SIMON BROWN: I’m talking to Mohammed Nalla. We find him at moe-knows.com; we also find him on Magic Markets Podcast. Go give that a listen. Mohammed, I appreciate the time today.
We are talking Ukraine, prepping for this. When last did we have a geopolitical big issue? Truthfully we have them, and oftentimes they include Putin. Perhaps the difference this time is that Nato’s (North Atlantic Treaty Organization’s) involved, the West is involved, with Putin saying Ukraine can’t be Nato; moving troops there. It’s getting messy. I’m not sure what the easy solution is. Reports [were] that he was pulling out troops to help the market on Tuesday. But the Nato chief is saying, no, he is just moving them around.
MOHAMMED NALLA: Simon, always a pleasure doing this, a pleasure chatting to you and the listeners. This is an ongoing issue. Yes, geopolitical risk is something that we always have to have on the radar, particularly with regard to the Ukraine and Russia. There’s been this tenuous relationship for quite some time. You’ve got to really cast your eye back, even to the whole issue around Crimea. Crimea was a region of the Ukraine, and Russia effectively annexed that just a few years ago.
So this goes back and, even if you want to cast your eye further back than that, you go all the way back down into the Russia/Turkish war; that’s when the Russian empire had claimed Crimea and so forth. So there’s a lot of history there.
Remember, this also is a product of the fact that the Soviet Union collapsed after the cold war, and over the last two decades we’ve had a very strong leader in Vladimir Putin whose popularity in Russia has been reasonably robust. He’s been there for almost two decades and this is again a sign of a leader who’s, I guess, reasonably confident enough to start pushing back against what has been a unipolar world for the larger part of the last couple of decades.
We’re now seeing fractures there, whether in China against the US, or whether that’s on Europe’s doorstep between Russia and Nato. We find ourselves at what I want to call an impasse, because we’re recording this today and yesterday there were talks that the Russians were withdrawing troops from the Ukrainian border, and today it’s back on again with the US saying, well, we’ve received no proof that Russia is withdrawing troops.
So it’s a little bit of ‘he said, she said’ and unfortunately that causes a little bit of volatility in the markets if you don’t look through some of the near-term risk.
SIMON BROWN: One of those issues is obviously energy. In fact, we spoke about energy lost year, particularly around the UK and Europe, and your predictions there were spot-on. Energy’s seen a huge surge in prices. Markets are kind of paying attention to it, but almost in the sense that they [were] more interested in the Facebook numbers and the like than they were in the Ukraine until the withdrawal happened.
But this could particularly on an energy front and particularly to Europe and Germany, have massive implications. But if there is ultimately some sort of invasion or something this is going to hurt markets.
MOHAMMED NALLA: Yeah. I think let’s unpack that a little bit. You’re correct in that we spoke about the energy constraint with the UK not so long ago, just a couple of months ago.
Read/listen: Understanding the energy crisis in the UK and Europe
I think early on in that push up in oil prices and energy prices I got that wrong. I thought we’d kind of plateau out between $60 and $70 a barrel. It’s now well north of $90, pushing on $100. What’s actually going on here?
Rewind to that point [of] the energy crunch in the UK: remember Europe in particular is very dependent on Russian gas for a lot of the energy. It was called a moment of idiotic genius when Germany decided to decommission a lot of their nuclear capacity in favour of green energy. The reason is – we’ve had this discussion – nuclear is considered or could be considered green. Regardless of that, something like 40% of German energy usage is dependent on gas being supplied by Russia. There is the Nordstrom 1 and now Nordstrom 2 pipeline that is really a bone of contention [with] the US.
Let’s unpack that as well. The old pipelines run through regions like the Ukraine, and that allows the Ukraine to effectively capitalise on what’s called ‘gas transit feeds’.
Now, if the Russians build a direct pipeline under I believe the Black Sea there, under that, going directly into Germany, it effectively bypasses the likes of the Ukraine. It makes Russia a lot more powerful.
Germany continues being a customer simply because it needs the energy, and that comparatively weakens the likes of the Ukraine and other peripheral quasi-Russian states. I think that’s been the bone of contention – that the US has pushed back against that because they are very wary of the ‘Russian bear’, if you want to call it that.
SIMON BROWN: You say Putin’s been there for two decades and, of course, he’s got [until] another, what, 2036 or some crazy date when he’s probably going to be around, probably until he dies. I was thinking about it earlier in the week, and one issue is Putin saying he doesn’t want the Ukraine part of Nato. I don’t think Nato wants the Ukraine part of Nato either, in case there’s an invasion and it’s got to come to the aid of [the Ukraine]. Is there some sort of sort of face-saving, or has it got to the point now where it’s almost sabre-rattling and no one can walk away without looking like a fool.
MOHAMMED NALLA: Again on this point, I think when we look at Nato, it’s almost incorrect to look at Nato as the homogenous entity. Yes, it’s a treaty and the members are governed by the statutes of that treaty. But I think the interests of respective Nato members here are diametrically opposed. I think Russia would very much just like this to go away, because Russia and Germany want energy. Germany wants energy security, so Germany wants this to go away.
Germany’s more likely to make concessions and let this de-escalate than the likes of the United States. I think that’s raised certain fracture points. A lot of commentary I’m observing coming out of Europe is saying, ‘Hey, Russia and US, if you guys really want to fight, you share a border up here in Alaska – why don’t you fight there and leave Europe out of this?’
That’s really what what it boils down to. You’ve got a new chancellor in Germany, Olaf Scholz, and he’s come out and had a rather interesting conversation with Putin. If you look at some of the snippets out of that he’s certainly potentially a lot more assertive than Angela Merkel was, just in terms of some commentary. I think this is because he’s got to save some face with Nato.
But, at the end of the day, I think it’s also in no one’s interest – Russia included – to have this escalate into an armed conflict. I think it’s Russia calling particularly the US’s bluff. Let’s see how this game of poker actually plays out.
SIMON BROWN: Perhaps it plays slowly, because reports were that the invasion would happen after the Olympics, which is next week. Then [last] weekend it was going to be this week. Does this almost fade away, and perhaps some of the troops start going home and some of them stay there? There’s kind of a stalemate where no one wins and no one loses face?
MOHAMMED NALLA: I’d like to see that. I would almost view that as a bit of a base case, simply because the biggest winner of any armed conflict here ironically would be, I guess, the US military industrial complex.
I think the Russians don’t necessarily want a war on their doorstep because that would force US troops and Nato troops directly on its border.
That’s the exact opposite of what Russia’s trying to achieve here. So I think, yes, the whole thing of Russia not wanting Nato on its doorstep – that’s important. It’s valid.
I think Russia’s annexation of Crimea and now, for example, the Donbas region, which holds a lot of Russian-speaking Russian loyalists in the Ukraine – those issues will continue being, I guess, the bulwark of Russia pushing against Nato and its long-time enemy, effectively the United States.
I don’t think Russia really wants to see Germany stop buying Russian gas, you know what I’m saying? That’s the reason why I say we need to be very distinct around what are European interests in this versus … US interests. Again, I would see this as a slow burn. It never really goes away. It’s the cold war that never really dies. It might de-escalate only to come back in a couple of years, very similar to what we saw with Crimea, this effectively being Crimea version two.
SIMON BROWN: Yes. That’s an excellent point and we’ll leave there. It’s a cold war. Russia doesn’t want a war its border. Absolutely.
Mohammed Nalla, always great insights. You find moe-knows.com and of course Magic Markets.