Russia and its redoubtable president, Vladimir Putin, have been much in the news lately. The latest flurry came when Putin was taken out behind the woodshed at the G20 conference in the Philippines last weekend over his recent moves to inject more Russian troops and arms into Ukraine.
For today’s Outside the Box we have two pieces that deliver deeper insights into the situation with Russia and Putin. The first is from my good friend Ian Bremmer, President of the Eurasia Group and author of Every Nation for Itself: Winners and Losers in a G-Zero World. You probably caught my mention of Ian’s presentation at the institutional fund manager conference where we both spoke last weekend. He had some unsettling things to say about Russia; and so when he followed up with an email to me on Monday, I asked if he’d let me share the section on Russia with you. Understand, Ian is connected,and so what you’re about to be treated to here is analysis from way inside. (He’ll be presenting at our Strategic Investment Conference again next April, too.)
Then we turn to a piece that my friend Vitaliy Katsenelson published last week in his monthly column in Institutional Investor. I need to preface this one by mentioning that Vitaliy was born in Murmansk, Russia, where he lived until age 18, when his family emigrated to the US. Fast-forward 23 years, and today Vitaliy is Chief Investment Officer for Investment Management Associates in Denver and author of the highly successfulActive Value Investing: Making Money in Range-Bound Markets and The Little Book of Sideways Markets. That’s quite a journey, and Vitaliy has some very strong feelings about the country he left as well as the one he came to. In his intro to today’s piece he admits,
But I think you’ll agree that when Vitaliy recently subjected himself to a 7-day news diet of nothing but Russian media, the better to comprehend current Russian attitudes, he resurfaced with some valuable insights.
And I can’t leave our deliberations on all things Russia and Putin without mentioning again Marin Katusa’s new book, The Colder War, which I featured in Outside the Box two weeks ago. It’s a compelling survey of the history and dynamics of world energy markets and the role that Putin seeks to play in them.
Geopolitically, the world seems to be a calmer place as we head into the Christmas season, with the significant and glaring exception of Russia. And remember, falling oil prices will seriously impact an already stressed Russian economy.
But before we turn to the eye-opening if somber notes below, I want to share with you a fabulous story from my friend Art Cashin, who is one of the world’s great raconteurs. I make sure to have dinner with Art whenever I’m in New York. In addition to his wisdom concerning the markets, he simply has the best stories. The last dinner (also attended by Barry Ritholtz and Josh Brown) was at an establishment called Sparks, an old New York watering hole and famous steakhouse not far from Grand Central Station.
Art shared the following story with us and had us in tears. Back in the day, the New York Stock Exchange was a mighty interesting place with a very curious cast of interesting and interlocking personalities. It has calmed down some over the decades, but the stories … well, let’s just let Art tell it.
For years, one of the communal tables at the Luncheon Club would issue a group challenge. They would all set a target for losing weight by some date a couple of months out. The one who weighed up furthest from their target had to buy dinner for the others.
In 1985, the loser was Maurice (Monk) Meyer of Henderson Brothers. Among the others were Jack (Jackie D) D’Alessandro, Pat McCarthy, Bill Fitzpatrick, and Roger Hochstin.
They decided to turn the event into a sort of a Christmas party and scheduled the dinner for the week before Christmas. They made reservations at Sparks Steakhouse.
As the day approached, there was an unexpected development. Mafia kingpin Paul Castellano was gunned down, along with his driver, on the sidewalk outside Sparks.
Nevertheless, the show must go on.
When the fated date arrived, the group decided to meet at the Luncheon Club bar for some rehearsal cocktails. They rehearsed for a couple of hours and then headed for Sparks.
As they arrived, around 7:00, there were some early hints it might be a bumpy evening. When they walked in, the hostess asked if they had reservations. “Only about the food,” snapped Pat McCarthy. That was followed by the maître d’ asking where they’d like to sit, only to hear Roger say, “In the non-shooting section, please.”
Once they were seated, they ignored the menu and ordered more cocktails and several bottles of wine. For the next three hours, they ignored the pleas of several waiters and the maître d’ to order some food to go along with the wine and drinks.
In the meantime, Roger may have been getting bored. He noticed another table with six Japanese men in their twenties and one older man, who looked maybe 60.
Somehow, Roger found a Chinese takeout menu from Chou Lu in his pocket. He put his napkin over his arm as though he were a waiter and went over to the table of Japanese men and began reading the menu in a form of broken Chinglish that would have embarrassed even the producers of the old Charlie Chan movies. Things like “Pork Flied Lice.”
Ironically, only the older man spoke English, and he seemed to think it was a wonderful joke. He told Roger that Roger’s table seemed to be having a wonderful time and asked if he might join it briefly.
Roger brought him over and introduced him around. There was a pleasant exchange for about 15 minutes and then Jackie D asked him where in Japan he came from. They man replied – “Actually, I’m from Okinawa.” Bill Fitzpatrick darkened and said, pointedly, “My favorite uncle was killed on Okinawa by you people during the war.” The man quickly excused himself.
Pat McCarthy reminded Bill that he had not had an uncle in the war. Jack turned to Pat and said, “That doesn’t matter; Bill went through the barrier about two drinks ago.”
Anyway, the waiter finally prevailed upon the boys to order entrees by 10:00. Meanwhile, Maurice was sinking fast. He had come out despite a bad case of the flu, since he was the designated payer. It quickly became evident that Meyer would not make it much past 10:30. He called for the check.
As they were about to help Meyer to his feet, Jackie D noticed that McCarthy had had his untouched entrée put into a doggie bag. Not wanting to be outdone, Jackie reached down and put his medium rare petite filet in his inside jacket pocket without benefit of a doggie bag.
At the coatrack, Jackie attempted to help Meyer get his overcoat on. In doing so Jack lifted his own hand high and out. That swept his jacket off to the side, revealing a shirt dripping with blood from the medium rare filet in his pocket.
Perhaps recalling Castellano’s recent fate, one woman at a table spotted Jack’s shirt and screamed, “My God! He’s been shot!”
Everybody in the restaurant hit the deck, including the maître d’ and our adventurous group. When everyone got back to their feet, the maître d’ told the boys they were never allowed back – collectively or individually.
In a huff, the boys headed off to the John Barleycorn.
Art can go on all night with stories like that. You really should put them into a book, Art.
You have a great week. I am off to the gym, where The Beast will continue to try to whip this poor old body into some similitude of shape.
Your still smiling from all the great stories analyst,
John Mauldin, Editor
Outside the Box
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Notes on Russia
By Ian Bremmer
Nov. 17, 2014
the russians are taking every opportunity to escalate an already plenty hostile relationship with the united states and some selected allies. the g20 summit was particularly negative on that front, with russian president putin bringing along some warships to australia, while canadian prime minister stephen harper led a rope line of western leaders calling putin a scoundrel and a liar.
putin left early, claiming a need to catch up on sleep and some other business to attend to.
like in ukraine.
i had a chance to talk with some senior russians last week, including two advisors to the kremlin. they explained that putin expected his offer of a ceasefire in southeast ukraine would be sufficient to get the americans to tolerate a status quo, while bringing the europeans to the table with some sanctions reductions. that didn’t happen: instead a coordinated harder line policy stayed in place, while the americans and germans looked set to put more sanctions in place unless the russians actively backed down. despite mounting economic pressure on the europeans, the frozen conflict/long game the kremlin was playing didn’t look like it was going to succeed.
and so the kremlin moved backed to escalation, dramatically expanding their direct military presence in the region – confirmed by nato and the typically-conservative osce, denied by the russian government – and announcing plans to build up troops in crimea. they’re preparing both sides to consolidate their territory, initially through taking the port city of mariupol…potentially then a land-bridge between eastern ukraine and crimea and beyond (odessa being the most obvious place). the most likely path is the kremlin now looking for provocations to “go further” – they’ve already expressed a level of outrage around the ukrainian government severing economic ties to the separatist region – then the fiction of ceasefire is erased and the russians/separatists take more territory. ultimately, whatever the formalized “governance” structure, the kremlin is moving towards making crimea and southeast ukraine a singl e place.
there’s very little the ukrainians can do. the ukrainian military will remain badly outgunned, and the local populations in the region remain fairly anti-kiev, even if they’re skittish about the notion of russian takeover. we’ll see a pickup in international calls to provide arms for the ukrainian military, but they’ll be rejected, most particularly by the united states. at best we’ll see a step up in intelligence and training support, to little consequence.
putin’s military efforts are also stepping up outside ukraine: the “unknown” but clearly russian submarine off sweden, a russian nuclear armed exercise during an intelligence meeting in denmark; bomber patrols in the gulf of mexico. they’re all bluster, but a clear message to america and its allies…and pose a far higher potential for accidents – one scandanavian airlines flight recently made an emergency alteration to its flight path when a russian military jet suddenly appeared in front of it.
the likelihood of moscow backing down in this environment is near zero. the sanctions aren’t having a meaningful impact on the russian economy (yet) and the popularity of the kremlin isn’t taking a hit. the speech from former soviet general secretary mikhail gorbachev – no fan of putin, but clearly pointing the finger at the west for russia’s troubles – makes that clear. and it’s getting harder for the americans to find an out. german chancellor angela merkel continues to be the best opportunity for compromise, but her relationship with putin is now only barely functional (the kremlin advisors i spoke with said this was the single biggest misstep from putin to date – they believed his bilateral conversations with her were too aggressive and led merkel to feel misled; neither believed the relationship could be salvaged near-term). and so russians are now presuming the sanctions environment will be there for the long haul, and are thinking about the longer term economic implications.
i’d now say that’s meaningful before we get to russia’s 2018 elections: further sanctions causing steep recession leading to unrest in the regions, which begins to metastasize to the cities. that would spook russian elites, some of whom could split from the kremlin. the key early warning indicator would be meaningful defections of any insiders to the west. but critically, we’re at least a year or two away from that. by which time ukraine has been economically devastated, while the strategic shift of russia-china is thoroughly entrenched.
Putin’s World: Why Russia’s Showdown with the West Will Worsen
By Vitaliy Katsenelson
Institutional Investor, Nov. 17, 2014
My father, Naum Katsenelson, painted this watercolor, “Dolls Become Humans,” two years after we came to the United States in 1993. This is the only “thematic” picture my father ever painted.
