Ad Hoc Commentary – Putin to swat flies and trip tigers

“Putin Said to Stun Advisers by Backing Corruption Crackdown”

“…Putin chose the corruption crackdown policy over the other option presented by his economic team: the “mega-projects” program. That path would further enrich two of his closest allies, billionaires Gennady Timchenko and Arkady Rotenberg, by transfering huge sums of money to contractors…”

http://www.bloomberg.com/news/2014-11-18/putin-said-to-back-crackdown-on-corruption-as-sanctions-bite.html

 

“…Even Mr Xi’s promise to go after tigers as well as flies is a direct quotation from Mao Zedong, who launched an anti-corruption campaign in the early 1950s to wipe out enemies and rivals…”

http://www.ft.com/intl/cms/s/0/1bc9c892-b8c7-11e3-a189-00144feabdc0.html

 

If master strategist Putin is going to walk in the footsteps of China’s Mao Zedong, then the corruption crackdown will see him swatting enemies and tripping rivals. If Putin is successful, then his grip on power will be solidified. This will mean that there will be no regime change from the Russian sanctions:

“…Western hawks want to make Putin a liability for Russia’s business class and thereby hasten his demise…”

http://www.newsweek.com/vladimir-putin-paints-himself-corner-262695

 

Yours truly think that this will impact two things: Russian asset prices and the future of Europe. Firstly, Russian equities and fixed income look cheap today. However, if investors realize that the sanctions is not going to lead to a power vacuum within Russia, then Russian assets will likely go higher. In other words, Russia will not follow the footsteps of Iraq after Saddam Hussein because Putin will likely stay in power.

 

Secondly, it is time for Europe to wake up and heed the advice of great minds like George Soros. Mr. Soros is one of the best analysts out there and he believes that Europe is facing an existential threat from Russia:

“…Europe is facing a challenge from Russia to its very existence. Neither the European leaders nor their citizens are fully aware of this challenge or know how best to deal with it…”

http://www.nybooks.com/articles/archives/2014/nov/20/wake-up-europe/?insrc=hpss

 

Soros has a very good track record in pointing out fallacies, and the latest fallacy is:

“…The argument that has prevailed in both Europe and the United States is that Putin is no Hitler; by giving him everything he can reasonably ask for, he can be prevented from resorting to further use of force. In the meantime, the sanctions against Russia—which include, for example, restrictions on business transactions, finance, and trade—will have their effect and in the long run Russia will have to retreat in order to earn some relief from them.

 

These are false hopes derived from a false argument with no factual evidence to support it. Putin has repeatedly resorted to force and he is liable to do so again unless he faces strong resistance. Even if it is possible that the hypothesis could turn out to be valid, it is extremely irresponsible not to prepare a Plan B…”

http://www.nybooks.com/articles/archives/2014/nov/20/wake-up-europe/?insrc=hpss

 

Even if you don’t agree with Soros, perhaps it is worth reminding ourselves that sanctions and austerity in Europe will neither create prosperity nor reduce youth unemployment. Sanctions will only exacerbate the economic situation in Europe, and the invisible hand of personal interest should move Europeans to help Ukraine:

“…[Sanctions] have a depressive effect not only on Russia but also on the European economies, including Germany. This aggravates the recessionary and deflationary forces that are already at work. By contrast, assisting Ukraine in defending itself against Russian aggression would have a stimulative effect not only on Ukraine but also on Europe. That is the principle that ought to guide European assistance to Ukraine…”

http://www.nybooks.com/articles/archives/2014/nov/20/wake-up-europe/?insrc=hpss

 

However, it is not unusual for great minds like Soros to be ignored. It is perhaps because plans like the one Soros outlined in his article requires those within the European Union, the European Bank for Reconstruction and Development, the World Bank, the IMF, and so on to come together and act in a unified, flexible and efficient manner. That is usually much easier said than done.

 

Good luck in the markets.