The War Clouds Are Gathering

Part 1: Russia Has Its Eyes On Ukraine And Ultimately The Bosporus Strait

As the equity markets seem to do nothing but climb higher, I am here to bring you a little dose of black swan reality. There are some very dark storm clouds gathering on the horizon in the form of ever increasing geo-political risk. Currently, the two biggest geo-political threats are the potential invasion of the Ukraine by Russia and the Chinese ambition to re-claim Taiwan.

In order to understand the potential for military conflict with Russia, one must understand the mind of Vladimir Putin. Putin, the President of Russia, is a former KGB spy who worked in East Germany as the Soviet Union fell apart. Watching his beloved country crumble in the Arms race against the United States severely affected Vladimir Putin. Ever since his days as a young KGB Agent, Putin has always desired to restore the greatness of the Soviet Empire. In Putin’s mind, the USA destroyed the Soviet Empire and Putin believes it is his mission to bring Russia back to it’s former glory. Vladimir Putin views himself as Romanov, a Great Emperor of Russia. Putin has even built himself a palace on the Black Sea that cost over $1BN and is modeled after the Palace of Versailles. He truly views himself as an emperor.

Putin, now at 68 years old, has begun to shift his mindset from maintaining his power and wealth to worrying about his legacy. As a senior citizen, he knows his years are quickly fading and if he wants to restore the glory of the Russian Empire, he must move swiftly and ruthlessly. Putin has zero qualms about waging war on anyone who gets in his way. This is a man who is alleged to have blown up an apartment building full of innocent people in order to put Russia on a war-time footing with Chechnya. Putin has poisoned political enemies and journalists, committed atrocities in Chechnya, Georgia and Syria, has authorized various cyber-hacking campaigns against the United States and threatened to shut off the gas pipelines to Europe. If Putin can get away with invading another country, he will absolutely do it. He will not resist the temptation to expand his empire on any humanitarian grounds.

What is the most likely next step for Vladimir Putin to expand his empire? Remember, Vladimir Putin is a famous Judo Player. In Judo, one of the main avenues of attack is to fake-out your opponent by attempting a sweep or a throw in one direction and as the opponent resists by placing their weight in a way that you cannot throw them, you immediately attack from the opposite direction allowing the opponent to put himself off-balance for you. Here, Putin is posturing as if he will attack Ukraine from the Russian border, but likely he has a much swifter and broader attack in mind.

In my opinion, Putin will initiate the invasion of Ukraine and the eventual invasion of Turkey from the North and the East. It is fairly simply to understand Putin’s plan by looking at a map of the region:

If you are not familiar with this region of the world, refer to the old Mark Twain quote, “God created war so that Americans would learn Geography.” As you can see on this map, Russia is on the Eastern side of the Black Sea across from the Ukraine. In 2014 Russia successfully invaded the Crimea, giving Russia more shore-line and access to the Black Sea. However, although the Black Sea is a warm water port that opens a lot of trade to Russia, it is still limited in its access to the world’s oceans. The one thing Russia has always lacked and that has effected its success on the world stage is access to a warm water port. A warm water port would allow Russia to build up a larger Navy and exert much more influence in world commerce. Russia is a product of poor Geography, having no access to the ocean below the Artic Circle. If Russia could get a warm water port under their control, it would accelerate their presence on the world stage immensely. During the 1980’s the Russians invaded Afghanistan in a costly and bloody war that lasted over ten years. The Russians invaded Afghanistan for one reason, to continue south and establish a warm water port. They were unsuccessful.

If Putin can conquer territory and establish a warm water port for the Russian Empire, he would have done something for Russia no other leader could. Putin has his eyes set on a warm water port. The most likely place for Putin to attempt to set up a warm water port is on the Bosporus Strait in Turkey (red arrow). The Bosporus strait controls access from the Black Sea to the Aegean and Mediterranean Sea. This is a vital trading and transport hub that would finally give Russia a warm water port with access to the ocean.

In my opinion, Putin has already been positioning for a push into Ukraine and eventually to the Bosporus Strait. Putin already has conquered territory and stationed troops in the Country of Georgia, which shares a North-Eastern border with Turkey. Additionally, Putin has seized control and has set up bases on Turkey’s Eastern border in the Country of Syria. Putin has seized control of the Crimea, directly north of Turkey on the Black Sea. If Putin can seize control of more Black Sea shoreline in Ukraine, his ability to attack Turkey would be greatly increased. Putin has spent the last ten years surrounding Turkey with one goal in mind, to be able to attack them multiple fronts when the time is right. Putin will likely attack from the Black Sea with his naval forces, from the East (from Syria and Georgia) and if he can seize more shoreline in Ukraine, from the North and West.

Putin is likely in final preparations for an attack on Ukraine to seize more territory on the Black Sea. In the last few weeks, Russia has moved over 80,000 troops, Tanks, Armored Personnel Carries, Artillery pieces, and naval ships to the border of Ukraine and on the Crimea. From past experience Russia knows you cannot conduct a land war in Ukraine in the Spring because you will get bogged down in the thick mud that is prominent in that part of the world. The Germans learned this lesson the hard way in their failed invasion of Ukraine/ Russia in 1941. Putin will likely wait until late spring/ summer and launch a swift attack by Sea and Land attempting to seize Odessa and the rest of the Ukrainian shoreline along the Black Sea. Putin knows the time to strike is now, with the United States struggling to recover from Covid and a war-weary populace, Putin has made the calculation that the US will not respond to Russian aggression against Ukraine. However, this would likely weaken our position in the world and create an impetus for China to seize Taiwan. If Russia were to invade Ukraine it would pave the way for Russia to eventually seize Turkey. Turkey is a member of NATO and if invaded by Putin, the United States would have to respond. This is a World War 3 doomsday scenario.

The events of the next few years will swiftly and severely change the Global World Order. The United States and Europe are likely on the decline and China and Russia are beginning to rattle their sabers for an increased military presence. The effects of this new world order cannot be understated. It will have implications for the US Dollar as the world reserve currency as well as the large amount of foreign investment in US Debt.

If Russia does invade Ukraine and begins a slow encirclement of Turkey, expect Oil and Gold to rise precipitously as well as Defense Contracting companies such as Lockheed Martin and Raytheon. Additionally, a good short would be the RSX ETF which tracks the Russian Stock Market Index as well as betting against the Russian Currency, the Ruble. It is likely that if Russia does invade Ukraine, heavy economic sanctions will be put on Russia which will hurt the Russian currency as well as diminish their ability to produce oil.

This is a space to keep a close eye on.

As Always, Happy Trading!

** This is not investment advice. Please consult a licensed financial planner to discuss a suitable investment strategy for your specific financial situation.**