The Economic Consequences of the Cold Peace

Brian Pellegrini, CFA, 22 March 2022

I do not know whether war is an interlude in The Cold War was a war, and we won it.
peace, or whether peace is an interlude in war. - Donald Rumsfeld
- Georges Clemenceau

• For investors, the likelihood of the world returning to some sense of order depends heavily on
American policymakers taking Russia seriously, rather than acting like “tough guys”. The sooner the
conflict in Ukraine can be brought to an end by removing the threat to Russia, the less damage will
be done to the post-Cold War order.
• The clock is ticking for Putin to stitch together a rump USSR before the Muslim population vastly
outnumbers the Slavic population. Also note that, at seventy-years old, Putin is over the average life
expectancy for Russian men. The clock is ticking for him personally.
• For Russia, there are undeniable benefits to using force in Ukraine - even after taking account of
wide-ranging sanctions by the West. As policymaking shifted from the Greatest Generation to the
Baby Boomers during the Clinton Administration, a “Great Carelessness” ensued. Putin wants to
remake the global security environment; he was going to need to upset the apple cart at some point.
Perhaps the most surprising aspect of Russia’s invasion of Ukraine is how surprised everyone was, including
this writer, that it occurred. Near-universal surprise occurred despite a year of clear diplomatic signaling
that military action was coming and a well-reported buildup of forces for months preceding the start of the
war. Russia’s intense interest in controlling its security environment is no surprise, but the timing of the
invasion seemed strange. The natural response from those expected to have answers who were caught by
surprise, as usual, was that Putin is a “madman”. However, if we take a moment to consider the last thirty-
years in the light of contemporary warnings made at end of the Cold War, it becomes clear that Ukraine
and Russia are yet more collateral damage from America’s ill-considered “freedom agenda”. The origins of
the current Ukrainian conflict in post-Cold War foreign policy, and the implications for the outcome of the
war are the topics of this note.
Carthaginian Peace
In 1999, only 31% of Russians felt their country deserved the status of “Great Power”. By November
2015 that share had climbed to 65%. It is no coincidence that over time Russia’s foreign policy
became more bellicose. In 2013, I first wrote about the coming showdown between the U.S. and
Russia:
Parallels between Rome vs. Carthage and the U.S. vs. Russia are clear and should serve as an
important lesson to Americans. After the economic and ideological defeat suffered during the
Cold War, Russia became an economic and social basket case through the 1990s. That situation
began to change with Putin’s rise to power in 2000. Putin has explicitly said his goal is to restore
Russia’s status as a Great Power and that natural resources are the best way to achieve this.

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 Indeed, in his doctoral thesis Putin complains that market reforms let the “strategic management
of the natural resources complex slip from [Russia’s] hands”. As with Hannibal in ancient
Carthage, this new Carthage had found a strong leader with nationalistic fervor, a desire to get
even and a clear strategic plan.
Flash forward nine years and Hannibal’s army is on the march. To understand Putin’s actions, and
forecast his likely next moves, we must first understand the grievances for which he seeks redress.
The great disconnect between elites in Russia and those in the United States is that the prevailing
attitude in the latter is that Russians have no reason to complain and should jump on the freedom
bandwagon. The differing opinions can be attributed to different historical narratives that have
developed on how the Cold War ended. Interestingly, and disturbingly, the situation is very much like
the end of the First World War where in the time between the end of hostilities and the start of peace
negotiations the attitude of the Allies shifted from “thank God it’s over” to “we won, you lost”.
There are two types of lasting peace that victors can impose. The first is a benevolent peace where
the root causes of the conflict are resolved, most likely in-favor of the victor but to the satisfaction of
both parties. Sadly, such happy outcomes are few. The second is a “Carthaginian” peace, referencing
Rome’s destruction of Carthage at the end of the Third Punic War. Fortunately, complete annihilation
is generally not viewed as an acceptable strategy for victory. Unfortunately, victors still try to get as
close as possible to complete victory. In the process, their treatment of the losers sows the seeds of
the next conflict. Such was the case at the negotiations for the Treaty of Versailles, as told in Keynes’s
The Economic Consequences of the Peace.
In the book, Keynes lays out the mindset of the Allied leadership during the Versailles negotiations.
Of particular interest, for the current discussion, is his description of the motives and goals of France’s
representative, Georges Clemenceau. According to Keynes’s firsthand account, each leaders’ goals
were: “Clemenceau to crush the economic life of his enemy, Lloyd George to do a deal and bring
home something which would pass muster for a week, the President to do nothing that was not just
and right.”, and “Clemenceau’s goal was to weaken and destroy Germany in every possible way….”
Clemenceau’s goal of weakening Germany to the fullest extent possible was not simply out of spite,
but rather a view that perpetual conflict between France and Germany was inevitable and
unavoidable. Keynes describes Clemenceau’s view in the following passages:
“According to this vision of the future, European history is to be a perpetual prize-fight, of which
France has won this round, but of which this round is certainly not the last. Thus, as soon as this
view of the world is adopted … a demand for a Carthaginian peace is inevitable, to the full extent
of the momentary power to impose it.
This is the policy of an old man, whose most vivid impressions and most lively imagination are of
the past and not of the future. He sees the issue in terms of France and Germany, not humanity
and of European civilization struggling forwards to a new order.”

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Keynes’s warning that the economic destruction and geopolitical humiliation of a defeated Germany
would lead to a bad end was, sadly, very prescient. Adolf Hitler neatly sums up the reactionary
Germany view in Mein Kampf:
“The Armistice of November 1918, ushered in a policy which in all human probability was bound
to lead gradually to total submission. Historical examples of a similar nature show that nations
which lay down their arms without compelling reasons prefer in the ensuing period to accept the
greatest humiliations and extortions rather than attempt to change their fate by a renewed appeal
to force.”
“Paris hoped slowly to disjoint the Reich structure. The more rapidly national honor withered
away in Germany, the sooner could economic pressure and unending poverty lead to destructive
political effects. Such a policy of political repression and economic plunder, carried on for ten or
twenty years, must gradually ruin even the best state structure, and under certain circumstances
dissolve it. And thereby the Frenchy war aim would finally be achieved.”
“As long as the eternal conflict between Germany and France is carried on only in the form of a
German defense against French aggression, it will never be decided, but from year to year, from
century to century, Germany will lose one position after another.”
For this writer, and many Americans of this era, it can be hard to take seriously a leader who has a life
mission (kampf) other than pure self-promotion. Some people seek power because they believe they
have a special gift or drive that enables achievement of some larger national goal. Recent American
presidents sought higher office and then found a mission for themselves once there. Leaders such as
Hitler and Putin seek power because it furthers their personal mission, which they articulated long
before taking the reins of power. Putin’s statements and written arguments bear a striking
resemblance to Hitler’s in that both are clearly written by men who see their life mission as salvation
from national disgrace at the hand of underhanded enemies.
The End of the Affair
“Even though we see ourselves as victors, we must “I see nothing but humiliation for
not humiliate the other side.” Russia if you proceed.”
- Ronald Reagan, June 1990 - Boris Yeltsin, May 1995

The ends of the First World War and the Cold War are similar that in neither case did the victors
realize the true state of collapse in the society and economy of the defeated until after demobilization
had begun. In both cases, what began as a negotiation of peace terms among equals turned into a
dictation of terms to the vanquished. In both cases the vanquished felt humiliated and swindled.
In early 1990, the main policy question being discussed in Europe was not the future of the Soviet
Union but rather the implications of German reunification. As one of the four acknowledged victors
of World War Two, Russia had a veto on any changes to the post-war governance of Germany. In the
United States and West Germany, policymakers were focused on finding a way to get a unified

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Germany into NATO. One concern that U.S. and Soviet leaders shared was that a Germany without
the protection of NATO would seek nuclear weapons.
In February 1990, Secretary Baker met with Gorbachev and asked hypothetically whether the USSR
would prefer to see Germany outside NATO with the group free to expand east, or Germany inside
NATO but no further expansion east. Gorbachev told Baker he preferred the later, and Soviet leaders
apparently took these proposals as policy promises. President George H.W. Bush was against putting
anything in writing and told Baker, “We prevailed, and they didn’t.” German Chancellor Helmut Kohl
also felt that NATO should lock in gains before Moscow regained its footing. In the event, a unified
Germany was included in NATO and limits were placed on limiting foreign troops and nuclear
weapons in East Germany but sleeping dogs were let to lay on the issue of further NATO expansion.
The collapse of the USSR changed the strategic balance and created a power vacuum. By 1993, Russia
descended into chaos and nationalist voices began getting louder so Eastern Europe went looking for
protection. The elder Bush administration had been unwilling to sign agreements limiting NATO
expansion, but they had been cautious about going ahead with expansion. A major change in attitude
took place when the Clinton administration moved in.
At the historic Helsinki Summit of 1997, President Clinton secured Russian President Boris Yeltsin’s
reluctant ascent to expansion by promising billions of dollars in foreign aid and World Trade
Organization Membership. The new strategy of expanding NATO into the former Warsaw Pact was
not without detractors. George Keenan, the original architect of NATO’s “containment policy” against
the USSR said that “expanding NATO would be the most fateful error of American policy in the post-
Cold War era,” because it would “impel Russian foreign policy in a direction decidedly not to our
liking.”

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Drifting Away
Heightened levels of external threat tend to breed “garrison states”. For countries with less-than-
perfect records on political freedom a vicious circle of internal political closure and external threats
from democracies can develop, driving a nation into authoritarianism. Russian elites see the post-
Cold War international environment as a threat to their survival. The official statements, state media,
and elite policy circles all present a worldview where the U.S. has marched relentlessly to the Russian
border and used force to overthrow rivals.
After the fall of the USSR, the discrepancy in military spending between Russia and the U.S. became
massive in favor of the U.S. Meanwhile, the Warsaw Pact dissolved while NATO continued to expand
closer and closer to Russia’s borders. That would have been worrying enough for Russia’s elite, but a
shift in U.S. foreign policy took place to define foreign democratization and human rights as primary
national security interests. This policy explicitly advocates for interference in the internal affairs of
the states, and it receives strong bipartisan support in the United States.
The critical turning point for the Russians was NATO’s offensive operations in Kosovo in 1999. The
USSR and Yugoslavia were similar enough that the fate of the later frightened the Russian elite. The
NATO bombing of Yugoslavia showed Russia that the West was willing to act without UN approval.
The link between external military power and internal political opposition came to be seen as a new
model of hybrid warfare. The idea that internal opposition could be leveraged to overthrow a regime
created an incentive to get rid of political reformers.
In each of the “color revolutions” and Iraq, the opposition was seen by the Russian elite not as
popular movements for freedom but organized pro-Western proxies. Countering the U.S. was not
simply about Russia’s military capability, but also about breaking the American “freedom agenda”.
Stricter control of Russian society and the strengthening of nationalist propaganda occurred right
after the color revolutions. By May 2014, the Russian military’s official policy listed color revolutions
as a form of hybrid warfare used by the United States that represented the primary threat to Russia at
present. It is noteworthy that as soon as Putin came to power, he crushed the opposition in
Chechnya to remove a potential U.S. ally within Russia’s borders.
Putinism
Putin is a member of the siloviki, the intelligence and security elite that run Russia, so instinctively his
goals are political and social stability. In commenting on the Soviet Union, he rejected the “shake-
ups, cataclysms, and total makeovers” that accompanied the Communists coming to power.
However, he deplored the chaos of post-Soviet Russia and prior to becoming president wrote that
“society wants to see the guiding and regulating role of the state replenished to the appropriate
degree.”
Putin’s early years in power were marked by an effort to shore up the infrastructure of presidential
power. Fellow siloviki were placed in key positions across the government and state-owned
corporations. Tax collection was tightened, and the budget was stabilized and then brought to a
surplus. The war against separatist rebels in Chechnya was ramped up violently.
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The operative methods of Putin’s system are state strength, limits on political contestation, popular
legitimacy via managed elections, and appeals to nationalism. Notably, Putin’s administration has
never transitioned to an unambiguous dictatorship. The siloviki are a powerful faction within the
Russian state who have access to guns and state intelligence resources. However, this group is
reactive and does not share a unified identity. They are unified by Putin’s patronage, not a common
creed or overlapping interests. The siloviki are the conservative guard of the existing order loosely
tied by shared interests, not a force for change that is a threat to Putin.
During the days of the USSR the siloviki controlled the so-called “Power Ministries”, which were the
Ministry of Defense, Ministry of Internal Affairs (MVD), and the KGB (now the FSB). Yeltsin split up
these agencies to make them less of a threat and, like all bureaucracies with overlapping missions,
they squabble for power and resources. The remains of the three agencies have strong and
independent identities so they are by no means a unified force. The FSB is obviously the most loyal to
Putin, but the agency does not control large numbers of troops.
The MVD has traditionally been used to deal with domestic protests and has riot police and “Internal
Troops” for this purpose. In 2016, Putin created the National Guard subordinate directly to him. The
new agency acts as a praetorian guard for Putin and reduced the power of the MVD and FSB by taking
personnel and resources away. Putin has just enough “organs of oppression” to avoid accountability,
but not enough for a straight re-run of the Soviet empire.
Renewing the Empire
To be a Great Power, a nation must enjoy a certain degree of domestic security against foreign attack. That
security can come in the form of military forces or alliances, but those can be expensive and unreliable.
The best forms of security are provided by Mother Nature. Geography, topography, and other natural
features can provide long-lasting – if not infinite – strategic advantages.
I discussed this topic in detail back in 2014:
Until 1999, Russia retained most of its “intermediate” buffer zone [against threats coming
from Central Europe], see Map A. In 1999 NATO was expanded to include Poland, the Czech
Republic and Hungary. That brought the border with NATO right to the core buffer of the
Baltics, Belarus and Ukraine. Russia’s situation became very disturbing to it in 2004 when the
Baltics joined NATO along with Romania and Bulgaria (although Bulgaria has been edging
back towards Russia recently).
With the buffers of Central Europe and its Eastern European satellites gone, Ukraine becomes Russia’s last
geographic bulwark against invasion from the west.
Map B below gives us a view of the topography of Ukraine. Like Belarus and Central Russia,
eastern and central Ukraine is a very low and flat plain. From a defensive standpoint, Russia
is wide open along its border with Ukraine since there is no topographical anchor to build a
defense upon. The closest such feature is the Dneiper River, which cuts through central

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 Ukraine. If Russia were able to control the whole of Ukraine it would also benefit from the
Dniester River and the Carpathian Mountains acting as natural barriers in western Ukraine.
A B

Eastern Europe
satellites Energy rich
Central Asia

Central Europe
buffer against
Germany

Source: GRID-Arendal, Connolly Insight

However, Putin’s goals go beyond tactical control of Ukrainian territory. Strategic control of Ukraine is a
necessity for Russia to be a Great Power. From Zbigniew Brzezinski’s seminal work The Grand Chessboard:
“The loss of Ukraine was geopolitically pivotal, for it drastically limited Russia’s geostrategic
options. Even without the Baltic States and Poland, a Russia that retained control over Ukraine
could still seek to be the leader of an assertive Eurasian empire, in which Moscow could dominate
the non-Slavs in the South and Southeast of the former Soviet Union. But without Ukraine and its
52 million fellow Slavs, any attempt by Moscow to rebuild the Eurasian empire was likely to leave
Russia entangled alone in protracted conflicts with the nationally and religiously aroused non-
Slavs.”
Putin’s appeals to Eastern Slavic ethnic unity have been a constant theme. I wrote about this in 2014:
“[W]e are not simply close neighbors but, as I have said many times already, we are one people.
Kiev is the mother of Russian cities. Ancient Rus is our common source, and we cannot live
without each other.”
It is important to note [Putin’s] choice of historical reference. By invoking the Rus’, Putin is
reaching back to the Eastern Europe’s Dark Ages for a pre-national common link between the
three Eastern Slavic countries. The Rus’ territory included all three countries and Ancient Rus’
served as the root language for the three branches of the language. Equally as important, the
Rus’ empire was a federation of separate semi-states. Thus, it appears that Putin is pitching to
Ukrainians and Belarusians that the three groups share a deep ethnic identity and as such
should work for the common benefit of each other in the context of some degree of autonomy.
In his efforts to use a historical narrative to tie together modern-day Eastern Slavs, Putin shows
that he has more on his mind than simply protecting Russian-speaking Ukrainians. Based on his
own words, we suspect Putin sees himself as a modern-day Prince Rurik. By uniting the Eastern
Slavic nations of today, Putin can recreate the Kieven Rus’ empire and dominate the tribes
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 around him. Again, the simple fact that he has a strategy, and his western counterparts do not,
makes him more likely to succeed. In the land of the blind, the man with one eye is king.”
C

As mentioned in the passage above from Brzezinski, the relative size of the Slav to non-Slav population is a
key limiting factor on the potential domain over which a new Russian Empire can lay claim. To include
energy-rich Central Asia in its empire, Russia must have enough Slavs to balance out the Turkic Muslims in
those territories. The problem for Russia is that life expectancies and birth rates in the Slavic areas of
Russia crashed to produce shrinking populations. While high birth rates and short life expectancies mean
the Turkic Muslim population is growing larger and relatively younger to the Slavic areas of the former
USSR. The clock is ticking for Putin to stitch together a rump USSR before the Muslim population vastly
outnumbers the Slavic population. Also note that, at seventy-years old, Putin is over the average life
expectancy for Russian men. The clock is ticking for him personally.

Source: Brainerd (2021)

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Closing the Door
“I think the charitable interpretation would be that “We lost confidence for one moment, but
sometimes we and Russia have different it was enough to disrupt the balance of
interpretations of history.” forces in the world.”
- Anthony Blinken, January 2022 - Vladimir Putin, February 2022

For Russia, there are undeniable benefits to using force in Ukraine - even after taking account of wide-
ranging sanctions by the West. Putin wants to remake the global security environment; he was going
to need to upset the apple cart at some point. Being an empire requires acting with confidence.
Russia’s invasion denies Ukraine entry into NATO indefinitely and, if victory is achieved, no U.S.
presence in Ukraine will persist. Putin has gone all-in on the Ukraine invasion. If he backs down
without overthrowing the government in Ukraine, the situation will be even worse. He must come
out ahead and look daring, but without appearing reckless.
Putin wants to close NATO’s “open door” policy and create a sphere of influence where Russia has a
veto on new NATO members. He has succeeded in forcing the U.S. to treat Europe as a theater of
primary interest at a time when the Biden administration wants to pivot to Asia-Pacific. If the U.S.
wants predictability and calm from Putin, it is going to need to meet a lot of Russian terms.
At the Munich Security Conference of 2007, Putin warned NATO against further expansion. He said,
“the presence of a powerful military bloc on our borders...will be seen as a direct threat to our
national security.” He was ignored, and in Spring 2008 Ukraine and Georgia were promised eventual
membership in the alliance. In August 2008, Russia invaded Georgia and continues to occupy portions
of the country. Putin has shown time and again that he considers strategic control Russia’s near
abroad to be an existential issue for the historic idea of Greater Russia, an idea he has dedicated his
life to.
In his televised speech announcing the invasion, Putin made plain the fact that the reasons behind the
war in Ukraine go far beyond what is happening in Ukraine. Note that Putin objects to American
arrogance just as much as he does Russia’s mistreatment.
“Where did this insolent manner of talking down from the heights of their exceptionalism,
infallibility, and all-permissiveness come from? … We saw a state of euphoria created by the
feeling of absolute superiority, a kind of modern absolutism…”
“If history is any guide, we know in 1940 and early 1941 the Soviet Union went to great lengths to
prevent war, or at least delay its outbreak. The attempt to appease the aggressor ahead of the
Great Patriotic War proved to be a mistake which came at a high cost to our people.”
“For the United States and its allies, it is a geopolitical policy of containing Russia, with obvious
geopolitical dividends. For our country, it is a matter of life and death, a matter of our historical
future as a nation. This is not an exaggeration; this is a fact.”

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Two days before the invasion of Ukraine the Russian Duma added prison time to a law that bans
equating the goals of Nazi Germany and the Soviet Union during the Second World War. Putin is
acting like Stalin in the 1930s in his attempt to reconfigure the geopolitical balance of power. He has
enlarged his state with claims to territory that was once part of a larger empire. Putin has also
launched “special operations” in the name of peace, like Stalin did in Poland. Putin does not mind
being equated with Stalin, but he cannot allow a narrative to take hold that equates Stalin with Hitler.
Win, lose, or draw, this great game being played by Putin does not end in Ukraine.
The Anti-Russia
In his July 2021 essay “On the Historical Unity of Russians and Ukrainians”, Putin discusses what he
views as Western encroachment into Russia’s sphere of influence.
“Step by step, Ukraine was dragged into a geopolitical game aimed at turning Ukraine into a
barrier between Europe and Russia, a springboard against Russia. Inevitably, there came a time
when the concept of ‘Ukraine is not Russia’ was no longer an option. There was the need for the
anti-Russia concept, which we will never accept.”
To have an “anti-Russia” regime in Ukraine, which is part of Russia in Putin’s view, is too much to
bear. Of course, Putin’s brusque handling of Ukraine’s political crisis in 2014 sowed the seeds for
Kiev’s interest in appealing to “the West”. But therein lies the cruelty of “the West’s” actions. Putin
was always more likely to beat Ukraine into submission than NATO was to defend its independence.
Putin’s initial action in 2014 was to secure the Crimean Peninsula, a strategic necessity. But then he
forced a difficult choice on Ukraine, either foreswear military cooperation with the West and
federalize, or risk losing more land. During the protests that shook Kiev in 2014, it initially appeared
an establishment character would take over from pro-Russian President Yanukovych. Instead, the
radical wing of the nationalists took over. Putin’s plan had backfired, but he did not fold.
Putin sees the current government in Kyiv as the product of a pro-Western coup, and therefore
illegitimate. In his view, the government is trying to establish legitimacy by being an “anti-Russia” and
America’s “gang” is provoking confrontation. U.S. support for Ukraine has been substantial since
ramping up from 2014. From 2015-2020 USAID from the State Department averaged $420 billion per
year and was $464 billion in 2021. From 2014-2021 the U.S. provided $2.5 billion of security
assistance.
In June 2020 Ukraine became one of NATO’s Enhanced Opportunity Partners, a status granted to six
close non-NATO countries. In 2018 and 2019 the Department of Defense sold Ukraine a total of 360
Javelins. In 2020, sales were expanded to include anti-ship and coastal defense systems were
included. A qualitative update of Ukraine’s military capabilities was in the process of taking place and
even accelerating. Time was working against Putin as the deep pockets of Ukraine’s new friends
threatened to undermine Russia’s historic advantage against its smaller neighbor.

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 Ukraine: Foreign aid and official development assistance received (billions)
$1,600

$1,400

$1,200

$1,000

$800

$600

$400

$200

$0

1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Sources: World Bank, Intertemporal Economics

Yes, Prime Minister

Prior to entering politics, Zelensky was a comedian on a TV series, Servant of the People, about an
outspoken teacher who gets elected after a political rant goes viral online. The Servant of the People
political party was created, and art became life. However, Zelensky’s virtue turned out to be only skin
deep and over the course of 2021 he was shown to be as corrupt as other leading Ukrainian
politicians. Zelensky’s disapproval rating climbed above fifty percent and most voters did not want
him to participate in future elections.
In 2019, Zelensky’s party won 60% of the seats in parliament – the first outright majority in Ukraine’s
history – but his support fell over the course of 2020 and 2021. In 2021, Zelensky turned to the post-
Soviet playbook of building a “power vertical”. A power vertical creates a chain of subordination and
loyalty to the president in all branches and levels of government, allowing a subversion of checks and
balances. Servant of the People failed to establish control of the local councils, so Zelensky has been
running an unofficial congress of local and regional authorities. Zelensky’s name was included in the
Pandora papers and his supporters have defended him by saying “everybody does it”.
Zelensky’s “de-oligarchization” has been criticized by the Council of Europe because it could easily be
politicized – and so it has. Zelensky was supported by Ukrainian oligarch Igor Kolomoisky, an enemy
of then-President Poroshenko. The “de-oligarchization” campaign has heavily targeted Petro
Poroshenko, Viktor Medvedchuk and Rinat Akhmetov – all political rivals – but Zelensky’s benefactors
have gone unmolested.
The National Security & Defense Council (NSDC) has been the center of decision-making since October
2020. The NSDC runs the Register of Oligarchs, which was created in legislation passed in late-
September 2021. The Council has bypassed the courts to place sanctions on Constitutional Court
justices, oligarchs, and pro-Russian opposition leaders. In Fall 2021, a purge took place in the Ministry
of the Interior and the Ukrainian Army with Zelensky loyalists being placed in key positions.
Sanctions against the oligarchs were surprising and politically explosive because in the past the NSDC
never targeted individual citizens. Medvedchuk, head of the “Opposition Platform – For Life” party,
was placed under house arrest and charged with treason. His TV stations were shut down in early
2021. In late-2021, Zelensky began a conflict with Akhmetov, whose media companies heavily
Page 11 of 16
criticized the anti-oligarch bill. On November 30th the Rada passed an “anti- Akhmetov” bill that
increased taxes on iron-ore makers. Petro Poroshenko, no friend of Russia, has also been charged
with treason for selling coal to the separatist areas.
Russian intelligence services apparently commissioned opinion polls late 2021 to determine whether
the Ukrainian people would fight for the current government. The opinion polls reported high levels
of political apathy any cynicism about the direction of the country. Putin seems to have taken those
results as a sign that many Ukrainians would not mind if he personally intervened in the running of
their country. This is the thought process of someone who had his leaders imposed on him
throughout his life. Not realizing that Ukrainians could hate all the options but still love having
options, Putin believed that, with so many clocks ticking, now was the time to spring his trap.
Timing of the Invasion
Putin would not let Ukraine become another “frozen conflict” because it was too strategically
important. The Kremlin is genuinely concerned that Ukraine will eventually join NATO. A qualitative
upgrade of military equipment was taking place in Ukraine as the country became the second largest
recipient of U.S. military assistance.
Putin tried and failed in his attempts to control Ukraine via energy prices and by forcing the separatist
oblasts back into a federalized state. In a 2021 article Putin wrote “apparently, Kiev does not need
Donbas.” Putin’s plan set in motion by the Minsk Agreement fell apart and the U.S. and Europe have
succeeded in propping up Ukraine. Clearly, in 2021 he came to the conclusion that more drastic
measures would be necessary.
The geopolitical landscape looked right to stage an invasion as 2021 came to a close, with a new
government in Germany and a politically divided Europe. The U.S. had a new(ish) president and was
on the back foot diplomatically after the withdrawal from Afghanistan. Russia had rebuilt its foreign
currency reserves (over $600 billion) and was ready to act more aggressively with oil prices well above
the $40 fiscal break-even. At the same time, Ukraine was becoming an unofficial member of NATO
and was taking increased deliveries of anti-tank missiles and Turkish drones.
In 2020 and 2021, Russia reasserted itself as a military force and provider of security in Eurasia.
Intervention in the Azerbaijan-Armenia war and putting down domestic revolts in Belarus and
Kazakhstan. Only Ukraine and the three Baltic countries remain outside the Russian sphere of
influence.
Revolution in Russia?
The ‘American Dream’ is that Russia suddenly wakes up one day “gets it” and turns into East America.
That is the driving force behind expectations of some sort of political uprising in Russia against Putin.
Endless hours will be spent on cable television gaming out scenarios where it might occur, but that is
a waste of time. Anything is possible, but unless Putin becomes unable to function, I see no reason to
expect internally driven regime change. As discussed above, the threat of color revolutions was

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recognized and dealt with already. Anyone who the West might have worked with is already in
prison, or dead.
The power system in Russia is built on the accumulation of capital from the sale of natural resources,
rather than innovation or consumerism. Unlike Western leaders, Russia’s elite are not beholden to
borrowing costs. The siloviki are ready to brutally suppress democratic movements to keep getting
paid. There are about two million of them and their commitment to security and stability keeps Putin
in power.
Putin’s annexation of Crimea was hugely popular, and he might have been looking for a repeat boost
before the 2024 presidential election in Russia. It remains to be seen whether Putin will benefit in the
polls from Ukraine, but it unlikely to be his downfall. Note that 67% of Russians reported approving
completely or somewhat with the Russian intervention in Kazakhstan. In addition, polls indicate Putin
has done a good job of getting the Russian public to see the U.S. as the aggressor in Ukraine. As
discussed above, taking a step back from the immediate circumstances shows Putin has a point about
this.

The Long Peace

The Cold War may someday be called the “Long Peace”, to use the phrase coined by John Lewis
Gaddis. The complexity of the “geometry” of power is important in maintaining peace. A bipolar
system lends itself to strict alliances where weaker powers are secure from each other as well as
major powers. Balancing power is difficult in a multipolar system because there are numerous
opportunities for a power imbalance to develop. Alliances are shuffled until an imbalance invites
aggression.
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When there is competition for security it becomes difficult for states to cooperate in an environment
of economic liberalism. When security is scarce countries worry about relative gains, rather than just
absolute gains. Interdependence creates vulnerability, which can breed aggression just as easily as it
can cooperation. Unfortunately, a little bit of insecurity goes a long way because of the so-called
“security dilemma”.
The “security dilemma” is that by making preparations for a less secure world, you frequently make
others less secure. In short, until everybody feels safe, nobody is safe. Thus, the prospects for
international trade and the global liberal order depend heavily on how everyone feels coming out of
the war in Ukraine – gulp.
Commitment problems mean that nobody will believe any treaties that come after the war and only
security deployments will make people feel safe. The relationship with the U.S. intensified in 2021
and Ukraine began to put a lot of focus on regional forums. These forums include Association Trio
(Ukraine, Georgia, Moldova), Lublin Triangle (Ukraine, Poland, Lithuania), and Quadriga Format
(Ukraine, Turkey).
Putin feels NATO broke its promise not to expand towards Russia and he sees Ukraine as collateral
damage in his effort to fight a historical injustice. After such a long period in power, Putin seems
himself as responsible for the post-Soviet world order. He is looking for a “do-over” of 1997 and the
current war is part of a much larger project. Prospect theory states that humans are more willing to
take risk to avoid losses than they will to secure gains.
Putin knows he has a lot to lose in Ukraine, so he will not back down before he secures his goals.
Already Russia is ramping up its use of heavy artillery, always the mainstay of its armed forces. Russia
has been holding back thus far because it cannot wage the precision warfare that NATO does. But
moral condemnation and economic sanctions will not stop a country from acting to protect its
security. If it takes fifty or one-hundred thousand dead to pacify Ukraine, Putin will abide it.
Short War, Long War
With enough material support, volunteers, and time, NATO could probably bleed Russia dry in
Ukraine like it did in Afghanistan. But before supporting such a policy in Ukraine, NATO members
should question whether supporting Bin Laden’s Merry Men turned out to be such a good idea.
Perhaps Russia can be pushed out after years of bloody warfare, but is that really necessary?
Ukraine has no defensive value for the other members of NATO geographically and has no military
resources to speak of that it can offer NATO. Ukraine can only be useful to NATO as an offensive tool
– to prevent its control by Russia and provide easy access to Russia’s sensitive areas. Indeed,
experience has already shown that associating itself with NATO has made Ukraine less secure, not
more.
If the world is to act in the best interest of Ukraine, and treat Russia as a Great Power, then Ukraine
should be encouraged to declare neutrality and unilaterally end the war immediately. The way to
make Ukraine safer is by making Russia feel safe, not by making Ukraine stronger. The war will
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become more destructive for Ukraine and the world will become progressively less safe if NATO
continues putting just enough weight on the scale to prevent Russia from an outright win. A conflict
in Ukraine that drags on for years could spread to the rest of the Caucuses and likely into the Middle
East.
The key for U.S. security is to reject the post-Cold War policy of Donald Rumsfeld, the anti-detant Cold
Warrior was one of the remaining Reagan Tribe sent to babysit Bush the Younger during his time in
Office. As discussed above, the members of the Greatest Generation that made up the Regan
Administration had a healthy respect for the Russians after fighting with them against the Nazis.
However, by the year 2000 there were few Reaganites still in working condition – Cheney was on his
fourth heart attack. Indeed, Rumsfeld was brought in against Bush-family policy of hiring former
rivals.
Thus, as policymaking shifted from the Greatest Generation to the Baby Boomers during the Clinton
Administration, a “Great Carelessness” ensued. When the Republicans took power again, a Boomer
was in the top office and the only Reaganites still standing were the warmongers. Rumsfeld, like
Clemenceau, saw himself in a position to do as much damage as possible to an eternal enemy and he
did so with gusto. The Bush Administration made friends in Eastern Europe and started handing out
NATO admissions like band t-shirts at a concert – even Albania got in!
Conclusion
The timing of Russia’s invasion of Ukraine was certainly a surprise, but it would be a mistake to write-
off Putin as a madman or to think Russian can be turned back with anything short of war. Putin’s
internal position is simply too secure, and control of Ukraine is too valuable a strategic asset to give
up because of sanctions.
Ukraine became a US ally without any debate about the message being sent to Russia or whether
there was any benefit to the U.S. Russia views prevention of a pro-Western Ukraine as a core
strategic interest. It will go to great lengths to prevent this. Short of going to war on Ukraine’s behalf,
there is nothing NATO can do. A smarter policy by the West would remove the that make Russia feel
the need to stage the invasion in the first place.
Indeed, Russia offered a rushed proposal to “go back to Germany” in Fall 2021. Obviously, a “do-
over” of 1997 is not going to happen, but the proposal and Putin’s subsequent statements hint at the
outline of a deal. At the end of the day, Russia simply wants to be taken seriously in its own back
yard. In the post-World War II era, the United States has militarily intervened in the Dominican
Republic (1963), Grenada (1982), and Panama (1983). Of course, numerous other clandestine
interventions have occurred.
In terms of motives, Putin is a Soviet Baby Boomer and one of the last of his generation. The USSR
was good to him, coming from a working-class family, and many others his age that currently run
Russia. Turning seventy this year, Putin likely feels a duty to get back something of “the good old
days” for those too young to remember.
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For investors, the likelihood of the world returning to some sense of order depends heavily on
American policymakers taking Russia seriously, rather than acting like “tough guys”. If Russia and
China can be made to feel safe, they will stop being a threat to countries around them. However, if a
tit-for-tat security escalation takes place there are only degrees of badness. In the best case, global
trade is seriously impacted, and inflation pressure is much higher because capital expenditure is
needed to build factories locally all over the world. The worst case is deteriorating security that leads
to more warfare. The sooner the conflict in Ukraine can be brought to an end by removing the threat
to Russia, the less damage will be done to the post-Cold War order.
A passage from George Keenan’s 1947 article (written under the pseudonym ‘X’) provides sound
advice for American policymakers trying to fashion a post-Cold War global order.
“United States policy toward the Soviet Union must be that of a long-term patient but firm
and vigilant containment of Russian expansive tendencies. It is important to note, however,
that such a policy has nothing to do with outward histrionics: with threats or blustering or
superfluous gestures of outward ‘toughness’. While the Kremlin is basically flexible in its
reaction to political realities, it is by no means unamenable to considerations of prestige.
Like almost any other government, it can be placed by tactless and threatening gestures in a
position where it cannot afford to yield even though this might be dictated by its sense of
realism.”

Related Notes
“Eagle vs. Bear: Checker’s vs. Chess” of 12 June 2013
“Putin in Ukraine: Raise, Check, or Fold” of 21 May 2014

References
Åslund, A. (1992). Russia’s Road from Communism. Daedalus, 121(2), 77–95. http://www.jstor.org/stable/20025434
Brainerd, E. Mortality in Russia Since the Fall of the Soviet Union. Comp Econ Stud 63, 557–576 (2021). https://doi.org/10.1057/s41294-021-00169-w
Colton, T. J. (2017). Paradoxes of Putinism. Daedalus, 146(2), 8–18. https://www.jstor.org/stable/48563056
Darden, K. A. (2017). Russian Revanche: External Threats & Regime Reactions. Daedalus, 146(2), 128–141. https://www.jstor.org/stable/48563066
Pyle, William, Russians' "Impressionable Years": Life Experience During the Exit from Communism and Putin-Era Beliefs (2020). CESifo Working Paper No.
8379, Available at SSRN: https://ssrn.com/abstract=3635174
Taylor, B. D. (2017). The Russian Siloviki & Political Change. Daedalus, 146(2), 53–63. https://www.jstor.org/stable/48563060
X. (1947). The Sources of Soviet Conduct. Foreign Affairs, 25(4), 566–582. https://doi.org/10.2307/20030065

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