Oscar Wilde described marriage as the triumph of hope over experience. In finance and geopolitics, by contrast, experience must always prevail over hope, and realism over wishful thinking.
A grim case in point is the confrontation between Russia and the West in Ukraine. What makes this conflict so dangerous is that US and EU policy seems to be motivated entirely by hope and wishful thinking. Hope that Russian President Vladimir Putin will “see sense”—or at least be deterred by the threat of sanctions to Russia’s economic interests and the personal wealth of his oligarch friends. Wishful thinking about “democracy and freedom” inevitably overcoming dictatorship and military bullying.
Investors and businesses cannot afford to be so sentimental. Though we should never forget Nathan Rothschild’s advice at the battle of Waterloo—“buy on the sound of gunfire”—the market response to last week’s events in Ukraine makes sense only if we believe that Russia has won.
The alternative to acquiescence in the Russian annexation of Crimea would be for the Ukrainian government to try to fight back, either by military means or by pressuring the Russian minority in the rest of the country. That, in turn, would almost inevitably imply a descent into Yugoslav-style civil war—with the strong possibility of sucking in Poland, the North Atlantic Treaty Organisation and the United States.
The West has no intermediate option between accepting the Russian invasion and full-scale war because it seems inconceivable that Putin would voluntarily withdraw from Crimea. Having grabbed Crimea by force, to give it up now would almost certainly mean the end of Putin’s presidency. The Russian public, not to mention the military and security apparatus, believes almost unanimously that Crimea is “naturally” part of Russia, having been transferred to Ukraine, almost by accident, in 1954. In fact, many Russians think, rightly or wrongly, that the entire Ukraine “belongs” to them. (The word “u-krainy” in Russian means “at the frontier,” and definitely not “beyond the frontier.”)
Under these circumstances, the idea that Putin would respond to Western economic sanctions, no matter how stringent, by giving up his newly gained territory is pure wishful thinking. Throughout its history, Russia has accepted economic hardships unimaginable to Western observers in pursuit of geopolitical goals. Thus the idea, which circulated in financial markets on March 4, that Putin was suspending military action because of a 10% fall in the Moscow stock market that day was, putting it mildly, naive.
The reality is that