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Putin Plays for Keeps in Crimea

Politics / Russia Mar 11, 2014 - 02:53 PM GMT

By: Peter_Schiff

Politics

For those investors who have grown used to the relatively minor geo-political crises of the past few years, the developing situation in the Ukraine and the Crimea must come as an unexpected communiqué from the early 20th Century.There can be little doubt that the drama will impact financial markets.


While President Obama is doing his best to invert Teddy Roosevelt's "speak softly and carry a big stick" approach to foreign policy, the real issue is how Crimea's proposed secession from Ukraine will lay bare the opacity of international law with respect to issues of sovereignty. Recently, President Obama said, "Under international law, force can only be used in self-defense or by a decision of the U.N. Security Council. ..." But Obama considered using preemptive force in Syria without U.N. approval. Laying aside U.S. adventurism in the Middle East over the past 20 years, in 1998 President Clinton intervened militarily when Kosovo attempted to separate from Serbia.

Although the stakes are far lower, in many ways the current situation on the Black Sea parallels the Cuban Missile Crisis of 1962. Only this time, the roles of each player are reversed.

The threat posed by Russian missiles in Cuba was acute and targeted at America's vital interests. President Kennedy simply could not accept a Russian victory, even at the cost of all-out war. Popular and military support for a tough line against the Soviets, both at home and abroad, allowed Kennedy to go "all-in" to force the Russians to ultimately back down.

This time, it is Russia that has by far the most at stake. The threat to Russia's key warm water naval base in the Crimea, and the potential for an expansion of NATO into its traditional sphere of influence is acute. President Putin cannot accept defeat, even at the risk of war. And like Kennedy, he enjoys the support of his military and his people. Despite the relatively weaker economic hand being played by Mr. Putin, do not expect him to fold.

From my perspective, Putin may see six major geo-political weaknesses in the U.S. position. First, he recognizes that the U.S. military and the U.S. public have grown weary of ill-advised foreign interventions. Second, Russia's close trade and energy connections to Western Europe are causing dissension among NATO allies at the prospect of a Continental conflict. The potential for Putin to drive a wedge between the U.S. and wavering EU allies is a risk that Washington must consider.

Third, Putin is acutely aware that a "victory" of Ukranian interests at the expense of Moscow will further weaken Russia's ability to maintain the allegiance of the remaining scraps of its old Soviet empire.

Fourth, Putin knows that Obama needs Russian support over key U.S. initiatives in Iran, Syria and North Korea. Further confrontation of the Crimea may come at a very high price to other interests that are much more vital to Washington.

Fifth, Putin knows that the United States does not wish to see Russia revert to a closer relationship with China, just as China expands her maritime and territorial interests in the Pacific. It is no accident that Beijing has been eerily silent with respect to Russian policy in Europe. Putin knows that oil rich Middle Eastern rulers feel deserted by the U.S. over its proposed nuclear deal with Iran and are looking for new 'protective' allies. It is a power vacuum that China and Russia would be glad to fill.

For its part, Washington must be conscious of the possibility of Russia striking back at the U.S. economically through disruptive sales of its $138 billion war chest of Treasury bonds. Such a move could trigger a financial panic in the West, especially if the moves could be coordinated with Russian allies.

It has been suggested that President Obama and Secretary of State John Kerry are looking to offer Putin a 'face-saving off-ramp' similar to the one that Kennedy made to Kruschev in 1962 (cancelling a planned deployment of medium range NATO missiles in Turkey in return for a Russian stand down in Cuba). However, for the reasons outlined above, Putin must have a strong instinct that Obama will not go to the mat over Crimea. As a result, he may not accept anything that fails to keep the Crimea firmly under Russian control.

However, the bigger issue involves the stand-off between Russia and western Ukraine. With armed soldiers and civilians facing each other, the local situation remains tense. Given the lack of discipline in newly formed units, the possibility of accidental aggression in the heart of central Europe is real.

Risk-taking investors may be wise to gear their portfolios towards a continuing risk premium in energy and precious metals, while maintaining a well-diversified portfolio. More prudent investors anxious for capital preservation may wish to hold back and heed Nathan Rothschild's advice to "buy on the sound of gunfire"

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By John Browne

Euro Pacific Capital
http://www.europac.net/

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.  Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with."  A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

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