I landed in St. Petersburg around midnight. Got into a taxi (an old Volga bought by the driver in former Eastern Germany when he was serving there on a special assignment) and we started driving toward the hotel. The driver’s name was Nitup. From the very start the conversation focused on the dream of Eurasia. Everything was about Eurasia, and “Eurasia without Ukraine cannot exist”. He lamented the collapse of the old Soviet Union and blamed Mikhail Gorbachev for “unilateral disarmament”.
Nitup wanted to educate me on “The Russia that Ought to Be”. He was talking about Michael Yuriev, the author of a utopian fantasy that dreams of the messianic role that Russia can play in the unfolding of events on a global scale. Yuriev’s dream in his book “Third Empire: The Russia that Ought to Be”, is for a Russian with an uncompromised ethnic identity that integrates parts of Ukraine into its territory. Nitup also talked about Ivan Ilyin and his fears of a west that will break the national identity of Russia and will corrupt it by penetrating into its culture and its vision. Suddenly and as Nitup was talking about those things, he switched the discussion on the sanctions imposed. He did not think that they could have any serious impact, while he brought up China and its absentee ballot at the UN Security Council meeting related to Crimea. As we were traveling along Koltsevaya avtomobilnaya on the beltway, he made an unexpected U-turn and took the exit on the opposite side of the ring road. He got out of the car, said he will be back soon and left me alone to contemplate.
I started thinking about China’s position and the inability (at least thus far) of the west to leverage the Chinese deep-rooted beliefs in the sovereignty of a nation. In addition, I was highly concerned of the inability of the west to leverage the Chinese trade relationships with Ukraine. Could it be an indicative sign of their territorial visions in the South China Sea? Are we entering into a period where borders will be changing?
How could we anticipate having effective sanctions without imposing restrictions on the money flows through the Swift system? Wasn’t the latter that made the Iranians eager to negotiate? How could we expect the sanctions to work if Kremlin’s inner-circle is untouched? (e.g. Defense Minister Sergei Shoygu, Chief of Staff Sergei Ivanov, FSB’ s chief Alexander Bortnikov, and Gazprom’s boss Alexei Miller)?
As the Middle East continues to be in turmoil with pending border changes there, how could the west focus on a strategic normalcy where both Asia and Europe require a lot more attention? If the US energy policy becomes more robust, how would that offset Russia’s leverage in using its energy reserves?
If strong sanctions are imposed on Russia, what could the consequences be on the western markets? A significant portion of EU’s trade is with Russia, and the capital markets have financed more than $500 billion of deals with Russian companies. If assets are frozen and Russian banks are affected, how could that impact the collateralization process and the velocity of collateral that needs to increase in order for the economy to escape from potential dismal growth rates (especially in the EU)?
Net private capital outflows from Russia have increased by at least 80% on a year-to-date basis (reaching over $50 billion since January 1st) and are expected to increase even more. If capital flight exceeds $140 billion for the full year (as is expected), then we may be entering into a period of economic and political instability in Russia which may be confronted by a cold-war mentality of “we will try to bring you down with us”.
As all these thoughts were crossing my mind, I contemplated whether bear signs may start popping up here and there. If that is to happen, how then in these circumstances can an investor be protected? The first thing is some tight stop losses in order to secure existing gains. The second is the use of vertical spreads. The third, is the use of safe havens, and the possible use of market inverse/shorting securities.
I knew that Nitup was about to come any minute now, and just wanted to send my own subliminal message to him, thus I pulled from my briefcase an Eagles CD that had the song “Get Over it”.
As Nitup opened the door, I asked him to play the song, telling him that has a message about Eurasia. Let’s review part of those lyrics:
You drag it around like a ball and chain
You wallow in the guilt; you wallow in the pain
You wave it like a flag, you wear it like a crown
Got your mind in the gutter, bringin’ everybody down
Complain about the present and blame it on the past
Get over it
Get over it
It’s gotta stop sometime, so why don’t you quit
Get over it, get over it
The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.
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