|  | | | | | The conflict in Ukraine is one of the worst human tragedies the world has witnessed in recent years but also one of the most fascinating historical developments. The conflict is reshaping not only the global political landscape but domestic politics as well.
From impacts on energy and commodity markets to the foundations of international trade, the economic significance of the Ukraine war is also enormous.
There is no question Ukraine will remain a recurring topic for us in the months and year ahead. As conscientious citizens, we need to decide what policies and positions to support. As investors, we need to develop a sense of how this whole debacle will play out.
A good point of entry into the Ukraine debate is to map out the political battlelines that have emerged in the U.S. since Russian troops invaded Ukraine just over two years ago. Official U.S. policy is of course to support the Ukrainian government’s efforts to repel Russian troops and protect the territorial integrity of Ukraine, including, it seems, disputed areas that are predominantly Russian-speaking.
In an interesting partisan role reversal relative to America’s experience with the Iraq war, the Democrats are largely united in their support for the Ukrainian cause, while Republicans are split.
It wasn’t so long ago that many Democrats were asserting that American involvement in Iraq was motivated by oil and the commercial interests of government contractors. They argued that our money was better spent on domestic priorities, our involvement lacked moral justification, and we were actually making a grave geopolitical strategic miscalculation.
Barack Obama differentiated himself first from Hilary Clinton in the primary, and then from John McCain in the national election, as a staunchly anti-war candidate, a view he held since he first ran for Senate in 2004. It was a somewhat risky position to take, but his message clearly resonated with voters. |
| | The days of sweetheart deals for Halliburton will be over when I’m in the White House. - Presidential candidate Barack Obama, October 2008. |
| | With some notable exceptions, like libertarian Congressman Ron Paul, the vast majority of Republicans supported the Iraq war. Nowadays, most seem to look back on it with serious regret. Donald Trump famously called the Iraq war “a big, fat mistake” when debating Jeb Bush in February 2016 during the Republican primary, perhaps marking a turning point in Republican consensus.
Today, Democrats are arguing for continued funding of Ukraine in much the same way George W. Bush and others sought to drum up support for Iraq. Putin, like Saddam Hussein, is characterized by many as a “madman” who must be stopped at all costs. Parallels to World War II are frequently invoked. Those who object to American support for Ukraine are likened to Neville Chamberlain or worse yet described as Kremlin pawns.
Many if not most Republican voters seem to have a negative view of American policy in Ukraine, as indicated by direct polling on the question. Republican primary support for candidates like Trump, DeSantis and Ramaswamy, who have each indicated a preference for a negotiated resolution, suggests most Republican voters are now quite skeptical.
Ukraine has become, in many ways, the litmus test for a “MAGA” versus “establishment” Republican. So-called establishment candidates like Nikki Haley, and before he pulled out, Chris Christie, have been as adamant in their support for Zelenskyy as any Democrat. They are joined by many prominent Republican senators, like Mitch McConnell.
Why the divide?
The core argument for standing up to Putin and continuing to fund the Ukrainian government’s war effort is not dissimilar to what we heard with regard to Saddam Hussein. If we don’t stop him now, he will move on to other countries, and the threat will only grow.
On January 4, 2024, Nikki Haley tweeted: “Russia said once they take Ukraine, Poland and the Baltics are next. This is about preventing war. We don’t want our men and women to have to go and fight.”
During a Fox News Town Hall on February 19, 2024, she further attributed such alleged statements of expansionist intent to Putin himself. |
| | Putin said, once he takes Ukraine, Poland and the Baltics are next. If that happens, those are NATO countries, that puts America at war. - Presidential candidate Nikki Haley |
|  | “Establishment” candidate Nikki Haley |
| Inflammatory remarks like these casually circulate because they align with the dominant narrative, but are they true?
In his recent interview with Tucker Carlson (over 200 million views), Putin essentially said the opposite of what Nikki Haley claims and that Russia has “no interest in Poland, Latvia or anywhere else.” |
| | It is absolutely out of the question. You just don't have to be any kind of analyst, it goes against common sense to get involved in some kind of global war. And a global war will bring all of humanity to the brink of destruction. It's obvious. - Vladimir Putin |
|  | Russian President Vladimir Putin |
| To our knowledge, Nikki Haley has no real basis to claim, as she brazenly does, with minimal if any pushback, that Putin’s stated or overt intentions are to conquer Europe. And if Putin did intend to conquer Europe, he probably wouldn’t be announcing it publicly.
That being said, is there any reason to think that Russia genuinely intends to invade other countries?
After all, this is the key argument against working to achieve a peaceful resolution to the crisis. This is the main premise upon which American taxpayers are being asked to continue to send hundreds of billions of dollars to Ukraine and prolong a conflict that has already resulted in hundreds of thousands of deaths.
What does Putin really want?
It is easy to project the worst of intentions onto Vladimir Putin, call him a deranged megalomaniac and dismiss anyone who tries to comprehend his government’s perspective as a craven traitor. Moral certitude feels good, but it does not necessarily help you arrive at the right answers.
In foreign policy literature, there is a concept of “strategic empathy,” which is simply putting yourself in the shoes of your adversary.
Russia is a country of approximately 140 million with a negative population growth rate and an average life expectancy that is about 9 years lower than the European Union. It is already in physical terms the largest country in the world by far and controls nearly twice as much land mass as the United States, which suggests it’s not in desperate need of more surface area. Despite its physical size and vast natural resources, Russia’s nominal GDP is smaller than that of France.
Putin has struggled for two years to achieve his military objectives in neighboring Ukraine. Even if he fantasized from time to time about becoming the Czar of Europe, the idea is absurd on its face.
Consider as well the interests of China, America’s real strategic rival, which has forged a “no limits” partnership with Russia as a consequence of the conflict. China is now the EU’s largest trading partner. Through its economic leverage over Europe, which is desperate for economic growth opportunities, China derives a wide range of advantages and favorable treatment within global institutions. |
|  | Xi with Macron, Merkel and EC President Juncker in 2018 |
| As Europe has become China’s most important market, trade with the United States has fallen considerably. In the U.S., imports from China were $427 billion in 2023, which is down more than 20% from the 2018 peak of $539 billion. These figures are nominal, so one can apply another 20+% discount to take into account cumulative inflation over this time frame and estimate the decline in the value of imports from China in real terms.
China needs Europe and likes Europe. What economic, political or strategic interest would China have in allowing its junior partner Russia to embark on a catastrophic invasion of a NATO country?
A more plausible interpretation of Putin’s motives is what the Russians and Russia experts have been telling us for years if not decades. They don’t want to dominate NATO countries. They are in fact mortally afraid of NATO and the offensive threat that they perceive NATO to be (rightly or wrongly—we can set that debate aside for the moment).
This is not a novel foreign policy perspective at all (or a “Kremlin talking point.”)
As far back as February 1997, we heard this from George Kennan. Kennan was the main architect of America’s grand strategy of “containment,” the long-term gameplan that arguably led the U.S. to ultimate victory over the Soviet Union in the Cold War. As a 93-year old man, Kennan felt it was so urgent to caution us about Russia’s likely adverse reaction to NATO expansion that he got an opinion piece published in The New York Times. |
| | And perhaps it is not too late to advance a view that, I believe, is not only mine alone but is shared by a number of others with extensive and in most instances more recent experience in Russian matters. The view, bluntly stated, is that expanding NATO would be the most fateful error of American policy in the entire post-cold-war era. - George Kennan |
|  | | More recently, another foreign policy expert in the same realist tradition as Kennan, Professor John Mearsheimer of the University of Chicago, has explained on multiple occasions the sequence of events that precipitated the Russian invasion of Ukraine. These include well-documented and extensive U.S. meddling in the 2014 Maidan Revolution, which polite society likes to ignore.
Also known as the Revolution of Dignity, Maidan was a violent coup that drove Ukraine’s legitimately elected President Viktor Yanukovych from power. This prompted Russia to seize control of Crimea, in large part to secure the naval base at Sevastopol. Russia’s only major warm-water naval base, Sevastopol has been used continuously by the Russian Navy since the late 18th century and is regarded as an essential strategic position.
Whether or not we agree with all or any of these Russian interpretations of events, they represent a coherent explanation of why Russia felt the need to act, defensively, to prevent a hostile military alliance from setting up shop 500 miles from Moscow. This explanation strikes us as more plausible than the idea that Putin is actually just gearing up to roll through NATO-backed Europe, with its vastly larger population and economy, arsenal of nuclear weapons, and American security guarantees.
A useful comparison can be made to John F. Kennedy’s statement of intent to use force if necessary, citing the Monroe Doctrine, against sovereign Cuba during the Cuban Missile Crisis in 1962. Fortunately, the Soviets recognized the scale of the provocation of installing missile systems off the coast of Florida and backed down.
Comments by former Israeli Prime Minister Naftali Bennett, who was deeply involved in the negotiations, have sparked intense debate as to whether or not the U.S. had a similar opportunity to avert the Russian invasion by supporting a peace agreement that kept Ukraine neutral and out of NATO. It certainly seems plausible that if we had different leadership in the White House at the time, we could have had a much different outcome.
What does the U.S. really want?
America’s strategic objectives with regard to Ukraine are hard to pin down, once you move past the analogies to Hitler (which as always function as a rhetorical tool to put an end to rational discussion).
A couple of months after the war started, Secretary of Defense Lloyd Austin indicated the goal was really just to leave Russia in a “weakened” state militarily, which suggests that engaging Russia in armed hostilities is a goal unto itself. As recently as February 20 of this year, President Biden was arguing that aid to Ukraine was desirable because it supported American jobs.
The economic interests behind our current Ukraine policy are hard to ignore. Money not only talks, but it shapes narratives. Many people stand to benefit from the hundreds of billions of dollars flowing to Ukrainian aid—from defense contractors to the think tanks they sponsor to the politicians whose campaigns they fund and who are eventually rewarded with lucrative board seats.
Just as there is nothing novel about the idea of Russian anxiety over NATO expansion, there is nothing new about economic interests distorting or even driving American policy decisions.
In his 1961 farewell address, President Eisenhower warned that the “conjunction of an immense military establishment and a large arms industry is new in the American experience” and that “we must not fail to comprehend its grave implications.” |
|  | Eisenhower’s personal copy of his 1961 farewell speech |
| It’s interesting to consider just how well certain defense contractors have performed over the past ten years, a time frame with a starting point that happens to coincide with the Maidan Revolution (February 2014). The escalation of political friction with a technologically advanced adversary like Russia, along with the growing threat from China, has necessitated a lot of spending on highly complex, high margin weapons systems. |
| | [I]n 2023, we ended our backlog with almost $161 billion, which is a record for us… [W]e expect stronger growth here in 2024 and that'll continue to grow. Just a great line of sight to growth in 2025 and beyond. - Jesus Malave, CFO, Lockheed Martin (TD Cowen Aerospace & Defense Conference, 2/14/2024) |
| | The chart below compares the share price performance of Northrop Grumman (NOC) and Lockheed Martin (LMT) to the SPDR S&P 500 ETF (SPY) over the past 10 years. Now sporting a combined market capitalization of about $170 billion, these two stocks meaningfully outperformed the S&P (which itself performed extremely well over the past 10 years, driven by mega-cap technology stocks). |
|  | | It’s impossible to produce a reliable analysis of any international conflict and develop a sense of how it might unfold without having a reasonably objective grasp of the players involved, their motivations as well as the historical backdrop. As noted, we will no doubt return to this subject in future issues. |
| | Among the calamities of war may be jointly numbered the diminution of the love of truth, by the falsehoods which interest dictates and credulity encourages. - “Man of letters” Samuel Johnson (1709-1784) |
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