Riding the Tiger By: Gabriel PotterMBA, AIFA® 2014.11.26

“He who rides the tiger dare not dismount.” – Chinese Proverb

Those of you who keep up with our weekly flash reports have seen frequent reference to general slowdowns in key emerging markets, China and Russia.  Furthermore, these economies have been tightening their own economic ties, with future Russian oil and natural gas earmarked for the rapidly growing Chinese economy.  However, in regards to political tone, they could not be further apart.  China seems to embrace the international social contract which promises better living standards and influence, while Russia has dismissed this arrangement.

China’s sphere of influence has been expanding and this has been a source of tension with their neighbors, particularly in the South China sea where fishing and oil resources are being contested with Vietnam, Japan, and others.  China has the ability to utterly overwhelm most of its neighbors to settle these disputes militarily.  Despite this, China is actively trying to peacefully compete the world at large, investing in frontier markets in Africa, relaxing some of its more stringent rules from the Mao era, engaging with the Western powers in Climate change agreements.  This emphasis on soft power is purely for self-interested reasons; China wants to expand more into global capital markets, as emphasized by its Shanghai-Hong Kong Stock Connect link which opened this Monday.  China wants to become a great global power and dares not jeopardize this goal by frightening off access to global markets and knowledge.  China’s leadership recognizes (correctly) that its growing power is better preserved in the long-term with a multi-faceted, nuanced approach to global diplomacy.  China has been on a long path of modernization and global integration from which it deeply benefits, but it must also respect the rules (at least to the outside world).

Russia started the new year with the Olympics:  a grand international ritual in the spirit of friendly competition.  Since then, Russia has been in a hurry to antagonize or threaten its neighbors rather than engage in any multilateral, brokered agreement with other countries.  The Ukrainian crisis sparked off this new approach from Moscow.  I am definitely not an expert on the complex cultural tapestry of the Ukraine, but some scholars might argue that the annexation of Crimea has at least some basis given their shared history and recent regional elections.  However, there are fewer civil agreements possible given the heavy-handed annexation and limited justifications.  Russia continues to advance its worldview through intimidation and dire warnings.  For instance, Russia has been conducting military drills within territory belonging to neighboring Baltic states and northern Europe, while suggesting that if border states combine with greater forces (i.e. NATO) to protect themselves, that World War III would be the direct result. 

Despite of – or perhaps even because of - international condemnation and sanctions, Vladimir Putin is still riding high on a wave of nationalism that solidifies his control of the beleaguered state.  As we’ve noted in our quarterly comments, the international sanctions are relatively minor, but the signal being sent is strong:  Russia is breaking the social contract.   After nearly 15 years of nearly unfettered authority, either as President or Prime Minister, Putin has suggested that he doesn’t want to run Russia for life, but merely another decade or so.  Not coincidentally, Putin has asked his financial team to plan for another decade of sanctions and recession, while increasing ties to eastern powers, far from European and US influence.  The great national resources and military strength of Russia probably can sustain it for another ten years, but at what cost to Russian progress and long-term economic potential?  Putin is eager for Russia to return as a great global power, but his policies will only increase his country’s isolation, not advancement.  Moving against the will of the international community has, paradoxically, bolstered Putin’s personal influence within Russia, but the inexorable will of the markets can only damage future prospects for his country. 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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