War in Ukraine: Part 2 – The New World

Those two days determined what Germany would do next: build out its army and start World War II.

Putin’s 1936 moment was in 2014 and 2015 when Russia invaded Crimea and Eastern Ukraine. (Some would argue it started earlier, in 2008, with the excursion into Georgia.) At the time, the West put toothless sanctions on Russia. Despite pleas from the US, the EU did not even consider increasing its defense budget. This inaction emboldened Putin to start his war with Ukraine. Today we are close to 1939, with Germany’s invasion of Poland and the start of what later became known as WWII. Except that it seems that Europe, acutely aware of its dark history, has finally woken up.

A day or two after Russia invaded Ukraine, the US and European countries started to come out with sanctions. They were pathetic and laughable. The low point was when Italy excluded exports of Gucci bags to Russia. It seemed like 2014–2015 all over again, in line with what Putin was expecting.

Then something changed on February 26.

I don’t think it was just one factor but a confluence of events:

• The horrors of this war were broadcast on social media for the world to see. This time it was not happening far away but just a few countries over to people who looked just like most other European citizens.

• When Sweden and Finland declared in recent days that they were exploring joining NATO, Putin threatened them with political and military actions (war!). Let’s pause. I want you to process this for a second. Russia was threatening war with two other nations, neither of which had even been part of the Soviet Union, if they made decisions to determine their own fate. This time it did not feel like an empty threat.

• Volodymyr Zelensky did not escape to Poland or to the US. In a rejoinder to the US’s offer of safe haven, he said, “I need weapons, not a ride.” He reenergized not just Ukraine but the rest of the world. (I wrote this article about this wonderful man when he was elected). The bravery of the Ukrainian people was and is inspiring.

European countries suddenly woke up and realized that they might be next.

As I have mentioned, this is the third (!) incursion by Russia into Ukraine. In the first one it chopped off Crimea, and then it invaded and destabilized the Donbass and Lugansk areas of Ukraine. These first two incursions were accomplished through lies. Just imagine this: Somehow Russian soldiers and tanks (yes, tanks!) ended up in Eastern Ukraine. Neither tanks nor soldiers were officially Russian. The soldiers were ex-Russian Army (though you did not have to have much imagination to understand that they were on the Russian payroll, which Putin of course denied). Crimea was invaded without a shot and “had a referendum”.

Until now Europe had chosen to take Putin’s lies lying down. It could see through them, but the truth was inconvenient for anyone other than Ukraine.

This time there were no pretenses. Putin has sent a good-sized chunk of the Russian Army into Ukraine. The Europeans realized that instead of fighting Russia with their own armies in the future, they could arm and support Ukraine today.

A dictator’s thirst for power is insatiable. After Russia swallowed Ukraine (with a lot of indigestion – more on that next) it would continue to try to put the Soviet Union back together, gobbling up other ex-Soviet republics. Europe could continue to ignore it and come out with more toothless sanctions, but at some point Putin would go after Estonia and Latvia, which are NATO countries. If NATO didn’t defend them, Europe as we know it would be over.

Before February 25, Germany (insultingly) sent helmets to Ukraine. Today it is sending anti-tank weapons. The EU is providing hundreds of millions of dollars’ worth of weapons to militarily outmatched Ukraine. Today every country in Europe wants to outshine the next with its real, tangible support to Ukraine.

European countries have closed their airspace to Russia (and the US just joined them). The West has frozen Russian Central Bank foreign reserves – I did not even know that was in anyone’s arsenal of sanctions. Many Russian banks have been removed from SWIFT, the foreign interbank payment system. Not all banks were cut off from SWIFT, because Germany and Italy rely heavily on Russian gas for their power generation.

What is amazing is that the corporate sector has joined the fight, too. Google Pay and Apple Pay no longer work in Russia. Apple has even stopped selling iPhones in Russia. Mastercard and VISA have blocked their networks in Russia. Soccer teams are cancelling their matches with Russian clubs. I did my little part: My next book was also going to be published in Russia. Now it will not, but I will be happy to see it published in Ukraine.

Russia is being cancelled, excommunicated from modernity by the West. It is being treated as the pariah it is.

I want to stress this point: Putin considers these post-February 26 sanctions which far exceed what he expected as declarations of war by the West against Russia. No, we don’t have the West’s armies on the ground in Ukraine, but the Russian Army is being fought with the planes and other weapons that are arriving nonstop to Ukraine from the West, and the Russian economy is being crippled by the West.

I fully support sanctions. Part of me is celebrating, and another part of me is sad. The Ukrainian people are not the only casualty of Putin’s war. The Russian people have suddenly found that they are facing a serious depression. I have read that a majority of the population supports this war and that Putin’s popularity is soaring. I am not sure I believe this – it is coming from media controlled by Putin. But even if it is true, these people are brainwashed and zombified by state-controlled media to a degree you cannot imagine. They have no sense of reality; they live in Putin’s Matrix. I’ll talk about that at length next time.

Then what?

Putin did not just miscalculate the West’s response; he completely missed the Ukrainians’ will to fight. This is in part why I was utterly convinced the war would not happen. I wrote:

I think Putin is bluffing – Russia doesn’t want a full-blown invasion of Ukraine. It would result in endless guerilla warfare in Ukraine. The Russian Army is superior to Ukraine’s, but there would be no victory in that war. Russia occupies Ukraine, and then what?

Then what? I vividly remember how Russians and Ukrainians and the rest of the Soviet Union fought the Nazis in WWII. I remember self-sacrifice. I grew up a block away from a statue of Anatoly Bredov, a Russian hero who blew himself up to keep the Nazis from reaching a strategic high point in 1944. Russia would not let me forget, and rightfully so. Statues of heroes who gave their lives while fighting Nazis are all over Russia.

During WWII both Russians and Ukrainians displayed plenty of heroism, but they had the “why” – they were fighting Nazi Germany for their families, for the future of their kids, for their homeland.

My thinking was, if Russia invades Ukraine to kill their democratically elected government and to install their own military puppet government and thus turn Ukraine into another, smaller version of dictatorial Russia, the Ukrainians will not stand for that. Ukraine is not a perfect democracy; it has its share of problems. But it is a democracy. It has things we in the West often take as much for granted as we do running water (I know I often do): freedom of speech, free elections, the rule of law, and due process.

I knew Ukrainians would fight to preserve that. And that is exactly what they are doing today. Ukrainians are behaving the same way they did when they fought the Nazis. Here is just one example: The Ukrainian soldier Vitalii Skakun blew himself up detonating mines so Russian tanks couldn’t cross a vital bridge. (I am proud to share a first name with this hero!)

In a delusional act of self-deception (or just plain arrogance), Putin thought Ukrainians would throw a welcoming party for Russian tanks roaming through Kyiv. The Ukrainians threw him a party, but by tossing Molotov (Zelensky) cocktails at the tanks, fighting till their last breath. Tens of thousands of volunteers have enlisted in the Ukraine Army. Even Kharkiv, one of the most eastern cities in Ukraine, with a predominantly Russian population, is fighting the Russian Army with all its will.

US General H. R. McMaster said, “To win a war you need both capability and will.” Ukrainians definitely have the will, and now they are getting the capability shipped to them from the West. Will it be in time?

The ineffectiveness of the Russian Army is somewhat surprising. But when you think about it, maybe it shouldn’t be. Russian soldiers don’t have the will – the “why.” What are they fighting for? Putin? Even if they believed in the “ridding Ukraine of neo Nazis” nonsense (I’ll address this topic in the future), their families were not threatened by Ukraine. Many have friends and family in Ukraine. They are them. I have a hard time imagining Russian soldiers sacrificing their lives to invade Ukraine.

This is why Russians soldiers are surrendering to Ukrainians. They are not cowards. I watched a dozen short video interviews with captured Russian soldiers. Their stories were one and the same. They were on training exercises. They were told they were going on a peace-keeping mission to Donbass and Lugansk. They crossed the Ukrainian border but found they were going to Kyiv or Kharkiv instead. I’d argue that these soldiers who surrendered are heroes. Unless there is a regime change in Russia, they cannot ever go back to Russia or they’ll be imprisoned for 15 years as deserters.

I know the Russian soldiers who are dying will not get much sympathy from us, after we have watched Ukrainian cities being demolished by Russian artillery. But these are just 18-year-old kids who were conscripted into the army. Even the ones that signed up voluntarily did not know that they’d be facing their Ukrainian brothers. These young soldiers who have been killed have parents and siblings who just lost their loved ones. I am maybe extra sensitive because I have a 20-year-old son who has been taught to love, not hate. He was born in the US. But he could have been born in Russia if my family had not been lucky enough to move to the US in 1991. I also remember being 18 years old in Russia and terrified that I might be drafted into the Russian Army. (I wrote about that experience here.)

The Russian Army is also not as capable as we feared. It is handicapped by kleptocracy. A lot of Russian tanks have been gutted, the metals from them sold for scrap and the instruments are taken out and sold on the black market. I am not surprised. Some things haven’t changed over the decades since I left Russia.

Also, just like any dictator, Putin staffs people in key positions based not on their capability but on their loyalty to him. Take the Russian Minister of Defense. Unlike in the US, where the Secretary of Defense is a political not a military position, in Russia the Minister of Defense is also a general in the army. Notably, the current Minister of Defense, despite being a general in the army, has no military background. None.

This is why I am so optimistic and worried at the same time. Ukrainians have the will and an increasing capability. The Russian Army has no will and the army is somewhat sclerotic. I am worried because, in place of tanks rotting on Ukrainian roads, either abandoned or out of gas, Putin will start using heavy artillery and missiles to level these cities. We already started seeing that on March 1st. But this war is not winnable for Putin even if he invades every major city. The Ukrainians will keep fighting and the West will keep supporting them.

Just to clarify, my main occupation is value investing and I did not become a rear admiral and military expert overnight. Please take what I just wrote with a grain of salt – I certainly do.

The world has changed

Ironically, before Putin started this war, the NATO that was “encroaching” on Russian borders was a toothless one. It was in semi-retirement and collecting peace dividends from the Cold War. The Ukrainian invasion brought it out of retirement. Today we see the NATO that existed during the Cold War, the one that Putin should fear. The peace dividend got cancelled by Putin (together with coupon payments on Russian bonds held by foreigners). European defense budgets are going up. Germany is boosting its defense spending by more than 30%. Other European countries will follow. NATO is more united than ever before. It now has a clear objective, which it did not have for over three decades.

China is paying close attention to what is going on in Ukraine, and it probably doesn’t like what it sees: a stronger, more coordinated West. Europe finally awakened to its dependence on natural gas from Russia. Even if the war ends tomorrow, Europe is on an irreversible course to reduce its reliance on Russian gas. Unfortunately, Germany is doubling down on green energy and coal instead of going back to nuclear. (I wrote on this topic here.)

As Russia has been cut off from the rest of the world in everything from planes to smartphones, it has been pushed into Chinese hands. Russia has what China needs – commodities. Before the Olympics Russia signed a large deal to sell its natural gas to China. China in turn will likely be providing Russia with everything the West is depriving it of.

The newly invigorated NATO and the extent to which the West has slapped sanctions on Russia make a Taiwan invasion by China – which would have a much greater impact on the global economy than the Ukraine invasion – less likely now. This topic requires a lot more thinking and analysis because China is economically much stronger than Russia and our dependence on China is much greater. Apple, for instance, cannot stop shipping iPhones to China if it invades Taiwan, not just because China is one of its largest markets, but because almost all of its iPhones are made in China. But it is a given that, just like the pandemic (which Putin made us forget about), the Ukraine war has reinforced and accelerated the movement toward deglobalization.

Next: In part 3 I will discuss the future of Russia.

Vitaliy Katsenelson is the CEO at IMA, which is anything but your average investment firm. In a brief moment of senility, Forbes magazine called me "the new Benjamin Graham”.

I’ve written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (I’m working on a third - you can read a chapter from it, titled “The 6 Commandments of Value Investing” here).

And if you prefer listening, audio versions of my articles are published weekly at investor.fm.

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