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NOT EVERY WAR ENDS IN PEACE - Rossoff & Company - Independent Financial Advisors - Points of View

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Points of View

Rossoff & Company’s Points of View is a forum for industry experts, leading finance professionals and senior Rossoff & Co. professionals to provide insights and commentary on current news stories, financial market themes and industry dynamics.

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The current crisis in the Ukraine is worrisome and more than a little annoying.  Didn’t we settle those Eastern European borders in the early 1990’s when the Soviet Union collapsed.  We won the Cold War, right?  There might not have been a peace treaty, per se, but there was a pretty clear understanding and a number of agreements.  The Soviet satellites – Poland, Hungary, Czechoslovakia, the Baltic states, et al – were set free and many of the Soviet republics, including Ukraine, became independent.  We won, they lost, peace was proclaimed, new borders were established and new independent states created.  And now that quasi-peace treaty, that understanding that ended the Cold War, is crumbling, at least as far as Ukraine is concerned.  Chaos now reigns in Eastern Ukraine and Russia has annexed the Crimea.  Pundits are worried that Moldova, with a large Russian population, might be next.  NATO is blustering, the U.S. is sanctioning and containment is in the air.  Should we be surprised?  I don’t think so.  Many wars end ambiguously – without a clear-cut winner and loser.  And when the end of a war is less than decisive, a new conflict almost invariably ensues – usually within about twenty years.  That’s what we are witnessing now.

History is replete with examples of wars that end but don’t achieve a lasting peace.  The most powerful recent case in point is World War I.  The German army collapsed in 1918 – the introduction of two million fresh American troops was a factor – and Germany was forced to suffer the humiliating and punishing Treaty of Versailles.  The German people, however, never fully accepted their lot.  Their homeland had not been invaded – Allied troops never entered Germany prior to the Armistice – and their population was not subjected to the brutal ministrations of a foreign power.  Reparations crippled the German economy for a time and undermined the Weimar Republic, Germany’s attempt at a liberal democracy.  Germany’s treatment at the hands of the Allies after World War I is not atypical of the experience of vaguely defeated powers. The winning side often overplays its hand against them.  Once Germany was back on her feet economically, she embraced the psychopathic Nazi regime and philosophy and wreaked havoc in search of revenge and the recovery of lost territory.   Some Western leaders today, including Hilly Clinton, have been quick to compare Vladimir Putin’s actions in the Ukraine to Hitler’s conquest of Czechoslovakia in 1938:  the autocratic leader of a not fully defeated power seeks to recover lost territory and reincorporate a population that shares his country’s ethnic and linguistic heritage.

World War II provides a counter example.  Germany and Japan were utterly defeated, their cities bombed out, their territory occupied and their leaders held to account.  The German and Japanese people, as a result, accepted their defeat and underwent a psychological transformation:  two of the world’s foremost warrior cultures actually became pacifist nations.  These two dynamic peoples re-channeled their aggressive energies into highly successful business cultures.  Could Germany have been brought into the fold of peace loving nations after World War I if she had been treated more either more harshly or more gently?  We shall never know.  Certainly, many observers of the Versailles peace, including John Maynard Keynes, warned of the dangers that might attend the harsh but not devastating treatment of post-World War I Germany.  What we probably can say is that the combination – indecisive victory and harsh peace – sow the seeds of future conflict.  After World War II, our policy makers deliberately nurtured Germany and Japan.  Western leaders enjoyed the best of both worlds:  a devastating victory with deep psychological impacts and a gentle and supportive peace.  

If we listen to the words of Vladimir Putin, we can hear the language of this familiar pattern.  We weren't really defeated in the Cold War, he says, but somehow we were dismembered and diminished by sly and grasping Western powers.  With his now 80% approval rating, it is clear that Putin speaks for the vast majority of his countrymen. Furthermore, Putin sees Russia as a great power and demands that the West acknowledge her as such.  Russia has natural resources, nuclear weapons, the strongest military on the European continent and a veto in the UN Security Council.  Never mind that the Russian economy is a relative weakling and her infrastructure in a state of deep decay.  When America threatened to blunder into war in Syria, Putin deftly calmed the waters and proved that Russia can still play a major diplomatic role on the world stage.  Russia settled matters in Georgia in 2008 to her satisfaction and acted swiftly in Ukraine.  Interestingly, Russia’s recent geopolitical forays, unlike America’s, have been relatively bloodless.   But then, so were Hitler’s, until the invasion of Poland in 1939.

What does all this mean for our strategy today vis a vis the Russians?  Perhaps it will help if we begin by acknowledging reality:  Russia was not devastated by the end of the Cold War.  No psychological trauma, akin to that suffered by Germany and Japan at the end of World War II, was suffered.  And although we attempted to treat Russia gently and coax her into a cooperative relationship with the West, our efforts were only partially successful.  While we welcomed Russia into the global system of trade and finance, we also worked to dismember her empire and leave many Russians outside the motherland.  What Putin has shown us is that we left scars on the Russia psyche and a yearning for restoration.  

For now, we will need to take a hard line with Russia on Ukraine:  you can have Crimea but that’s it.  If we allow Russia to hive off Eastern Ukraine as easily as she did Crimea, we will be encouraging bad behavior and will likely get more of it.  As for the future, when Russia’s perceived interests are at stake, we will need to deal with her carefully and give Russia a seat at the table.  Russia is an important regional power and must be treated as such.  Otherwise, she will assert herself when she can and we will likely need to back down.  Not good for us or for Russia.

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  • David Dzidzikashvili Wednesday, March 11, 2015

    I think the West in general does not understand the Russian and Putin's mentality and decision-making strategies (rational or irrational, this is a different topic). In Putin's zero-sum game world view - it's either black or white, win or lose, etc… where compromise is a sign of weakness. With left wing governments of EU and Barack Obama's impotent foreign policies + ISIS pressure on the world leaders, left for Putin an awesome opportunity to take chunk of land and claim as own. Instead of fury, the issue of Crimea has fallen to the deaf ears of the Western leaders at large (EO and Obama). Crimea was not even mentioned in the Minsk v2.0 cease-fire agreement. So what we get from this deal? Violations and potential of more warfare and bloodshed to take on Mauripol, to open up a corridor and connect Crimea to Russia and be able to supply by land everything: weapons, tanks, munitions, food, etc… 3-0 win for Vladimer Putler as of start of 2015! If the Americans and the EU do not wake up now and keep turning a blind eye on the Russian aggression and Russia-Ukraine war and does not provide lethal (defensive and offensive) weapons to Poroshenko, then the EU and USA have successfully undermined and destroyed the post-WW2 international order by simply ignoring the broken rules and let the Kremlin bully run the show.

    P.S. I think the EU (Merkel-Hollande) will wake up only after the Russian tanks will roll in and stop in Berlin, Paris and Brussels…And with current pace, this is not an unimaginable situation.

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