Talk Of Another Cold War Is Just Talk

Russian troops pour over a border. An autocratic Russian leader blames the United States and unspecified "radicals and nationalists" for meddling. A puppet leader pledges fealty to Moscow.

It's no wonder the crisis in Ukraine last week drew comparisons to Hungary in 1956 and Czechoslovakia in 1968 or that a chorus of pundits proclaimed the re-emergence of the Cold War.

But there's at least one major difference between then and now: Moscow has a stock market.

Under the autocratic grip of President Vladimir Putin, Russia may be a democracy in name only, but the gyrations of the Moscow stock exchange provided a minute-by-minute referendum on his military and diplomatic actions. On Monday, the Russian stock market index, the RTSI, fell more than 12 per cent, in what a Russian official called panic selling. The plunge wiped out nearly US$60 billion (RM195 billion) in asset value, more than the exorbitant cost of the Sochi Olympics. The ruble plunged on currency markets, forcing the Russian central bank to raise interest rates 1.5 percentage points to defend the currency.

Putin "seems to have stopped a potential invasion of Eastern Ukraine because the RTS index slumped by 12 per cent" on Monday, said Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington.

On Tuesday, as soon as Putin said he saw no need for further Russian military intervention, the Russian market rebounded 6 per cent.

Putin seems to be "following the old Soviet playbook", in Ukraine, Strobe Talbott, an expert on the history of the Cold War, told me this week. "But back then, there was no concern about what would happen to the Soviet stock market. If, in fact, Putin is cooling his jets and might even blink, it's probably because of rising concern about the price Russia would have to pay."

Talbott is the president of the Brookings Institution, a former ambassador at large who oversaw the break-up of the former Soviet Union during the Clinton administration and the author of The Russia Hand.

Russia is far more exposed to market fluctuations than many countries, since it owns a majority stake in a number of the country's largest companies.

Gazprom, the energy concern that is Russia's largest company by market capitalisation, is majority-owned by the Russian Federation.

At the same time, Gazprom's shares are listed on the London stock exchange and are traded over the counter as American depositary receipts in the United States as well as on the Berlin and Paris exchanges.

More than half of its shareholders are American, according to J.P. Morgan Securities. And the custodian bank for its depository receipts is the Bank of New York Mellon.

Many Russian companies and banks are fully integrated into the global financial system.

   The old Soviet Union, in stark contrast, was all but impervious to foreign economic or business pressure, thanks in part to an ideological commitment to self-sufficiency. As recently as 1985, foreign trade amounted to just four per cent of the country's gross domestic product, and nearly all that was with  communist satellite countries of Eastern Europe.

But the Soviet Union's economic insularity and resulting economic stagnation was a major cause of the Soviet Union's collapse.

According to Talbott, the Soviet Union's president at the time, Mikhail Gorbachev, was heavily influenced by Soviet economists and other academics who warned that by the turn of the century in 2000, the Soviet economy would be smaller than South Korea's if it did not introduce major economic reforms and participate in the global economy.

To attract investment capital, Gorbachev created the Moscow stock exchange in 1990 and issued an order permitting Soviet citizens to own and trade stocks, bonds and other securities for the first time since the 1917 Bolshevik revolution.

Even before this week's gyrations, the Russian stock market index had dropped near eight per cent last year, and it and the Russian economy have been suffering from low commodity prices and investor concerns about the Federal Reserve's tapering of bond purchases -- factors of little significance during the Cold War.

By contrast, today "Russia is too weak and vulnerable economically to go to war," Aslund said.

"The Kremlin's fundamental mistake has been to ignore its economic weakness and dependence on Europe.

"Almost half of Russia's exports go to Europe and three-quarters of its total exports consist of oil and gas. The energy boom is over, and Europe can turn the tables on Russia after its prior gas supply cuts in 2006 and 2009.

"Europe can replace this gas with liquefied natural gas, gas from Norway and shale gas. If the European Union sanctioned Russia's gas supply to Europe, Russia would lose US$100 billion or one-fifth of its export revenues, and the Russian economy would be in rampant crisis."

Putin may be "living in another world," as German chancellor Angela Merkel put it this week but surely even he recognises that the world has changed drastically since 1956 or 1968.

He has no doubt been getting an earful from his wealthy oligarch friends, many of whom run Russia's largest companies and have stashed their personal assets in places like London and New York.

The oligarchs "would not dare to challenge him", a prominent Russian economist told me. "But they would say something like they would have to lay off workers and reduce tax payments."

Russia does have uniquely strong ties to Ukraine.

"Of all the former provinces of the old Soviet Union, it's the most painful to have lost and the one many Russians would most want to have back," Talbott said.

"The ties between Kiev and Moscow go back over 300 years. Ukraine is the heart of Russian culture."

With Russian troops entrenched in the Crimean Peninsula and some Russian Ukrainians clamouring for annexation, there may be little the US or its allies can do to restore the status quo.

"Containment, in a muted and modified way, will once again be the strategy of the West and the mission of Nato," Talbott predicted

But not another Cold War, which is surely a good thing.

"A propaganda war is completely feasible," the Russian economist said.

"The recent events were completely irrational, angering the West for no reason. This is what is most scary, especially for businesses.

"Instead of reforming the stagnating economy, Putin scared everybody for no reason and with no gain in sight. So it is hard to predict his next actions. But I think a real Cold War is unlikely."

New Straits Times