Markets may be nervous, but a Russian invasion of Ukraine seems unlikely

As markets, politicians and international observers grow increasingly concerned about a Russian invasion of Ukraine, the likelihood of it actually happening is low, says Max King. Here's why.

Winston Churchill described Russia as “a riddle, wrapped in a mystery, inside an enigma”. 

More than 30 years after the fall of the Berlin wall, Western politicians and media prefer to think of it in far simpler terms; as an existential and permanent threat, as if nothing had changed.

A Russian invasion of Ukraine is “extremely unlikely”

Barely a day has passed in the last few weeks without a new warning about an imminent Russian invasion of Ukraine. This, says Mattias Westman, founder of Prosperity Capital, a Russia-focused asset manager, is extremely unlikely.

Vladimir Putin “is popular, but starting a war would not be”, especially when the death toll started to mount. This was the lesson from Boris Yeltsin’s disastrous wars in Chechnya, a small autonomous region of the Caucasus. Russia won, but the cost was enormous, the result was devastation and the consequence a protracted guerrilla and terrorist campaign against Russian civilians.

The West thinks of Putin as a dictator who liquidates or exiles the opposition, rigs elections and hankers for the old Soviet Union. Yet, says Westman, his survival depends on the prosperity of Russia and the approval of its people. 

Invading Ukraine, a country larger than France with a population of 44 million, against a hostile population with a largely conscript army could turn into a military disaster. It would certainly be unpopular in Russia, not least because Putin always says that Russians and Ukrainians are “brothers.” 

The Churchill quotation ends by stating “perhaps the key to that riddle is Russian national interest”. Russia may not see Ukraine as the enemy, but the relentless expansion of Nato into the former Eastern bloc is seen by Russia as a threat comparable to the threat the Soviet Union once posed to America by stationing missiles in Cuba.

Why is the West so concerned about Ukraine? It acts as if Ukraine was a de facto member of Nato, which implies being prepared to go to war to defend a country with which it has no special ties, relationship or affinity. 

Ukraine’s boundaries were drawn in the post-war period by Stalin and then Khrushchev as the meaningless internal boundaries of the Soviet Union. These included not just the Donbas region in the east, and Crimea, historically close to Russia, but also parts of Romania, Czechoslovakia (now Slovakia) and Poland, including its historic cultural capital of Lvov. 

Yet its borders were ossified at independence. Initially, this was supported across the country, but Ukraine soon divided politically into a pro-Russian and Orthodox east and a westward-looking and Catholic west, a divide that was reflected in successive elections. 

The vote for Viktor Yanukovich, the former pro-Russian president, in Crimea was 79% and Westman believes Crimeans were 80-90% pro-Russia, a little less than the 95% recorded in the plebiscite.

Westman points out that the West had used a plebiscite, against Russian opposition, to justify carving Kosovo out of Serbia – but then opposed one when applied to Crimea. Plebiscites should be the peaceful way to resolve border disputes but, it seems, democracy gets in the way of geopolitical strategy.

Geopolitics is complicated

The demonisation of Russia was stepped up by Russia’s intervention to quell the uprising in Kazakhstan. “The reasons for the protests were legitimate”, says Westman, “but most of the colour revolutions ended badly. There is some benefit to change but the West’s fantasy of promoting democracy is hopelessly naïve.” 

At best, the replacements for incompetent and corrupt governments are no better. At worst, as in Egypt and Syria, the result is greater tyranny or a bloodbath.

Nursultan Nazarbayev, the recently retired president of Kazakhstan, sought a balanced relationship with the West, Russia and China but his replacement and protégé, Kassym-Jomart Tokayev, turned out to be less pliable than hoped for. 

Now, Russian influence has increased, which may not please the Chinese, who need Kazakhstan’s resources. This may not be a bad outcome for the West. “It is absurd to confront both China and Russia at the same time, driving the two countries together,” says Westman. 

Perhaps the best analysis of Russia came in an interview in the Evening Standard some years ago by the internationally-renowned theatre and film director Andrei Konchalovsky. “China will eventually set its eyes on those empty expanses of Russia, with all of those natural resources. There are two people per square kilometre in Siberia and 150 per square kilometre in China. So if Russia does not want to become Chinese it will have to join the great Judaeo-Christian civilisations. In the end, after you and I are gone, Russia will become a European country.”

Meanwhile, “The West expects Russia to act in a European way but it doesn’t.” Konchalovsky hopes Russia will change but warns that change is slow. “In the West you want everything to happen in five years, the term of presidents. Such impatience!” Russia, he believes, needs a strong leader.

“Putin keeps Russia frightening. For the West, it’s nice to have someone to be afraid of. The confrontation between the West and Russia goes back a long time, since before the Bolsheviks. It’s seven or eight centuries old. It’s a very vivid and fruitful dynamic.” 

This does not exonerate Putin. His presidency started well but he has simply been in power too long. His military adventurism, or threat of it, in the former Soviet Union has created a series of mini-failed states, expensively supported by Russia, and alienated the populations of the new countries. Yet he failed to protect Armenia from Azerbaijan’s  invasion which will surely lead to another war.

Entrepreneurialism in Russia has been slow to develop, resulting in sluggish growth and a resource-dependent economy still dominated by oligarchs, while China’s imperialism has been supported by a strong economy. Putin’s dream of uniting the former Soviet Union in a confederacy of independent states becomes more implausible every year and is unlikely to outlive him.

This should make the Russian stockmarket something of a bargain, particularly given its high exposure to resources. Unfortunately, Prosperity funds are not open to retail investors but as my colleague Dominic highlighted yesterday, JP Morgan Russia (LSE: JRS) is. The investment trust trades at a double-digit discount to net asset value and its share price, though now recovering, recently fell by a third.

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