Stand Up to Bullies. You’ll Only Have to Do It Once.

Is the world ready to do what is necessary?

Of course, it isn’t. Collectively, the world is good at screaming about all sorts of immediate and looming crises, whether that is climate change, totalitarian governments abusing civilians and trampling on personal rights or outright genocide. A speech and a prayer suffice but we’re not going to do anything.

Donation websites, lighting buildings in flag colors of abused nations, and sending hopes and prayers accomplish nothing. We send prayers. We just won’t answer them.

Consequences are Fine

The Ukraine war’s consequences are severalfold. Economically, global consequences may be slower and less spectacular than the dramatic Russian military invasion. But, the effects will permeate the global economy, and Russia will be the biggest long-term loser. While this does not comfort families suffering and dying in the streets of Ukrainian cities, it realigns global industries and economies, strengthens the West, and is likely to galvanize United States’ leadership in the global economy – setting up an even more intense rivalry with China.

Global Order?

The war is incomprehensibly tragic, not just for Ukrainians, but also for Russians and our “global order” (which seems a comically tragic term used for anything related to international interaction and cooperation). The economy does not have a morality switch where the outcome for the good guys is a foregone conclusion.

Work, effort, and sacrifice are essential – all of which are avoided by all the meaningful players and replaced with speeches and well-intended websites with good intentions accomplishing nothing.

It’s All About Energy

Russia’s invasion drove oil above $100 a barrel and European natural gas prices rose by almost 70%. Coupled with a desire to enhance alternative energy, the lack of a carbon-based energy foundation suddenly exposes the weakness and the folly of a strategy that believed a transition to alternative energy could be easily accomplished with no legacy of fossil fuels or the need to slow the transition.

Reality, now magnified clearly, is that we cannot simply flip a switch and be carbon neutral, much less be driven by decreasing levels of fossil fuels. More likely, the invasion exposes the need to have significant carbon fuel reserves and this will probably set alternative energy programs back for many years.

Power is prosperity and freedom. Carbon fuels generate power for every significant economy. Emerging economies need even more, and the disruption from Russia that accounts for 12% of global oil supply and 17% of global natural gas supply highlights the need to explore and secure additional carbon fuel sources. BP cannot be “beyond petroleum.”

We’re Stupid but Mean Well

The risk of dependence on Russian natural gas supply has been known for many years. The Russians have used their natural gas supply into Ukraine as negotiating leverage against all of Western Europe. Yet, the EU not only did little in recent years to reduce dependence on Russian gas, in some cases, most notably Germany, they also heightened their dependence, even abandoning nuclear power – a clean source of sustainable energy and an absurd folly to give up in hindsight.

Declaring these maneuvers naïve or even misguided understates the seriousness of these mistakes. A nuclear-armed tyrant does not need additional leverage, yet, Western Europe continued to give Putin the components to be a serious threat and to undermine Europe’s energy security.

The EU and NATO are good at speeches and well-intentioned outrage but lack any courage or fortitude to do something meaningful. Therefore, they appear to be less than useless because the belief that a good speech and an appeal to humanity somehow stops a tank from rolling is tragically comical.

If It’s Costs Us Something, Now We Care

Inconvenience and real sacrifice motivate some action. But the absurdity of sanctions against the Russians (really? Are we forgetting Leningrad or Stalingrad?) reflects this misguided logic. If it hurts for us to go without, it must hurt for them. We dramatically underestimate Russian fortitude. Measuring price and cost in terms of lost market value or net worth to oligarchs misses the fundamental point by a mile. The West’s actions cannot match Russia shot for shot. It must be the equivalent of an order of magnitude in response. In other words, it’s Liar’s Poker.

Remember Liars Poker?

On the trading floor at Salomon Brothers the head trader, John Meriwether, was getting a little bit too popular for the CEO, John Gutfreund to stand. So Gutfreund thought he would intimidate Meriwether by challenging him to a game of “liars poker” (look it up – but it’s something securities traders do all the time) to intimidate him. So he went up to Meriwether and said “I will play you one hand of liar’s poker for $1 million.” Gutfreund thought Meriwether would back down. In any event, if Meriwether matched the bet or even doubled it, Gutfreund would come out the winner regardless of the outcome because of his will and determination to challenge with such high stakes.

But Meriwether knew the right response – “one hand, $10 million.” Gutfreund had no choice but to back down because he didn’t have the fortitude to respond to an order of magnitude threat. Meriwether proved that by challenging with such an extreme counteroffer (or in this context, counterattack) he had already beaten Gutfreund because regardless of his response, and even if Gutfreund won the hand, Meriwether showed the courage and fortitude to be the leader.

The will to do what no one else is willing to do determines the outcome even before the battle was fought. Putin believes this and the US and the EU must respond like Meriwether in liar’s poker. Increasing the stakes by an order of magnitude is what it takes to put a tyrant in his place.

Be Willing to Do the Unimaginable

It’s the same game with Russia and Putin. We have to counter a $1 million bid (his invasion of Ukraine) with a $10 million raise. Cut off all economic trade, supplies, and financial resources from the rest of the world, stare down his nuclear threat, and probably even NATO forces in Belarus – I suggest that is a brilliant flanking strategy that would leave him helpless. Regime change in Belarus is a Queen’s Gambit. We have NATO and the US. We have a stacked deck and it’s time to go all in.

The world needs the fortitude to back a 10x bet and not blink. I fear that is lacking.

Back to Energy and Commodities

Energy price increases will negatively affect the global economy. Europe is especially vulnerable because, as we discussed, it did little to reduce its dependence on Russian natural gas and is unlikely to do anything unless forced. Now, it is forced.

Economic headwinds from higher energy prices impact consumers who have fewer resources and drive inflation even higher. Supply chain disruption from the pandemic’s lingering effect will now be accelerated via the pervasiveness of higher energy costs.

Is this energy disruption temporary? Oil futures are currently lower than spot prices suggesting that the market expects this status to be temporary. Central banks seem to be looking through the events in Ukraine and are not tightening or speeding up any response to headline inflation. Global stock markets are volatile and challenged to converge on a single narrative for our future economic status.

Western sanctions will have a less dramatic effect. Remember, this is the Russians. Let’s not be misguided, a severe sanction is not the equivalent of a bomb falling in Kyiv. Sanctions rarely have immediate or dramatic effects. The trade-off favors Russia. They are better prepared than most to withstand sanctions and, while Russia is dependent on revenue from Europe, Europeans are more dependent on Russia’s oil and gas and cannot replace it in the short run.

The Long Run

Ukraine’s losses go well beyond what can be measured in any ledger. Russia will suffer economically, perhaps more than Ukraine, because the impact of Russia’s large-scale invasion should be more severe over time. While sanctions are taking an increasing toll, it is Russia’s isolation and investor uncertainty will weaken trade and other economic links. If Europe can reduce its fossil fuel dependence on Russia, there will be more fallout.

But let’s be clear, Russia still has substantial energy and commodity resources. Russia and Ukraine combine for approximately 30% of the world’s wheat supply, among other essential commodities.

Longer-term economic consequences for the rest of the world should be less severe, but, political bodies and policymakers have proven ineffective at best in dealing with global challenges. Now, essential energy supplies, higher short-term inflation, and a financial and material global supply chain is disrupted and potentially severed.

Central banks, the EU, NATO, and other entities have proven to be ineffective bumbling fools, for the most part. Giving speeches while people die appears to be an acceptable policy.

China is Watching

“See the whole board” is good advice for any chess player. This is an obvious opportunity for China to step in to strike energy and commodity deals, even currency and financial transactions that will strengthen China disproportionately. It is in their self-interest to defy Russia’s global political and economic isolation. A charming and passionate speech from the EU is not going to change that, either.

China will strengthen its position via Russia. Now the United States has to assert itself as a global leader not only in the allocation of financial resources and trade but, in dealing with a nuclear-armed tyrant and a totalitarian regime on a global stage. The US can’t pretend it doesn’t face an existential threat and needs to play liars poker – a 10x economic, military, and political wager. It’s time to act like the guy with the big stick.

The 10x Strategy

See the whole board. Western Europe and Russia are more like pawns than the knights or bishops they envision themselves to be. China has powerful pieces, but the US still has the Queen protecting the King. It’s time to play that gambit.

Defense budgets will rise, tension intensified, investment in education, health care, and infrastructure will be reduced as military spending increases throughout the US and the European Union. However, only more conflict and disruption are likely because the 10x strategy will be ignored, and even greater prices will be paid.

Uncertainty will be pervasive and the global economy will become more volatile. Security will be especially uncertain.

A big uncompromising response now is the most likely strategy to settle these dramatic issues – and if it leads to regime change in Russia, that helps everyone, especially the Russians. The US and the EU need to grow up and start acting like global leaders.

See the whole board.