Markets already see a Putin win

March 6, 2014

Oscar Wilde described marriage as the triumph of hope over experience. In finance and geopolitics, by contrast, experience must always prevail over hope, and realism over wishful thinking.

A grim case in point is the confrontation between Russia and the West in Ukraine. What makes this conflict so dangerous is that U.S. and EU policy seems to be motivated entirely by hope and wishful thinking. Hope that Russian President Vladimir Putin will “see sense” — or at least be deterred by the threat of sanctions to Russia’s economic interests and the personal wealth of his oligarch friends. Wishful thinking about “democracy and freedom” inevitably overcoming dictatorship and military bullying.

Investors and businesses cannot afford to be so sentimental. Though we should never forget Nathan Rothschild’s advice at the battle of Waterloo — “buy on the sound of gunfire” — the market response to this week’s events in Ukraine makes sense only if we believe that Russia has won.

The alternative to acquiescence in the Russian annexation of Crimea would be for the Ukrainian government to try to fight back, either by military means or by pressuring the Russian minority in the rest of the country. That, in turn, would almost inevitably imply a descent into Yugoslav-style civil war — with the strong possibility of sucking in Poland, the North Atlantic Treaty Organization and the United States.

The West has no intermediate option between accepting the Russian invasion and full-scale war because it seems inconceivable that Putin would voluntarily withdraw from Crimea. Having grabbed Crimea by force, to give it up now would almost certainly mean the end of Putin’s presidency. The Russian public, not to mention the military and security apparatus, believes almost unanimously that Crimea is “naturally” part of Russia, having been transferred to Ukraine, almost by accident, in 1954. In fact, many Russians think, rightly or wrongly, that the entire Ukraine “belongs” to them. (The word “u-krainy” in Russian means “at the frontier,” and definitely not “beyond the frontier.”)

Under these circumstances, the idea that Putin would respond to Western economic sanctions, no matter how stringent, by giving up his newly gained territory is pure wishful thinking. Throughout its history, Russia has accepted economic hardships unimaginable to Western observers in pursuit of geopolitical goals. Thus the idea, which circulated in financial markets on Tuesday, that Putin was suspending military action because of a 10 percent fall in the Moscow stock market that day was, putting it mildly, naive.

The reality is that Putin backed himself into a corner by invading Crimea. This seemingly clumsy manoeuvre, however, far from being the foolish tactical blunder derided in Western media, is actually a textbook example of strategic real politik.

Putin has created a situation in which the West’s only alternative to accepting the occupation of Crimea as a fait accompli is war. Since a NATO military attack against Russia is as inconceivable as Russia’s withdrawal from Crimea, Putin’s redrawing of the Ukraine’s borders seems bound to prevail.

The only question now is whether the Ukrainian government will calmly accept the loss of Crimea, or try to retaliate against Russians within its new borders; thereby offering Putin a pretext for invading the rest of the country and precipitating all-out civil war.

This is the question investors must consider in deciding whether the Ukraine crisis is a Rothschild-style buying opportunity or a last chance to bail out of equities and other risky assets before it is too late. The balance of probabilities in such situations is usually tilted towards a peaceful solution — in this case, Western acquiescence in the Russian annexation of Crimea and the creation of a new national unity government in Kiev that is acceptable to Putin.

To resolve the confrontation, such a government would probably have to guarantee the official status of the Russian language and preserve Russia’s effective veto over Ukrainian relations with NATO and the European Union. This is indeed the most likely scenario, and the one most investors and businesses are effectively assuming will happen by the end of the week.

The trouble is that the alternative, a civil war in Ukraine, while far less likely, would have far greater impact  on European and global economies, on energy prices and on stock-market prices around the world that are setting record highs.

Looking back through financial history at comparable episodes of severe geopolitical confrontation, stock-market investors have usually done well to wait for clear evidence of a decisive outcome before plunging in.

In the 1991 and 2003 Iraq wars, for example, investors did well to “buy on the sound of gunfire,” but only after the outcome of the engagement was clear. In 2002, the Standard & Poors 500 index fell by 25 percent during the run-up to war. It only turned decisively in March, when the U.S. attack on Iraq began, gaining 35 percent by the end of the year.

Similarly in 1990 and 1991, it was only six months after Saddam Hussein’s invasion of Kuwait, when victory for the U.S.-led forces in Iraq had become inevitable, that equities advanced strongly. They gained 25 percent over the next four months.

A better analogy for the current confrontation may be the 1962 Cuban Missile Crisis. After a summer of nervous speculation in which stock markets around the world fell by 20 percent, President John F. Kennedy confronted Russian leader Nikita Khrushchev with a nuclear ultimatum to remove Soviet missiles from Cuba. Within a week, Wall Street started rising and ultimately gained almost 30 percent in six months.

But the 1962 rebound only started once it became clear that Khrushchev was backing down and Kennedy had won the war of nerves. A logical explanation for this week’s stock market movements is that investors now see a similar outcome in Ukraine.

But this time with Russia as the winner .


PHOTO (TOP): Russian President Vladimir Putin chairs a Russian government meeting in the Novo-Ogaryovo residence outside Moscow March 5, 2014. REUTERS/Alexei Druzhinin/RIA Novosti/Kremlin

PHOTO (INSERT 1): A screen displays the trading day’s final tally for the Dow Jones Industrial Average over the floor of the New York Stock Exchange March 4, 2014. REUTERS/Brendan McDermid

PHOTO (INSERT 2): Military personnel, believed to be Russian servicemen, walk outside the territory of a Ukrainian military unit in the village of Perevalnoye outside Simferopol March 3, 2014. REUTERS/Baz Ratner


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> the West’s only alternative
This is incorrect. Sanctions against Russia have and will cause real damage to Russia. Russia cannot afford to burn 20 billion every 2 days to support the Ruble. In fact western economies and the EU can bring Russian citizens to their knees with economic sanctions.
That’s IF Ukraine doesn’t launch a military action to clear Russians from their border, at which point Russian war with Ukraine is unthinkable for everyone in Russia except in the empty space between (ras)Putin’s ears.

Posted by UScitizentoo | Report as abusive

I strongly doubt there will be civil war in Ukraine, especially that the Ukrainian borders are better protected from touring Russian provocateurs now. As for Russia, Putin has set foot on the path of destruction, and no one can guarantee that his country sooner or later wouldn’t fall to pieces.

Posted by okcahac | Report as abusive

Give it a rest, UStoo. You’re on the wrong side of history, no matter where you post.

It’s funny watching the left/”right” Punch and Judy show that’s been going on.

The West is run by the tribe, on both sides of the aisle, and is reaping the “benefits” of doing their bidding.

Go Vlad, go.

Posted by f00 | Report as abusive

I think the expression in the article “real politik” is a good one especially in the context the article presents.
From the point of the western world the whole global system has turned into a giant market, like playing a giant Monopoly game totally ignoring living human beings still existing there.
It is chilling how the writer is assessing a potentially disastrous geopolitical situation from cold blooded money point of view.
And this is why from western perspective they will never understand people like Putin or Netanyahu, or even the Arabic nations, they are simply not on the same wavelength.
I am not saying the above mentioned are angels, or they do not act from selfish interest, or they do not place money high on the agenda.
But they still act mostly on emotional ground, still closer to humane reality, closer to their people, their culture, instead of from purely marketing decisions.
The whole “solution package” for the economical crisis in the western countries is based on the financial institutions, GDP, growth figures, without any consideration to the actual people living there.
We have become so inhumane that it is beyond scary.
We have forgotten human beings are emotional creatures, purely based on desires, acting on instincts.
We are locking ourselves into a totally unnatural, artificial “Matrix” which has no right to exist in a natural system.
We are running out of time, we have to return to be simple, natural, emotional human beings, start talking to each other, on equal terms, on ground level, start mutually working out how to escape from this vicious cycle where money trumps life.

Posted by ZGHerm | Report as abusive

Well Ukarine and a few others can vote to be separated from the Soviet Union. Now, crimea can not? Is that called double standard? I can vote to be separated from the rest of the world too, if I own a few submarines and nuclear war heads.

Posted by putinV | Report as abusive

It’s nice to see realistic story from US.
Ukraine’s real problem aside from corruption is their anti-Russia policy is too hard, so they might go civil war between north and south.
US politicians are still in dream of NYC is world government. UN brought some good IMF, WHO, FAO and Hague. As most of conflicts in British-US originated is solved. May be you should ask Russia to host UN 2.0 in Crimea this is wild solution, but only solution which make everyone happy, except reporters and demonstrators for profit. US politicians will be more free to act reasonable without media push. Anyway, US is not paying for UN.
Globalism was a dream US running world as US like. In reality, US got global chasing dream. Globe just share portion of dream. Now, it’s time we have to prepare Chinese and Russian convert fixed asset investment to European asset management company’s company bond. (It will be just on the book to protect against possible US seizure) But it will create huge problem in US asset situation. Before they go direct to buy. But now, you will see European or Singaporean brokers to deal.
Well, you see picture US is now in position of Roman Church before Reconquista. South Korea is half lost Morocco. Japan is Gibraltar.  Guam, Hawaii, and whole Pacific is Iberian Peninsula. Japan already accept loss and readying fight back from foreign otherwise why Japan is paying for base construction in Guam and request right to co-usage. PLA converted from Shia to Sunni Muslim. Russian is just same north riders loving chance to enjoy warm weather.
Funny part is each one of US is acting exact way as junta leaders and politicians in fall of west Roman Empire, falling apart because of wealth in life demanding more from outside. I guess human nature does not change.

Posted by yellowjap | Report as abusive

This article is the most accurate I have read about the whole Ukranian affair. Ukraine in the end is Russia backyard, and there is nothing that the West can do about it.

@UScitizentoo, you want to put sanctions on Russia, hahahahahahah.
Typical repsonse of a dumb American.
Russia has tens of billions of dollars of US bank loans. They can just decide not to pay them if sanctions are placed on Russia. Oh and lets not forget about gas. Europe may just wake up one brutal winter morning to find out that the gas has been shut off, for good…….

Posted by KyleDexter | Report as abusive

More gibberish from Galetsky. He shoots from the hip with innocuous predictions to get a book deal. Take for example his line of the markets didn’t take off during the 1991 and 2003 Iraq wars until only after the outcome of the engagement became clear. As if the Iraqi military ever stood a chance? It is his incessant reliance on generalizations that make this man nothing but a salesman of hot air peddling. Russian corruption rolls through Ukraine gas pipelines. Corruption is the basis of business in both countries. Ukraine wants out and that will break the revenue stream to Russian officials, hence this power play by Moscow. It only serves as a warning to Western businesses that currently take advantage of Russian corruption to keep prices low and profit margins wide, that it soon becomes caught in Putin’s web. Western business is wary of sanctioning Putin because then it will need to adopt stricter regulated business that often shrinks profit margin. It’s cheaper to pay off dirty politicians than raise rates and taxes on local consumers.

Posted by Interestink | Report as abusive

An article that starts by misattributing a quote about (RE-)marriage to Oscar Wilde can hardly be taken seriously. It was Dr Johnson who said that a man who marries for a second time demonstrates a triumph of hope over experience. Anatole Kaletsky should retire gracefully, having ornamented debates on international politics for many decades.

Posted by Longinus | Report as abusive

This seems to me to be a fairly accurate assessment of Russian attitudes and political moods, and Western misconceptions. For context, I have relatives in Russia and have visited Russia about five times: I think they’re mostly a tough, pragmatic and practical people (with a minority addicted to drugs or seduced by romantic conceptions of Western culture distorted by Western corporate-sponsored images of fantastic wealth and prosperity).

I’m skeptical that Obama is willing to go to war at all. His handling of the mission to kill or capture Osama bin Laden was a master-class in cool diversion (reputedly holding a social event and cracking jokes while he knew the special forces were already in transit); and was a triumph for the special forces themselves… But I sometimes doubt whether Obama is willing to take America to war under any circumstances at all. War is a horrific thing — many soldiers will tell you there is nothing more horrible than war at all — but sadly, I sometimes wonder whether Obama is reckoning with political calculations over his prematurely and manipulatively awarded Nobel Peace Prize.

The new authorities in Kiev, and the Americans/British, are also doing a poor job of persuading anyone of the moral correctness of their position. Putin has written copiously to persuade us over to his position — yet we get nothing but the usual ruminations of punitive “sanctions” from the West! The best argument I’ve read against Yanukovich, besides Russian admissions that he was corrupt, has come from a commenter on Reuters: idUSBREA2007M20140301

PaulBradley wrote: @carlmartel – – How can Yanukovich be considered a valid President of Ukraine since he FLED threat of legal process – i.e. impeachment proceedings by the Ukraine’s Parliament representing 450 seats???

— Doesn’t this kind of pull the foundations out from under the feet of Putin’s whole argument?

This Kiev parliament might have made strategic errors (e.g. making it their priority to remove recognition for the Russian language — sending a very bad political signal to Russian constituents); but Putin’s argument that Kiev didn’t impeach Yanukovich seems hollow after we all saw the CCTV images of Yanukovich’s entourage fleeing his palace in Kiev; and after we have all heard Yanukovich agitating for war while at the same time stating he believes invasion would be wrong!

As for Yanukovich’s pretences that his palace grounds were “owned by dozens of people” and that he paid $3M to the Ukrainian state for that mansion… Why then, if everything was legitimate and above-board, did his people throw so many documents into the lake? What did they have to hide? I’m dumbfounded that no journalists are challenging him. Did the security guards at his press-conference not let them, or did they just fail to ask?

Posted by matthewslyman | Report as abusive

I think Kiev should also politely ask Tymoshenko to shut up and stop pretending to represent them. Even the BBC is reporting that they don’t want her back.

Posted by matthewslyman | Report as abusive

market has forgotten about the Crimean Tatars.

Posted by LevinY | Report as abusive

…My personal conclusion, until I hear better arguments by either side, or see more persuasive evidence: there isn’t a right or a wrong side in this dispute. Most factions are simply acting in what they consider to be their own various personal/national selfish strategic interests (even William Hague, UK’s foreign minister, admits that Russia has legitimate interests in the region — especially, I suppose, in their strategic defensive interests in Crimea). So we’re going to have to make do with Realpolitik, get off our high horses, and start understanding each other’s interests and seeing what we can do to help each other and work together more effectively: mutual assurances of security and fair trade (and mutually agreed definitions of what that means) would probably be a good start.

Posted by matthewslyman | Report as abusive

The article’s definition of “win” is overly simplistic. It seems inevitable that Russia will control the Crimea in a month, a year, or a decade. Neither NATO nor the EU will go to war to push Russia out of a nation that is not a member of either. The EU is not a military alliance. NATO is committed to mutual defense of other treaty members. Ukraine cannot possibly fight Russia. Russia will annex the Crimea. It is very unlikely that anything can change that.

But this victory will be Pyrrhic. Winning the Crimea may come at the cost of 1/6th of the Russian economy if the sanctions are sustained. And rather than allowing the entire Ukraine to slip into the pro-Western camp it forces the western part of the Ukraine to join the Baltic states in firmly aligning with the West as a bulwark against Russian imperialism. Perhaps more important in the long term, it forces NATO and the EU to consider Russia an actively hostile threat rather than merely a geopolitical rival.

While a year ago it seemed unthinkable that there could be another pan-european war, today this is no longer the case. European nations will increase the percentage of their GDP that is spent on the military, and there will be a cultural reorientation toward considering war with Russia a realistic possibility that has not previously existed in most of Europe. Even if this is not combined with sustained sanctions, this will ensure Russia’s long-term decline in relative strength on its Western border.

It didn’t have to be this way. Russia could have used its influence to agitate for succession in the Crimea, using the threat of civil war to destabilize the Ukraine in order to try to prevent Ukrainian membership in NATO, and failing that to push for a real civil war that would at least have given Russia the opportunity to plausibly move to protect the Russian populations in the Crimea without alarming its western neighbors and rousing them to action. Instead Putin was impatient, greedy and aggressive. The whole world now sees that Russia is a rogue state. Crimea ensures Russia is isolated from the West.

Meanwhile on its eastern border, China is its only ally with any real power. Yet China’s biggest reason to stay friendly with Russia so it can steal more Russian technology and Russia has no choice but to continue allowing it because the Chinese market for their weapons funds their development programs. And every year China gets closer to surpassing Russia in military technology, while having a far larger economy, population, and industrial base than Russia has. Does Russia even have a plan for what they will do once China doesn’t need them anymore?

I don’t see Crimea as a “win” for Russia.

Posted by Jeff98201 | Report as abusive

Solutions begin with a focus on how the parties can agree, not on how they disagree.
My framework for a solution is published at: 1-richard-berger/2756863-crimea-one-mans -idea-to-calm-the-waters-and-calm-the-ma rkets

Posted by boater805 | Report as abusive

Lol. This author is the only fool with an opinion so off based that even Putin would laugh at. Wait until the Russian are tired of eating stale bread. We’ll see who get hanged in the red square.

Posted by TAAmerican | Report as abusive

The Russian of today is a modern day consumer and no comparison with Russians of the past; they will not accept the hardships in the long run.
The Russian economy will become more chaotic and will come around. Why is Crimea worth hardship. As for naturally Russian sounds like Hitler in 1930s’. There is also another aspect; Russian gas will be partly replaced by other energy sources and there will be a boycott of “all that is Russian” by citizens of the civilized world who do not welcome Putin’s early 20th aggression. Sochi will be boycotted by many and what a boondoggle- Russia is close to bankruptcy. Remember Mussolini, Hitler, Hussein and countless other set on expansion. And remember Stalin he was done in by his own. The criminal element in Russia are likely unhappy with the austerity that Putin expects and may well do him in. Putin is finished – what happened to term limits – Putin’s action are all about Putin and the longevity of his power.

Posted by ThomasOne | Report as abusive

As Machiavelli said, “Politics have no relations to morals,” and whether the West believes their actions are right or not, they are not functional. A full scale war with Russia might result in Crimea’s return to Kiev’s control, but short of that, all the west can do is cause mutual inconveniences with Russia. It all begs the question, why are we even involved? Ukraine is in no way an ally of the U.S. or E.U., and is not a N.A.T.O. member. Exercising self-determination is hardly a humanitarian crisis that the world stage should play a part in. The West has been reduced to a group of reactionary, self-righteous countries, where wishful thinking rules, and critical analysis is all but eradicated.

Posted by JohannesBouvier | Report as abusive

Sure the United States and NATO has conventional superiority in armaments. However, to the imbeciles who beat the war drum: There are only LOSERS in a nuclear exchange. Think about that!

Posted by evoltan | Report as abusive

[…] given that there was never any chance of economic sanctions stopping Putin, for reasons explained here in March. There are several good reasons to welcome the incipient Ukraine […]

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[…] given that there was never any chance of economic sanctions stopping Putin, for reasons explainedhere in March. There are several good reasons to welcome the incipient Ukraine […]

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