| Bill Browder, Hermitage Capital Management (Photo credit: Peter Lindbergh) |
Nearly every investor, world leader and concerned citizen is looking at Vladimir Putin right now and wondering if he will back down or escalate Russia’s military involvement in Ukraine. That one outcome will determine the future of European security and economic stability for years to come.
I’m afraid that, based on the reasons behind Putin’s motivations for invading Ukraine in the first place, there is no chance that he will back down. To understand this, all it takes is a simple analysis of how this crisis unfolded.
First, Putin didn’t start this war because of NATO enlargement or historical ties to Crimea, as many analysts have stated. Putin started this war out of fear of being overthrown like Ukrainian president Yanukovych in February 2014. Yanukovych had been stealing billions from the state over many years, and the Ukrainian people finally snapped and overthrew him. Compared with Putin, Yanukovych was a junior varsity player in the field of kleptocracy. For every dollar Yanukovych stole, Putin and his cronies probably stole 50. Putin understands that if he loses power in Russia, he and his underlings will lose all the money they stole; he will lose his freedom and possibly even his life.
Putin may not have been at risk of an imminent revolution in February of last year, but he could see the writing on the wall. So in March he took aggressive preemptive action. His 1999 invasion of Chechnya, which led to his presidential election, had taught him the value of war in shoring up his popular support.
As Putin and his colleagues evaluated their options, they realized they didn’t need to launch an expensive and deadly invasion anywhere. Russia already had 12,000 troops in Crimea stationed at a naval base in Sevastopol — they could reclaim Crimea with almost no effort. In March 2014, using irregular troops and mercenaries, Russia retook Crimea with almost no loss of life. At the same time, Putin ran a propaganda blitz at home to convince the Russian people that the Ukrainians were fascist Nazis who were going to kill the “good Russians” living in Crimea.
Putin’s plan worked perfectly, with his approval rating shooting up from 55 percent to 88 percent. Unfortunately, he couldn’t just stop at Crimea. If he had, a more strident nationalist would have come along and accused Putin of being weak, taking his spot and putting him in the position he was trying to avoid by starting the war in the first place.
So Putin had no choice but to escalate by going into eastern Ukraine. Unfortunately for Putin, this didn’t work out nearly as neatly as in Crimea. There were no Russian troops stationed in eastern Ukraine, and Russia had to send in much bigger groups of mercenaries, criminals and secret policemen. This group didn’t hold up well when the Ukrainian army finally came in to challenge them, and to maintain the effort, Putin was forced to send in regular Russian troops and heavy artillery last summer. The shooting down of Malaysia Airlines Flight MH17 was the turning point for Putin. Europe imposed devastating sanctions on Russia.
The sanctions forbid Westerners from lending to Russian companies. This means that the $650 billion of hard currency debt owned by Russian companies can only be refinanced inside of Russia. This has led to massive capital flight, a devaluation of the ruble of more than 50 percent and a monumental recession, which is only just beginning.
Putin has never dealt with economic chaos before. Though some may argue that this will bring him to the table to negotiate with the West, in my opinion any negotiation would be seen as a sign of weakness and is therefore the last thing Putin would want to do.
Putin’s only likely response is to escalate in Ukraine and possibly open up new fronts in other countries where there are “Russians to protect.” But doing so will only harden the sanctions, leading to further economic pain in Russia — and further military adventures to distract Russia’s people from that pain.
I cannot imagine a scenario in which there is any compromise, because for Putin compromise means being overthrown. Judging from all of his actions to date, he is ready to destroy his country for his own self-preservation.
We should start preparing ourselves for a war in Europe that may spread well beyond the borders of Ukraine. The only Western response to this has to be containment. This all may sound alarmist, but I’ve spent the past eight years in my own war with Putin, and I have a few insights about him that are worth knowing.
Bill Browder is the founder of London-based Hermitage Capital Management and the author of Red Notice: A True Story of High Finance, Murder, and One Man’s Fight for Justice.
