The London Brief - April 18th, 2022

The London Brief April 17th, 2022 In late March, Vladimir Putin attended a rally in Luzhniki stadium with 95,000 flag-waving people. In his speech, he referred to an admiral, Fyodor Ushakov, who in the 18th century helped win Crimea back from the Ottomans. “He once said that the storms of war would glorify Russia. That is how it was in his time; that is how it is today and will always be!” But given his passion for history, Putin seems to have ignored the Winter War, described in Stalin: Court of the Red Tsar by Simon Sebag Montefiore. On November 30th 1939 five Soviet armies attacked Finland along an 800-mile border. They expected to take over the country in ten to twelve days. Joseph Stalin created a crude puppet government of Finnish Communists confident they would be walking into Finland unimpeded. Instead, the outgunned Finns dressed like ghosts in white suits and fought. “The forests were decorated with frozen pyramids of Soviet corpses.” The Finns used 70,000 empty bottles filled with gasoline and threw them against Russian tanks, called Molotov cocktails, in honour of the Soviet magnate who was leading the war. By mid-December, Stalin had lost 25,000 men. One of Stalin’s generals, Kliment Voroshilov reported, “139thDivision’s in difficulties… no fodder all… no fuel… Troops scattering.” Russian forces were dying from hunger as they had not secured a proper supply line. According to historian Pavel Petrov, the Russian State Military Archive has a database confirming 167,976 killed or missing. History certainly rhymes and Putin’s selective readings forgot the importance of supply chains and the pitfalls of over-confidence. They Called It The 2016 book Black Wind, White Snow by Charles Clover, who was the Financial Times Moscow correspondent, noted that the Russian elite was starting to live in an alternative reality. Clover noted that when Putin took over the Crimea, people either thought Putin was delusional and petty or that it was part of a defence mechanism, also called the “rational explanation”. He argues that it was neither. Rather, it was about preserving Russia’s civilisation identity. ‘Eurasianism’ is a term coined by fringe philosophers who hold that Russia is not a nation, but a civilisation. “Rather than being a branch of the rationalistic West” Russians are descendants of the Mongol Horde. They saw the “shedding of slavish Western conformity and the rebirth of authentic Russianness, a Biblical event, a cataclysm that ring earthly beauty.” The surprising element of the philosophy is not its lack of substance or it’s mysticism, but rather how “consensus it appears to enjoy across the Russian elite”. He notes lies unite rather than divide Russia’s political class. “The greater and more obvious the lie, the more his subjects demonstrate their loyalty by accepting it, and they more they participate in the great sacral mystery of Kremlin power by believing it.” This is part of totalitarianism where “loyalty to a man has been supplemented by loyalty to an idea and a set of texts that possibly no one believes”. Movements defined by ‘alternative histories’ are there to dynamite the existing consensus. “Eurasia’s appeal stems not from its accuracy or its explanatory power or its rigour (none of which it has), but from the way it exorcises demons, heals psychic wounds and papers over ruptures in Russia’s crude and disjointed history… conspiracies are often preferable to empirical reality, because they offer order, predictability and an explanation for misfortune… Eurasia was therapy for three generations of men who were buffeted by wars and repressions and wanted to find some sense in their suffering.” To the extent such things are kept within Russia, it probably does not matter so much to those living in the West. But there seems to be a disturbing gameplan that can in part be summarized by The Foundations of Geopolitics written by Alexander Dugin in 1997 when everything was going wrong in Russia. Dugin’s writings are thought to be the philosophy behind Putin and his actions even though there does not seem to be a direct link between the men. His book was the idea that the Cold War was not a clash between communism and capitalism, but rather a permanent conflict between two geographical realities – the world’s great land power of ‘Eurasia’ and its natural ‘Atlantic’ sea power’ represented by at first Great Britain and then the United States. The U.S. is Russia’s most dangerous foe and “unbeknownst to even its own population, the United States is working right now to destroy its foe.” To thwart the conspiracy of Atlanticism led by the US and NATO and aimed at containing Russia within rings of independent states, he advised the following in 1997:

1. In the West: Russia must coax alliances by using economic power

2. East Europe should be divided into two spheres of influence (like the Molotov-Ribbentrop Pact of 1939).

3. A Russian-German alliance can reorient Europe away from Atlantic influence and towards Eurasia.

4. France would turn to Eurasia then.

5. Create a Moscow-Tokyo axis by dissolving mutual security treaty with the US.

6. China was considered under the sphere of influence of America so was considered best to neutralise or given a sphere of influence in Southeast Asia.

7. Dismember Georgia and annex the Ukraine

8. Give Azerbaijan to Iran for an alliance

9. Add Finland to Murmansk

10. Serbia, Romania, Bulgaria and Greece join Russia as an Orthodox Third Rome

Aspects of this agenda do not seem to be holding true. For instance, China is most certainly not under the sphere of influence of America and Germany is now firmly going back to Atlanticism. But it does explain perhaps why Putin supports people like Marine Le Pen (to help turn France to the Eurasian idea), or why Gerhard Schroder was courted so heavily (to promote economic dependence). It also helps explain why Russia has courted Japanese businesses so assiduously over the years. China also appears to be acting according to designed plan. It’s important for the West to respond, figure out what its opponents are doing and not sit on the side lines. Figuring out how it will impact business fundamentals and economics will not be easy. QE and QT During the pandemic, the Fed bought $3.3 trillion in Treasuries and $1.3 trillion in mortgage-backed securities as it sought to keep borrowing costs low. Now the Fed plans to “roll off” what it bought, which may start in May. Over a 12-month period, the Fed may shrink its balance sheet by $1 trillion, about twice as fast as QT. Over three years the Fed may shrink its balance sheet by $3 trillion taking it from 36% of GDP to 20%. This could equate to a 0.25% to 1.25% rate increases but no one really knows. Most macro fund managers I speak to are assuming it impacts yields by about 0.5% and is not in current prices. Powell says, “We have a much better sense, frankly, of how rate increases affect financial conditions.” QT mainly impacts the longer-term yields. This could be more potent as it may impact the hot segments of the credit market such as mortgages. If QT hit longer yields, then you may need fewer rate rises to tame inflation. QT did lead to a liquidity crunch in the overnight borrowing market, but the overnight lending facility should prevent this. Bill Dudley said, “The risk of a spike in rates like we had in September 2019 is much, much lower.” Another concern is the Fed’s $326 billion in short-term Treasury bills. Some observers think they will roll off supercharging QT; others that it will stoke volatility. End Note Over the years, the brief has been something I’ve written to make sense of complexities and opine on events that I think could have the biggest impact on markets. Given that ideas don’t come on a calendar schedule, I’ve decided to turn the brief into a more sporadic missive when there is something more worth talking about. As a result, the briefs will probably be shorter and more singular topic oriented. I’ll still try to always put in an end note though. Chinese censors rewrote the 1999 classic Fight Club. Fight Club is a critique of U.S. capitalism, so it serves the party’s needs but in the real ending, Tyler Turden blows up all the skyscrapers in Delaware, where the major credit card companies reside. In the Chinese ending, it just cuts to a black screen with the words, “Through the clue provided by Tyler, the police rapidly figured out the whole plan and arrested all criminals, successfully preventing the bomb from exploding. After the trial, Tyler was sent to a lunatic asylum receiving psychological treatment. He was discharged from the hospital in 2012.” The ending kinds of ruins the build-up, but probably best not to give a COVID-weary population any bad ideas. Omar Sayed

Surrey, April 17th, 2022