The World As It Is

Date: 02/06/2023
Author: Mr. X

We have to deal with the world as it is, not as we want it to be. 

If there’s one rule I could impress upon people with trading, personal finances, and life, it would be that.

Life is unfair. The system often seems rigged. I disagreed with my late and great friend, Dr. Kent Moors, about the trader populism surrounding the meme stocks GameStop (GME) and AMC. The biggest win for RID came with AMC and I thought traders had a legitimate beef with exchanges like Robinhood (HOOD) that halted trading just when it seemed like retail traders were on the cusp of victory. I didn’t mind diving into those stocks when I saw opportunity. I don’t like the hedgies, the politicians, or most financial journalists and so-called experts.

But that doesn’t make them liars, nor does it mean that conspiracies explain everything that seems destructive or counter-intuitive.

Most of the Western press has been militantly pro-Ukraine since the Russian invasion. It doesn’t follow that this is all lies or that the Kremlin, of all things, is the fount of truth. Let’s not forget that until just hours before the invasion, pro-Russian media outlets were mocking the White House’s line that Russia was on the brink of military action. People can hold (with some justification) that the war really began in 2014, that Russia has strategic and even moral reasons for intervening, or that Russia was provoked. None of that changes the objective reality that just before the invasion, the White House was telling the truth and the Kremlin was not.

I was right in predicting a Russian invasion. However, I was partially wrong because I thought Russia would limit its intervention to the Donetsk and Luhansk People’s Republics, instead of driving towards Kyiv. This is another case of believing a nonsensical Russian narrative – the drive on Kyiv wasn’t a brilliant feint to draw Ukrainian forces away from the east, but a Baghdad Boogie style drive into what Russia thought would be an undefended capital.

President Vladimir Putin fell victim to hubris. I remain convinced that had he limited his intervention to the DPR/LPR, the West would not have supplied Ukraine with as many weapons, Ukraine’s international diplomatic message would be less clear cut, and the West’s support would be less enthusiastic. Russia would have a far more powerful moral argument. As it stands, drive around many cities, towns, and even rural areas in America and you’ll see the blue-and-gold of Ukraine flying next to the Stars and Stripes in front of many private homes. No doubt President Putin rues his mistake and is infuriated that he’s fallen into a quagmire.

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Still, even admitting all this, perhaps because of all this, we should cast a skeptical eye on the Western press. For the course of the entire war, following Ukraine’s successful defense of the capital, we’ve been hearing that Russian forces are on the brink of mutiny, that Putin is about to be overthrown in a coup, that he’s dying, and/or that there is some massive democratic movement waiting to overthrow the regimes in Moscow and Minsk, Belarus. All this seems very questionable.

While getting polling data out of Russia is difficult, what we have show Russians support the war. Many Russians have fled the country, but the same could be said of Ukrainian refugees, most of whom will probably not return. President Putin has prevented the war from directly affecting the lives of most Russians. While the Russian military has performed more poorly than expected, the Russian economy has done better than expected (perhaps even outperforming the United Kingdom, at least according to the International Monetary Fund).

My current view is that Russia is fighting the kind of war it can win right now, or at least not lose. I have three reasons for this.

  1. There are signs that Ukraine is running short of manpower, with conscription efforts stepping up throughout the country. U.S. Army General Christopher Cavoli, NATO’s top officer for Europe, admitted that the drain on resources is going beyond NATO’s estimates.
  2. There are signs that Western willingness to provide Kyiv with weapons and money is starting to wobble. Hungary’s Viktor Orban is pressuring the Kyiv government to stop trying to conscript or pressure the Hungarian ethnic community in Transcarpathia. Hungary has been pushing this line for about a decade. In the unlikely event of a total Ukrainian collapse, Hungary might even seize the area to “protect” its co-ethnics. The White House is reportedly telling Ukraine it needs to show results soon or there may not be enough political will for more aid. Moldova is accusing Russia of planning to destroy its government.  It’s a bold claim, but it might not be enough to win over the public in a country facing economic collapse.
  3. Russia is losing its “creative class,” skilled tech workers who could power the Russian economy, but this is also the group that would lead any movement for regime change. Putin himself isn’t sorry to see them go, calling them “scum.” In his mind, this may be something of a spiritual purification for Russia. Any move to overthrow Putin will look like (and, in truth, will probably be) a foreign plot. Any Russian leader who would replace Putin would be, like Louis XVIII, arriving with the baggage train of the enemy.

The most important man right now is Yevgeny Prigozhin, founder of the Wagner Group. The Wagner Group is leading the Russian offensive right now. While the Russian military is failing to properly train its “mobilized” recruits, Wagner is putting its men, some of whom are prisoners, through a brutal one month regime focusing on light infantry tactics (and four hours of sleep a night.) Some say that Prigozhin could pose a political threat to Putin, but this is unlikely. He is the political equivalent of someone from the nouveau riche, a jumped of caterer and former petty criminal who has proved useful to the Russian president. Without Putin’s support, he lacks the elite connections to make a bid for power. At the same time, he is sufficiently influential (along with the hawkish Dmitry Medvedev and Chechnyan leader Ramzan Kadyrov) to keep pressuring the regime to go farther.

A recent interview revealed a remarkable look at Prigozhin’s mindset. He brags that he is not “some estranged figure” but has visited his men. He waves away accusations of far-right views among the troops, saying that no one cares about anything except how they do their job. He gently prods the “official” military leadership telling them to visit the front lines. He rather chillingly plays the Internet troll when asked about charges Wagner kills defectors with hammers. “I just know the hammer is a pretty tool and symbol,” read one translation.

A Wagner patch/flag that was circulated even before the current war

The most significant part of the interview is that he says if Russia intends to reach the Dnieper, it will be two more years of war, while about a year-and-a-half to consolidate Donbass. These are timeframes far longer than many analysts seem to projecting. It seems that many analysts seem to assume that the war will end relatively soon or that peace talks are likely to begin. In reality, Russia is likely to pursue a “frozen conflict” and remain ready to pounce if Western aid and patience drives up.

The next few months may determine Ukraine’s survival. Russia will be facing better weaponry, more motivated troops, and American intelligence guiding Ukrainian artillery strikes. At this point, America is de facto a belligerent in this war. We are all just pretending this isn’t happening because no one wants to admit America could be on the edge of war with a nuclear power. If Ukraine can sever Russia’s land bridge to Crimea, threaten the recapture of Mariupol (Russia’s big prize so far), and relieve Bakhmut, Putin’s regime will be threatened. In that case, I believe the Kremlin will use tactical nuclear weapons.

However, I don’t see this scenario happening for Ukraine. Ukraine seems to be running short of manpower. Troops being captured and displayed on social media appear old and out of shape. Ukraine’s government seems far more unstable than Putin’s. All Russia needs to do is hold its position and wait for the West to lose its collective will. With the United Kingdom barely avoiding a recession, the European Union suffering from energy shortages, and NATO paralyzed by Turkey, Putin may yet survive this debacle. If the United States has to shift its attention to the South China Sea, that will be drain on resources that could otherwise go to Kyiv.

Putin is playing the long game, and Prigozhin is telling the world. Investors should plan on a long war. There will be no peace negotiations nor will economic measures bring Russia to the table. Russia will either enforce a victor’s peace on Ukraine after it takes Donbass, or Ukraine will break through Russian lines this spring and drive for Crimea. If that happens, I have little doubt Russia will turn to nuclear weapons. Russia cannot survive the loss of Crimea and remain united. Though many American policymakers are dreaming of the breakup of the Russian Federation, splitting a nuclear autocracy into several warring states with revanchist strongmen at the head is hardly a better from our point of view.

Sadly, the best case scenario may be what’s happening now. A frozen conflict, extending at least the rest of this year, with Russia seizing Donetsk and declaring a peace that no one else recognizes. In the long run, negotiations could settle the issue with a fair referendum for Donbass. The tragedy of the war is an offense against the human conscience, but we can’t do anything about that. The world is what it is and only the dead have seen the last of war. The brutal truth is that a massive military shift in the campaign puts us in a position where the stock market will be the least of our concerns.

One thing is for sure. Defense stocks are a strong bet for the long term. Great power conflicts have returned, and they are here to stay. China is learning for what’s happening. With the demographic issues it is facing, it is going to have to make it’s own move soon.

Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for to bring you news on what those with power are debating, planning, and doing.

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