May 11, 2022

[TOP STORY] How will the “cold war” poker game between Russia, Ukraine and the United States play out?

SIMON BROWN: I’m talking to Mohammed Nalla. It can be found on moe-knows.com; it can also be found on Magic Markets Podcast. Go listen to this. Mohammed, I appreciate the weather today.

We are talking about Ukraine, we are preparing for it. When was the last time we had a big geopolitical problem? Honestly, we have them, and often they include Putin. Maybe the difference this time is that NATO (North Atlantic Treaty Organization) is involved, the West is involved, Putin saying Ukraine can’t be NATO; move troops there. It gets messy. I don’t know what the easy solution is. Reports [were] that he was withdrawing troops to help the market on Tuesday. But the NATO chief says, no, he’s just moving them.

MOHAMMED NALLA: Simon, always a pleasure to do this, a pleasure to discuss with you and the listeners. It is a permanent problem. Yes, geopolitical risk is something we should always have on our radar, especially when it comes to Ukraine and Russia. There was this tenuous relationship for a while. You really have to take a look back even at the whole issue around Crimea. Crimea was a region of Ukraine, and Russia effectively annexed it just a few years ago.

So it goes back and, even if you want to look further than that, you go back to the Russo-Turkish war; that’s when the Russian Empire claimed Crimea and so on. So there is a lot of history there.

Don’t forget that it’s also a product of the fact that the Soviet Union fell apart after the Cold War, and for the past two decades we’ve had a very strong leader in the person of Vladimir Putin, whose popularity in Russia has been reasonably robust. He’s been around for almost two decades and it’s yet again a sign of a leader who is, I guess, confident enough to start pushing back what has been a unipolar world for the better part of the past two decades.

We are now seeing fractures there, whether in China versus the United States, or whether on Europe’s doorstep between Russia and NATO. We find ourselves in what I would call an impasse, because we are recording this today and yesterday there were talks that the Russians were withdrawing their troops from the Ukrainian border, and today it is again the case with the United States saying, well, we haven’t received any evidence that Russia is withdrawing its troops.

So it’s a bit of a “he said, she said” thing and unfortunately it causes a bit of volatility in the markets if you don’t look through some of the short-term risks.

SIMON BROWN: Energy is obviously one of these issues. In fact, we talked about the year of power loss, particularly in the UK and Europe, and your prediction there was accurate. Energy has seen a huge price spike. The markets sort of pay attention to it, but almost in the sense that they [were] more interested in Facebook and other numbers than they were in Ukraine until the withdrawal.

But it could, especially on the energy front and especially for Europe and Germany, have massive implications. But if there is finally some kind of invasion or something like that, it will hurt the markets.

MOHAMMED NALLA: Yeah. I think we’re going to decompress a bit. You’re right that we talked about the energy constraint with the UK not too long ago, just a few months ago.

Read/listen: Understanding the energy crisis in the UK and Europe

I think at the start of this surge in oil prices and energy prices, I was wrong. I thought we would plateau between $60 and $70 a barrel. It is now well north of $90, pushing over $100. What’s really going on here?

Rewind to this point [of] the energy crisis in the UK: remember that Europe in particular is very dependent on Russian gas for a large part of the energy. It has been called a moment of silly genius when Germany decided to decommission much of its nuclear capacity in favor of green energy. The reason is – we had this discussion – that nuclear is considered or could be considered green. Regardless of this, around 40% of German energy consumption depends on gas supplied by Russia. There is the Nordstrom 1 pipeline and now Nordstrom 2 which is really a bone of contention [with] United States.

Let’s unpack that too. Old gas pipelines pass through regions like Ukraine, allowing Ukraine to effectively capitalize on so-called “transit gas supplies”.

Now, if the Russians build a direct gas pipeline under, I believe, the Black Sea there, under it, going directly to Germany, it effectively bypasses the likes of Ukraine. It makes Russia much more powerful.

Germany continues to be a customer simply because it needs energy, which comparatively weakens Ukraine and other peripheral quasi-Russian states. I think that’s been the bone of contention – which the United States pushed back because they’re very wary of the “Russian bear,” if you want to call it that.

SIMON BROWN: You say that Putin has been here for two decades and, of course, he has [until] another, what, 2036 or some crazy date where he’ll probably be around, probably until he dies. I was thinking about this earlier in the week, and one of the problems is that Putin says he doesn’t want Ukraine in NATO. I also don’t think NATO wants Ukraine to be part of NATO, in case there is an invasion and they have to come to the aid of [the Ukraine]. Is there some kind of face rescue, or has it gotten to the point where it’s almost a saber rattle and no one can walk away without looking like a fool.

MOHAMMED NALLA: Again on this point, I think when we look at NATO, it is almost incorrect to consider NATO as a homogeneous entity. Yes, it is a treaty and members are governed by the statutes of this treaty. But I think the interests of the respective NATO members here are diametrically opposed. I think Russia would love to see that gone, because Russia and Germany want energy. Germany wants energy security, so Germany wants it gone.

Germany is more likely to make concessions and leave this de-escalation than the United States. I think that brought up some fracture points. A lot of the comments I see from Europe say, “Hey Russia and the United States, if you really want to fight, you share a border here in Alaska – why don’t you fight there and leave Europe out of it?’

That’s really what it boils down to. You have a new Chancellor in Germany, Olaf Scholz, and he came out and had a rather interesting conversation with Putin. If you look at some of the excerpts from that, it’s certainly potentially a lot more assertive than Angela Merkel was, just in terms of commentary. I think it’s because he has to save face with NATO.

But, at the end of the day, I think it’s also not in anyone’s interest – including Russia – for this to escalate into armed conflict. I think it is Russia that particularly calls the US bluff. Let’s see how this poker game actually plays out.

SIMON BROWN: Maybe it’s playing slow, as reports said the invasion would happen after the Olympics, which is next week. Then [last] weekend it was going to be this week. Is it almost fading, and maybe some troops are starting to go home and some are staying? There’s some sort of stalemate where no one wins and no one loses face?

MOHAMMED NALLA: I would like to see that. I would almost consider that a base case scenario, simply because the biggest winner in any armed conflict here would be, ironically I guess, the US military-industrial complex.

I think the Russians don’t necessarily want a war on their doorstep, because that would force American troops and NATO troops right to its border.

This is the exact opposite of what Russia is trying to achieve here. So I think, yeah, the whole thing about Russia not wanting NATO on its doorstep – it’s important. It’s validated.

I think the annexation of Crimea by Russia and now, for example, the Donbass region, which is home to many Russian-speaking Russian loyalists in Ukraine – these issues will continue to be, I guess, the bulwark of Russia pushing against NATO and its long-time enemy, in fact the United States.

I don’t think Russia really wants to see Germany stop buying Russian gas, you know what I’m saying? This is why I say that we have to be very separate between European interests and American interests. Again, I would see this as a slow burn. It never really goes away. It’s the Cold War that never really dies. It might defuse to come back in a few years, very similar to what we saw with Crimea, this is actually the second version of Crimea.

SIMON BROWN: Yes. This is an excellent point and we will leave it there. It’s a cold war. Russia does not want war on its border. Absoutely.

Mohammed Nalla, always great ideas. You find moe-knows.com and of course Magic Markets.