Monday, March 3, 2014

How I learned to stop worrying and love the Russian invasion

As the events in the Ukraine and Crimea have developed at a breakneck pace, there has been much angst expressed in the media. The equity markets have sold off but most of the worries expressed is noise.

I offer to my readers another way analytical framework for the current geopolitical situation..

Conventional wisdom interpretation
One analogy that is often used in foreign policy journals in the West's dealings with Russia, formerly the Soviet Union, is that while one side thinks it's playing chess, the other is playing poker. The implication is that we, the West, are playing the wrong game. An alternative interpretation is that both sides can get what they want, it's just up to each side to understand the trade-offs of its own strategy.

Here's the conventional wisdom interpretation. A recently widely quoted Politico commentary by Ben Judah about the Ukrainian crisis indicated that the West is weak geopolitically because it only cares about money:
Western leaders are stunned because they haven’t realized Russia’s owners no longer respect Europeans the way they once did after the Cold War. Russia thinks the West is no longer a crusading alliance. Russia thinks the West is now all about the money.

Putin’s henchmen know this personally. Russia’s rulers have been buying up Europe for years. They have mansions and luxury flats from London’s West End to France’s Cote d’Azure. Their children are safe at British boarding and Swiss finishing schools. And their money is squirrelled away in Austrian banks and British tax havens.

Putin’s inner circle no longer fear the European establishment. They once imagined them all in MI6. Now they know better. They have seen firsthand how obsequious Western aristocrats and corporate tycoons suddenly turn when their billions come into play. They now view them as hypocrites—the same European elites who help them hide their fortunes.

Once Russia’s powerful listened when European embassies issued statements denouncing the baroque corruption of Russian state companies. But no more. Because they know full well it is European bankers, businessmen and lawyers who do the dirty work for them placing the proceeds of corruption in hideouts from the Dutch Antilles to the British Virgin Islands.
Judah is right, the elites in the West does primarily care about money. How else do you think they got to be the top 1%?

Good riddance?
Mark Galeotti of NYU's Center of Global Affairs wrote in a blog post (h/t Patrick Chovanec) that Russia may be doing the Ukraine a favor by fostering an independent Crimean Republic loyal to Moscow:
Strictly from a coldly logical position (and I am not advocating this, I should add), in many ways it is in Kyiv’s interests for Moscow to steal Crimea, and turn it into some pseudo-state or new part of the Russian Federation. Ukraine loses a sunny peninsula, but also a distinct drain on the state’s coffers (the Crimean economy is not great, and the region receives net subsidies from the centre). It sheds the most troublesome and Russophile of its regions, one which has been a turbulent locus of trouble for Kyiv for most of post-Soviet Ukraine’s history. It also gets concrete proof of the threat it faces from Russian bullying and probably accelerated and solicitous assistance from the US, EU, NATO, etc. It also validates every Ukrainian fear about Russia.
The post is well reading in its entirety but Galeotti makes a good point. If Putin wants the Crimea, why not let him have it? In the corporate world, this would be called "restructuring", "shedding underperforming assets", or "right-sizing". In other words, rather than allow a bunch of federal bureaucrats in Washington figure how to deal with Putin, why not let the market do it for us?

Consider that during the Vietnam War, the United States spent about $1 million (when in the 1970's when $1 million meant a lot more) for every man, woman and child in Vietnam. Might it have achieved its foreign policy objectives much more cheaply? Maybe LBJ might have been able to achieve his Great Society without throwing the country into an inflationary spiral and at the same time scarring the American psyche for an entire generation. *

My American friends should imagine a scenario where a foreign power, e.g. Cuba, invades Puerto Rico. Yes, this the PR with a history of being a black hole of unsuccessful federal subsidies to foster industry, growth and employment. This is the PR with its teetering finances and near bankrupt status. What should Washington's response be?
  1. This is an unacceptable violation of American sovereignty and would be dealt with in the harshest possible manner.
  2. Thank you for invading. Please take it.
There are no right or wrong answers to this question. Just know that if one side is playing chess and the other poker, both can win. You just have to know what you are winning and what you are losing.

* Addendum: I had seen the $1 million expenditure figure in a documentary called the 10,000 Day War several decades ago, but I have been unable to verify that number.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.


Anonymous said...

Wow...the power of thrusting your head into the sand...

Yeah...what a relief. Part of Ukraine is now owned by Russia. We didn't want it in the first place.

Also, come on Cuba. Please invade Puerto Rico and take it. And if you want more, we got Detroit, California, and New York City waiting for you.

RJ said...

Hey Anonymous:

Please re-read the article. It appears you have completely, and I mean completely, missed the entire point of the piece. -RJ

Anonymous said...


I love your blog but where did you get this number from?

"Consider that during the Vietnam War, the United States spent about $1 million (when in the 1970's when $1 million meant a lot more) for every man, woman and child in Vietnam."

1975 Vietnam had a population of around 50 million and according to "Costs of Major U.S. Wars" by the Congressional Research Service the Vietnam War had a total cost $111 billion (1975 $) or $738 billion (2011 $), respectively. Even if we use the higher of the two numbers

$738 billion / 50 million = $14760

Best regards,


Cam Hui, CFA said...

Mike - I remember seeing it on a documentary entitled "The 10,000 day war"

JoeBama "Truth 101" Kelly said...

Only thing I would have changed was adding "Dr. Strangelove: or how I stopped...

Always a good read Mr. Hui. Thanks for your work.

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Anonymous said...

You got it the wrong way: Ukraine is a pretty poor country but Crimea is bringing in lots of revenue during summertime due to its beach resorts (think Yalta).

Cam Hui, CFA said...


Is that an opinion that you are expressing about the Crimea, e.g. Puerto Rico has nice beaches and therefore it should be of value for its tourism revenue, or do you have any hard figures to back that assertion up?

See this Washington Post article: