Russia has launched a full-scale military invasion into Ukraine, beginning what is now the largest military conflict in Europe since World War Two. In response, tensions between the US and Russia have been escalating. Really the threat levels and risk of conflict expansion are just terrifyingly high. I think the second Cold War has already started.
No Diplomatic Representation anymore in Russia
It’s about as high, maybe not quite as it was at the time of the Cuban Missile Crisis. We have hardly any diplomatic representation anymore in Russia. They don’t have too much of a diplomatic representation here. Just 60 years ago, the US and Soviet Union were at the height of a Cold War that nearly resulted in an all-out nuclear war.
And some experts worry that history might be repeating itself. We’re in it now. And Russia is very much trying to drop an iron curtain, a second iron curtain, and Ukraine is trying to prevent itself from coming down on the Russian side of the Iron Curtain.
How will this one be different?
If a new Cold War has already begun, how will this one be different? And what will it mean for a US economy that’s still reeling from the pandemic? There are several similarities between the first Cold War and the events unfolding today that could be signifying the start of a new Cold War. For one, both incidents involve the same three key players.
Putin is the aggressor. Putin chose this war, and now he and his country will bear the consequences. Whoever tries to interfere with us and further create threats to our country, and to our people should know that Russia’s response will be immediate and will lead you to such consequences that you have never seen in history. It is still Russia and the United States.
If China involved in it
And there’s a risk, of course, that this will expand to involve China. Something that should be clear from that joint statement that Russia and China made on February 4th from the Olympics. There have also been similar invasions.
During the first Cold War in 1956, the Soviet Union invaded Hungary to repress a revolution. Later in 1968, the Czech Republic and Slovakia, which were then united under Czechoslovakia, were invaded for similar reasons.
Some experts also point out that Ukraine shows surprising similarities with Germany during the Cold War, split into East and West, each controlled by two opposing forces. Germany was certainly a frontline state during the Cold War. It was a divided country.
West Berlin was a sort of island of freedom in the middle of the German Democratic Republic, which was a very authoritarian state. Ukraine looks as if it’s acquiring part of that role now in as much as it is the final state between the easternmost border of NATO of democracies and Russia.
I don’t think this is a role it chose. Of course, Germany didn’t choose that role in the Cold War either. America’s response to Russia’s ambition remains somewhat similar as well. The essence of the Cold War was the theory developed by George Kennan said “The way you deal with the expansionist Soviet Union is you do everything to push back against it and contain it.”
And containment was. It was military containment. It was political containment and economic containment. In response to the threat, it posed to democracy. The US imposed similar sanctions against the Soviet Union during the height of the Cold War, with regulations like the Export Control Act of 1949 designed to hurt the Soviet economy.
Economic Containment Part
What I see now happening is the economic containment part of it is already there. If you look at the sanctions that the U.S. and its allies have imposed on Russia, we’re going very much back, including export controls. We’re going very much back to the kind of economic containment you had during the Cold War.
Rather than wait 50 years, we’re going to bankrupt Russia in a month. But that’s the strategy. It worked last time. We were able to outspend the military and bankrupt Russia, it took 50 years. Now we’re trying to do it in a matter of weeks and it looks like it’s going to be quite effective. But there are also some major differences that set the current crisis apart.
I think that we are definitely headed into a 21st-century version of the Cold War, but it’s going to be different from the Cold War that existed really between 1949 and 1989. While Russia has had a history of invasion during the first Cold War, its mission today is quite drastically different.
What Putin seems to be talking about is actually absorbing Ukraine within Russia. He has talked about the extinction of Ukrainian statehood. Nobody ever did that with regard to the Hungarians and the Czechs during the Cold War.
Nor were those military interventions on anything like the scale of what Putin is doing. And while the threat of nuclear war has made a return following Putin’s ominous warnings, it plays a far less important role compared to the first Cold War.
For the moment, nuclear weapons are peripheral to this conflict, apart from the single vague threat that Putin made in ordering an alert. But even though the alert was more rhetorical than it actually did not see significant redeployments of Russian forces in connection with the alert, which we did see when alerts were carried out during the Cold War.
So the tension is high, but as is always the case in history, the parallels are not exact. But perhaps the most crucial difference that could also have a heavy impact on the future is China’s role in the ongoing conflict. 1969, the Soviet Union and China fought a border war, and people were worried that this might escalate into a major war between Russia and China.
But the US held the cards
It didn’t. But at that point, the US held the cards. The Soviets decided to accept the US offer of detente, of improving relations, because they were they saw China really as their major adversary. Well, the tables are completely turned today.
The U.S. is in the position that the Soviet Union was in the early 1970s, faced with two major adversaries. So logically, you might argue that it would make sense now for the United States to try and improve ties with China, to try and get China to maybe use some influence on Russia to cease what it’s doing or at least distance itself from Russia.
I don’t think the Biden administration is willing to do that. Having declared that China is a major adversary.
So there I think we are in a completely different situation than we were during the Cold War. The unique nature of the second Cold War makes its outcome so much harder to predict and therefore dangerous. Putin might be going for legacy here if his main goal is to restore the borders of the USSR as they were before the fall of the wall. And his only goal here is reputation.
Then he’s not going to be a rational counterparty to any negotiation that ends the conflict. That’s the most terrifying risk. That’s why people should care. It’s hard to imagine a shooting war breaking out between Russia and the U.S. That would be catastrophic. I think that the sanctions will be put on and then Russia will seek out other world partners, maybe China and maybe some of the OPEC countries. And I think a lot of the battles then will be on the economic front.
The crisis in Ukraine is posing a new challenge to a market
The crisis in Ukraine is posing a new challenge to a market that’s been recovering from the uncertainties of the pandemic. The market’s been pretty volatile. You know, for the most part, it’s been down since the crisis developed. And you would expect that the market doesn’t like uncertainty. And this casts a lot of uncertainty.
Then in terms of the world economy. It’s very difficult for me to make a very bearish case for commodities in the short term or a very bullish case for equities in the short term. Without me believing that we’d have to have pretty quickly here a comprehensive peace and everything gets real Kumbaya and s’mores by the campfire very quickly.
And I don’t think that’s what’s going to happen In the longer term, the health of the market depends on where the crisis in Ukraine is headed next. The market over time has been up, so it’s been able to weather these crises that have developed. But I anticipate that that will be the situation here unless things just get really out of control and there’s open conflict in Europe beyond the borders of Ukraine. If we were to see Kyiv fall and Ukraine fall, then we’d see equity markets take very big hits. If tactical nukes were to be deployed, the downside is immeasurable. Inflation and stagnation remain other concerns.
In February 2022, inflation rose 7.9% from 2021, according to the Consumer Price Index, the highest level since January 1982. One thing that I’m worried about is the price of food because Ukraine and Russia are big exporters then as far as food is concerned. Things like wheat and corn and barley. Ukraine is the fourth largest barley exporter in the world.
Growth-Inflation Situation in the United States
And so that has some potential impacts then on things like meat prices. Before the Russian war on Ukraine. We had a growth-inflation situation in the United States, very strong growth, but also very high inflation. Now, we might have a situation where growth slows down a little bit, especially if the Fed is going to raise rates, however cautiously. They do it with even more inflation. So is it stagflation? Not quite. Not as severe likely as Europe. But we are going to see more inflationary pressure and some slowing of growth.
Gas prices that made records following the invasion of Ukraine will likely stay volatile until the crisis ends. Part of the increase in the price of oil occurred before tensions developed between Russia and Ukraine. And then once the conflict started, that’s when we’ve seen these big surges. So that’s when we saw the big day-to-day rises in terms of gas and oil prices. If there’s an upside, most experts find the American economy healthy enough to weather through a second Cold War. If an all-out economic war against Russia were to break out, chances are it will be an extremely one-sided battle. I think the U.S. economy right now is pretty strong and can withstand pretty much anything that Russia can throw at us economically. The balance of economic power between Russia and the U.S. is such that it’s not really, you know, from the US point of view, it’s not going to be that important. It’s much more devastating for Russia.