Putin will seek to salvage power and wealth

The Ukrainian-Russian conflict is more complex than most Western analysts acknowledge, writes Coolabah Capital's Christopher Joye. Here, he makes his case and shares why a negotiated settlement may come relatively quickly over the next three months.
Christopher Joye

Coolabah Capital

In the AFR I write that much elite opinion has argued that Russian President Vladimir Putin is a madman, intellectually unhinged or in neuronal decline. This columnist’s analysis implies that he is an intelligent and adroit political decision-maker who, perhaps for the first time in his career, has suffered from massive hubristic overreach with potentially catastrophic consequences for both the Russian economy and his tenure as leader. His next steps will shed light on which side of this debate is right.

In contrast to China’s President Xi Jinping, Putin is not a princeling ideologue with a fatalistic sense of his own inevitable ascendancy. Distilled down, Putin is a ruthless pragmatist who cares about only two interdependent things: money and power, which he has assiduously accumulated over the last 22 years at the apex of Russian politics.

Western politicians who first met Putin in the 1990s thought he had the potential to be the next great liberalising Russian reformer (many thought the same when Xi assumed office in 2012).

A defining impression from subsequent meetings was that Putin gradually became more arrogant and focused on surrounding himself with the trappings of extreme power and wealth. The apogee of this is, of course, the construction of Putin’s extraordinary Italianate palace, estimated to have cost a staggering $US1 billion. Small beer in the scheme of things for one of the richest men in the world.

The rationale for, and the dynamics governing, the Ukrainian-Russian conflict is more complex than most Western analysts acknowledge.

This is not really a war between two independent sovereign nations, like the United States and Iraq. Between 1922 and 1991, Ukraine was a part of the Soviet Union. In the preceding centuries, Ukraine was partitioned between the Russian empire and Poland. Many western Ukrainians who deeply despise Putin nonetheless consider themselves members of the same people, and effectively the same country, as their Russian brethren. These perceptions are echoed by Russians, a large number of whom have extended family living in Ukraine.

When asked about the origins of this dispute, some Ukrainians say a better analogy would be a civil war between the Democrats and Republicans in the United States, or individual states within a country like Australia (imagine if Western Australia sought to secede).

This conflict is not, therefore, so much about claims to a distinctive heritage: it is a battle over political autonomy. Ukrainians are fighting valiantly for their right to live in a democracy and, by definition, explicitly rejecting Putin’s attempts to impose his ruthless, kleptocratic dictatorship on them. It is a war between liberty and totalitarianism.

Consensus had it that Putin’s vastly superior military assets would take Kyiv in days, steamrolling their pithy Ukrainian opposition. Markets rallied after the first day or two on the presumption that this would be a quick and relatively surgical campaign.

The initial round of sanctions announced by the West was insipid and accompanied by equally paltry military support. Yet when the brave Ukrainians, fighting for their freedoms, began successfully resisting Putin, the West realised it had a horse it could back. Russia was slammed with unprecedented sanctions while scores of countries sent waves of anti-tank and anti-aircraft missiles into Ukraine.

Putin’s response has been revealing. A madman might have tried to raze the country, perhaps by resorting to tactical nuclear weapons. Instead, Putin has approved no less than four independent peace meetings with the Ukrainians in the first two weeks of war. Even more remarkably, the Kremlin surprised markets a few days ago by presenting a written peace proposal that it promised would result in the immediate withdrawal of all Russian forces from Ukrainian territory.

This three-part offer required Ukraine to acknowledge: first, that Crimea, lost in 2014, was part of Russia; second, that the two separatist regions bordering Russia are independent states; and, finally, that Ukraine would never join NATO or the eurozone.

For an intelligent but paranoid despot, Putin feels aggrieved that a long-time Russian and Soviet territory was moving to welcome NATO forces and expose Russia to potentially existential security risks. This had been Ukraine’s direction of travel.

Putin’s core mission was to remove the current Ukrainian government and replace it with a proxy that commits to not undertaking these changes.

The more recent market rally was triggered by President Volodymyr Zelensky’s televised reply in an interview with a US news network. Zelensky suggested the Russian proposal was not far from what Ukraine could accept. He said he had cooled on the idea of joining NATO. The Crimean question appeared to be a non-issue. And on the status of the separatist regions, Zelensky said there was room for compromise.

It has been clear for at least a week that this war was heading for a quagmire: a stalemate that would not likely be resolved without Russia resorting to extreme measures. This was doubtless a shock to Putin, who assumed he could sweep through the country quickly, much like the rest of the world.

The second surprise for Putin has been the reaction of the West. Putin has single-handedly galvanised extreme unity both within the eurozone and between the US, UK and the rest of the liberal-democratic world. He’s even convinced a pacifist Germany to spend €100 billion ($A152 billion) to return its defence force to a mighty fighting machine.

The unremitting Western sanctions are destroying the Russian economy, the oligarchs that preside over it and, alongside them, their president’s power and wealth.

Sensing an opportunity to finally cauterise, if not crush, one of the biggest risks to the liberal democratic order, the West has sought to strike as many withering blows as possible on Putin’s toxic regime.

Putin has even managed to (further) isolate China, which is being badly tarnished by its refusal to criticise Russia’s invasion despite the fact that it violates China’s core principle regarding the sanctity of a nation’s territorial rights. This has been the key maxim behind the One China policy that overrides Taiwan’s claims to sovereignty, which Beijing has convinced most nations to embrace.

The bottom line is that after the success Putin had with military campaigns in Syria, Chechnya and Georgia, he has made a massive miscalculation with Ukraine, which is attributable to hubristic overreach.

Even more importantly, though, he looks to be error-correcting and trying to construct himself an off-ramp via the peace negotiation process. This would be the rational response of a pragmatist trying to salvage his irreversibly damaged power and wealth. There are naturally downside risks whereby, cornered with no face-saving options other than to double-down, Putin does try to flatten Ukraine.

Yet in contrast to other campaigns, this one is against those he regards as his own people, and, moreover, it is a war that is clearly divisive at home. It is telling that when addressing Russians via televised speeches, Putin has focused on convincing his audience that Russia is not harming any civilians and will generously compensate soldiers who have been killed or wounded in battle.

This columnist’s central case is that there is a negotiated settlement relatively quickly at some point over the next three months, with the risks skewed to it being sooner rather than later.

The other big news during the week is that the Reserve Bank of Australia’s deputy governor, Guy Debelle, will retire to take on a leadership role with Fortescue Future Industries, which is chaired by Malcolm Turnbull.

Debelle has been a brilliant policymaker and architect of many of the RBA’s best tools, including the successful bond purchase program and the globally unique “committed liquidity facility”.

His departure paves the way for an overdue external appointment to succeed the current governor, Phil Lowe, in the vein of Labor’s 1989 selection of the serving treasury secretary, Bernie Fraser, which was inspired.

For all its immense academic talents, the RBA is an excessively insular and hierarchical organisation that would benefit from an injection of fresh blood to help it better adapt to future changes. Current treasury secretary Steven Kennedy and/or his deputy secretary Jenny Wilkinson could be inspired choices.

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Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 40 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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