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U.S.-Russia War Hype Could Stimulate Both Economies

Monday, October 17, 2016 5:33
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Russia flagAnalyst Martin D. Weiss delves into the investing ramifications of the media’s recent obsession with hyping a highly unlikely war between the U.S. and Russia.

The first time Elisabeth and I visited Russia, we stayed with dear friends in a Soviet-era apartment of St. Petersburgh.

We waited patiently in long lines like everyone else.

And everywhere we went, we thoroughly enjoyed the warm hospitality of a country still mostly enamored with everything American.

But on our most recent visit, all that had changed dramatically.

While strolling along a southern city’s beautiful embankment of the Volga River, one friend asked me, her voice cracking with emotion:

“Why do Americans hate Russians so much?

“Why in the world is Obama providing arms directly to ISIS?

My rudimentary Russian was good enough to understand the questions. But no language seemed good enough to provide simple answers, except to say “it’s not true.”

From there, we went to Zheleznovodsk, a cluster of mineral water spas in the Caucasus Mountains.

Thankfully, everyone abided by the golden rule that health — not politics — was the main topic worthy of discussion.

But there was one exception. Our massage therapist always had his radio tuned to talk shows with nonstop rants on “America’s evil plots to bring Russia down.”

As I soon learned, he didn’t have much choice. All Russian news sources blast out similar “information and analysis” almost around the clock.

It is the most pervasive propaganda machine I have ever studied or experienced in my lifetime.

It engulfs government media, “independent” media and social media. It deploys tens of thousands of individuals who provide personal “testimonials” designed to shock and awe, invoking deep feelings of pity or hatred. It’s in multiple languages, including English. It employs “prominent Western analysts” to tout the same theories and support them with a tirade of stats and “facts.”

It is extremely effective. And it’s downright dangerous. The narrative:

1. Obama is leading a global conspiracy to destroy Russia.

2. Clinton will do exactly the same, or worse.

3. Unless Trump wins, Russia and the United States are headed for nuclear war.

Hard to believe they truly see the world this way? Then consider last week’s comments from Russian lawmaker Vladimir Zhirinovsky:

“Americans voting for a president on November 8 must realize that they are voting for peace on Planet Earth if they vote for Trump. But if they vote for Hillary, it’s war. It will be a short movie. There will be Hiroshimas and Nagasakis everywhere.”

Zhirinovsky himself is not considered a particularly believable source in Russia. But thanks to round-the-clock messaging by the media, the anti-Clinton sentiment is almost universal.

All this raises urgent questions for investors: How did U.S.-Russia relations deteriorate so far, so fast? What will be the impact on the global economy and markets? Is war with Russia truly likely?

The Rapid Deterioration in U.S.-Russian Relations

I hate to say this, but in this new 21st Century cold war, many Western analysts argue that it was NATO that fired the first shot. Follow along with me as I retell the events based on some (but not all) of the known facts:

February 9, 1990. Secretary of State James Baker is in Moscow negotiating the reunification of Germany. Transcripts of the meetings show that, in exchange for Russian cooperation, he makes “iron-clad guarantees” that NATO will not expand “one inch eastward.”

In the years that follow, NATO and State Department officials correctly argue that there was never a formal deal. But Russia argues, also with some factual basis, that the quid pro quo was understood on both sides: Gorbachev would cooperate fully on Germany and the U.S. would limit NATO’s expansion.

Mid-1990s. Russia’s economy is in shambles; its military, in disarray; its hegemony over East European nations, virtually non-existent.

So those former Warsaw Pact countries see absolutely nothing to gain from a continuing military alliance with a fallen empire. They naturally gravitate to NATO.

March 12, 1999. NATO begins adding a long line of former Soviet Bloc countries …

  • first, the Czech Republic, Hungary and Poland, three countries still far from the Russian border …
  • but then, five years later, a new batch, including Bulgaria and Romania, somewhat nearer to the former Soviet Union, plus …
  • Lithuania (very near the Russian border) along with Estonia and Latvia (right on the Russian border).

Early 2014. The Ukrainian revolution bursts onto the global scene with unpredicted fury. A series of violent events — by protesters, riot police, and unknown shooters — erupts in Kiev. It culminates in the fall of the pro-Russian Ukrainian government and the rise of a pro-Western regime.

For Vladimir Putin, it’s the last straw.

In addition to sharing a long, 2,000-mile border with Russia, Putin views Ukraine as an integral part of Russia’s history and geography. So do most Russian citizens.

On February 22, he convenes an all-night meeting with heads of security forces, declaring that Crimea must be returned to Russia.

On February 27, he sends in troops; and the very next day, unidentified Russian men in military uniform take control of the two main airports. Soon, they take the entire peninsula.

In March, Crimeans vote in a referendum to rejoin Russia, and the Russian Federation promptly moves to annex the territory.

It is the first time in modern history that a major nation invades and captures the territory of another nation. It’s a large, resource-rich area. It’s in Europe. And this single act threatens to dismantle the world order that has prevailed since the end of World War II.

The West responds with three rounds of sanctions, expanding each as the war in the Ukraine escalates. Russia responds in kind, with a total ban on food imports from the EU, U.S., Norway, Canada and Australia.

September 2015. Russia jumps into the Syrian civil war, starting with air strikes against rebel forces … soon expanding to a massive build-up of military bases … and most recently, the bombing of entire cities like Aleppo.

September 2016. The United States and Russia jointly announce a Syrian cease-fire. But they leave a gaping loophole: The agreement does not apply to attacks against “terrorist targets,” which, according to Russia’s standard definition, might also include U.S.-supported rebels.

U.S.-British airstrikes aimed at ISIS accidentally kill 60 Syrian government troops. Syrian or Russian airstrikes kill 14 aid workers and destroy 18 truckloads of food.

In Russian news outlets, Moscow declares that U.S. and Russia have broken off diplomatic relations regarding Syria, a not-so-subtle threat to U.S.-Russian relations overall.

October 2016. Russia suspends a landmark agreement with the U.S. to dispose of surplus weapons-grade plutonium. It announces its plan to re-establish military bases in Vietnam and Cuba. And it continues to move steadfastly toward conflicts with the U.S.

The U.S. retaliates with formal accusations of war crimes in Syria and of malicious meddling in the U.S. presidential elections.

October 15, 2016. Just this past Friday, CNN explains it this way:

“It’s not a new Cold War. It’s not even a deep chill. It’s an outright conflict.”

What Next?

I pray, hope, and expect that a direct conflict between the two nations is not in the cards, at least not in the near future. But it’s undeniable that the two nations are already engaged in escalating economic wars, cyberwars and most recently, proxy wars.

The most frightening prospect of all: The declared readiness — and willingness — on both sides to use tactical nuclear weapons.

Technically speaking, these smaller bombs are less destructive than the mega-weapons that were so widely feared during the Cold War. But paradoxically, therein lies the big concern: It’s precisely because they are less destructive that supposedly “sane” military strategists on both sides seriously consider using them.

Expect the following economic consequences:

First, regardless of which party controls the White House, Congress, and the Supreme Court … and regardless of federal budget deficits, the state of the economy or the direction of financial markets, we’re bound to see a rapid build-up of

  • U.S. conventional forces,
  • tactical nuclear weapons, plus
  • security, intelligence and cyber capabilities.

Defense and cyber-related sectors will explode with growth.

Second, despite any noise to the contrary, expect aggressive government efforts to stimulate the economy.

Whether they succeed or not in avoiding a recession is another matter entirely. But with the threat of U.S.-Russian conflict, you can be certain that the Treasury and the Fed will pursue this course to the bitter end.

Third, the fear of war — in all shapes and forms — will continue to drive global flight capital to the United States. But, as I’ve warned, this cannot continue forever. If U.S. civil conflicts deepen, much of that capital flow may reverse, seeking new safe havens.


The Market Vector Russia ETF Trust (NYSE:RSX) was unchanged in premarket trading Monday at $18.46 per share. Year-to-date, the largest ETF targeting Russian equities has gained 26.01%.

This article is brought to you courtesy of Money and Markets.

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