The Game is Afoot (2021)

“...the most dangerous scenario [to American security] would be a grand coalition of China and Russia...united not by ideology but by complementary grievances.”

Zbigniew Brzezinski, 2017

For centuries, Russia sought to maintain “buffer zones” against invasions (there have been many) while various opposing powers have sought to “contain” Russia by controlling the same “zones.” In the 1800s, this long-running geopolitical tug of war was known as “The Great Game.” During the 1900s, fortunes of the Game’s participants have shifted in the wake of world wars, revolutions and the Soviet collapse. Now, another shift is upon us, as evidenced by the recent Russian and Chinese actions that challenge the US hegemony and, ultimately, the USD’s global reserve currency status.

Even if partially successful, these actions portend changes in the global balance of power, trade, monetary arrangements and, inevitably, markets. However, these brewing conflicts get resolved, evolving geopolitical and currency risks are not priced into financial assets or gold. It may feel like we are entering “uncharted waters” but a quick look back can help illuminate the nature of the geopolitical changes and their attendant risks, which are now higher than at any time since the late 1980s.

To get a sense for how “not new” the current geopolitical conflict is, let’s turn to Lord Palmerston (thrice the Foreign Secretary and twice the Prime Minister of the British Empire during its 19th century apex) and to Winston Churchill (who needs no introduction).

Firstly, Palmerston’s explanation of the perpetual nature of national interests:

“We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.”

Secondly, Palmerston’s view on the British (and Western) “eternal and perpetual” interests vis a vis Russia:

“The best and most effectual security for the future Peace of Europe would be the severance from Russia of some of the frontier territories acquired by her in later Times, Georgia, Circassia (Chechnya), the Crimea, Bessarabia (Moldova), Poland & Finland.”

Thirdly, Palmerston’s outlook for Russia, which he saw as a strategic threat to the British (Western) hegemony:

“Russia will in due time become a power almost as great as the old Roman Empire. She can become mistress of all Asia, except British India, whenever she chooses to take it; and when enlightened arrangements shall have made her revenue proportioned to her territory, and railways shall have abridged distances, her command of men will become enormous, her pecuniary means gigantic, and her power of transporting armies over great distances most formidable. Germany ought to be strong in order to resist Russian aggression, and a strong Prussia is essential to German strength.”

If Western interests, ambitions and fears haven't changed much over the centuries, neither have Russia's. Here is how Winston Churchill defined Russia’s interests in his famous “enigma” speech delivered 30 days into WWII when it briefly appeared as if Stalin and Hitler had become allies after signing the Soviet-German non aggression pact.

"I cannot forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an enigma; but perhaps there is a key. That key is Russian national interest. It cannot be in accordance with the interest of the safety of Russia that Germany should plant itself upon the shores of the Black Sea, or that it should overrun the Balkan States and subjugate the Slavonic peoples of south eastern Europe. That would be contrary to the historic life-interests of Russia."

As a grandmaster of the "Great Game," Churchill saw through appearances and predicted that Russia would fight Germany on the side of the allies. Note that Churchill referred to the USSR as “Russia.” He understood, as had Palmerston, that governments and even political systems can change but critical national “life-interests” endure.

Given Russia’s historic security interests, consider NATO’s post-Soviet self-described “enlargement” from the Russian standpoint. To paraphrase Churchill, it could not have been in the historic life-interests of Russia that American and NATO forces planted themselves along Russia's Western, South Western and Southern borders.

This NATO map shows that most of the Russian historic buffer zones are now allied with NATO and if Ukraine were to join NATO, Russia would have no buffer zones at all. Over the past decade, as Russia’s military capabilities and economic situation have improved, its assertions of interests along its borders and in Eastern Europe have resumed and become forceful. Hence, the escalation over Ukraine and demands for Western security guarantees.

In 1962, President Kennedy threatened war and the Soviets stood down because not having Soviet missiles in Cuba was vastly more important to the US than having them there was to the USSR. Now, 60 years later, the situation is reversed - not having NATO in Ukraine (and Eastern Europe) is vastly more important to Russia and both sides know this. Given the history, this turn of events should not be a surprise and neither should the likely outcome. I think the West will stand down, Ukraine will not join NATO and NATO presence in Eastern Europe will be renegotiated. The “Great Game” has just taken yet another major turn. Back to Palmerston:

“The policy and practice of the Russian Government has always been to push forward its encroachments as fast and as far as the apathy or want of firmness of other Governments would allow it to go, but always to stop and retire when it met with decided resistance and then to wait for the next favorable opportunity.”

This was written in the 19th century, yet it describes the 2014 Crimea annexation and the current standoff to a tee. Russia’s actions, within her historic spheres of influence, have always been driven by political calculus. Weakened post-Soviet Russia could not oppose NATO expansion but now, having deployed asymmetric unconventional weapons, and having secured the Chinese support, Russia is ready to push NATO forces away from its borders and to seek, together with China, a global power rebalancing towards a new multipolar world order where the US would no longer be the sole superpower controlling the international monetary regime and financial system.

Here are some of the key strategic “messages” that I heard Putin deliver in the Valdai speech:

A. The post-WWII global order, including the USD reserve currency status, reflected who had won the war;
B. the Soviet collapse left the US as a sole hegemonic superpower for 30 years;
C. left without opposition, the US has stumbled militarily, financially, economically, politically, and morally;
D. at the same time, Russia and China have strengthened and now seek a “multipolar” global power structure;
E. “multipolarity” entails re-cutting the spheres of influence and ending the USD hegemony in trade and finance;
F. one cannot ignore that in the past, all such conflicts have been settled through wars - aka “Thucydides Trap.”

Bottom line - Russia and China have built asymmetric military capabilities, financial resources and massive gold reserves in support of their expanding geopolitical, economic and monetary ambitions, putting them in a position to effectively disrupt the post-Soviet global power balance.

Whatever happens, it is time to pay close attention - the 30-year long American “unipolar moment” is over and the “Great Game” is afoot! Again. Because the US unipolar hegemony and the USD’s monetary primacy are inextricably linked, investors who take the status quo for granted are taking extraordinary risks without being paid for them.