Missile Crisis, investors were better off waiting for the confrontation to reach some kind of climax before putting on more risk.

After the S&P 500’s 6.5 percent fall between 16 and 23 October 1962, the market moved on to gain 30 percent once it became clear Khrushchev would be backing away from the brink.

Similarly, in the 1991 Gulf War, when it was not until the bombing of Baghdad actually began and a quick US victory appeared to be a certainty that equities bounced back, gaining 25 percent by the summer.

Thus, investors did well to buy at the sound of gunfire, but lost nothing by waiting six months after Saddam Hussein’s initial invasion of Kuwait in August 1990.

In finance and geopolitics, experience must always prevail over hope, and realism over wishful thinking.

By Steve Blizard  30 March 2014

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