March 4th 2014 will perhaps be in the history books in the same way as October 24th 1962. In 1962 as the USA prepared for nuclear war fear was replaced by relief as Russian ships turned away and the Cuban missile crisis was defused. On March 4th this year the massed divisions of the Russian Army stopped their advance and the feared occupation of Eastern Ukraine was cancelled. Was it the diplomats or soldiers who achieved this? No, it was a new and powerful force for peace which blunted the charge; it was the fall in the value of the rouble, the collapsing stock market and the rising yields on government debt which resounded within the Kremlin’s walls. Militarily they could have been in Kiev by nightfall but at what cost?
The traditional direction of causality has always been that those who have money can afford guns, and therefore that the wealthiest world powers have often been the best armed. But the relationships between guns and money are neither constant nor simple and they seem to have entered a new phase on March 4th.
The old relationship has not always been that straightforward as there are stages of development and life cycles of empires to contend with, and as a wild simplification the key is to be found in the interplay between how well organised a government is and its stage of development with swift and relatively bloodless periods of expansion and bloody periods of disintegration. Often within a country it has been the bankers and industrialists who have tried to hold back wars but I argue below that the internationalisation of financial markets has now changed the game forever.
Any discussion of the Ukraine should start with geography. Indeed the clue in English is in the use of the definitive article. Why is it ‘The Ukraine’, not simply ‘Ukraine’ – for the same reason as it is ‘The United States’ or ‘The Nederlands’ – an adjective requires an article – because Ukraine means border land and so has a ‘the’ before the description. It lies at the border between North and South, of East and West and life on the borders of great civilisations and major empires will often be complicated. The sea and water ways are still today the principle trade routes and the Crimean peninsula is the closest opening to the open sea from the Russian hinterland. Recent history has, particularly from the British viewpoint, put Russia as an expansionist aggressor. But actually, although Russian influence was expanding for much of history, the last 150 years are best seen not so much explained as Russian expansion as in the contraction of the Turkish and Austro Hungarian empires. The reason we, the British, went to war in Crimea last time we fought the Russians was to stop them inheriting the old Eastern Empire, which has stayed pretty well intact since the fall of Rome. The reason we then, exactly 100 years ago, joined them in the war which destroyed not only the Ottomans but the Hapsburgs and the Romanovs was to stop the Kaiser taking over the remains of the Austro Hungarian Empire. And so the Ukraine today, 100 years on, is still remembering the shot that rang out in Sarajevo. Perhaps one hundred million people have died in the intervening century as the death throes of these great European empires continued, and the replacement nation states seek to find their various identities – and in the case of the Ukraine, its borders. The Ukraine has generally been fought over by the great powers as a side issue to their ownconflicts and its current borders are essentially those imposed on the defeated Russia by Germany in 1917 – the German motive being to establish a chain of border states it would use as a buffer to contain Russia. It was demilitarised manoeuvring space which was uppermost in design not national or ethnic identity.
So if history and geography have conspired to make the Ukraine a strategically important mixed up place pulled in all directions, what has changed and why do I feel rather hopeful that this time round local tensions will not lead to two world wars and death, dismemberment and impoverishment for almost every nation involved.
Finance and Economics
Among the dangerous fallacies put forward by an extremely insightful but disastrously erroneous Karl Marx was that the Capitalists wanted wars and prospered on the back of conflict. From the start of recorded history the enemy of enterprise has been governmental interference and in war governments have always felt free to intervene without limit. Confiscation of goods, land and workers were just as normal in Caesar’s time as today when a state went to war; disruption of markets and trade routes and misallocation of resources were just as much a feature of the crusades as religious fervour. Marx was right only in one respect – that in Victorian times the heavy engineering industry was prominent and profitable and the process of arming navies and land forces involved great expenditure on heavy metal. He confused this with a theorem that if you created a well- armed force that you would use it and certainly some of the explanation of some conflicts (including perhaps the first world war) depend on a fatal combination of strong armies and weak governments. The weight of history though is on the side of strong governments and strong armies being necessary and usually sufficient for prolonged periods of peace.
Financial markets now are a better defence than the Maginot line
The Treaty of Brest-Litovsk created a line of buffer states to protect against Russian expansion and the armed response of NATO to the occupation of Crimea has been to extend air patrols over the border states, but not to garrison them. Why then did President Putin call off the massed invasion force that are ready to roll into the eastern part of the Ukraine and stop at occupying just the Crimean peninsula which the whole world (probably including many Ukrainians) and most of its inhabitants are very happy to see re-united with Mother Russia? The answer is to be found in the development of financial markets. When the first world war broke out the Governor of the Bank of England briefed the government on the outflow of gold but the wealth of the governing classes was still based on land and the new wealth creators measured their success in factories, in ships, in plantations and their income and access to their assets was still close to home. To the extent they had financial assets or used banks these would have a strong domestic bias, and although there were family links and international financial houses like Rothschild, and even international banks like Societé Generale, these were much smaller than the domestic enterprises outside Britain. The British Empire was international but it was in 1914 still essentially British and the levers of power were centred in London. Over the last century all of the major economies have become dominated by financial markets (China least so and most recently) and international capital controls have almost disappeared. The free flow of capital has produced unparalleled prosperity and growth across the world, and the creation of financial assets has proceeded faster than real economic growth in all developed nations. Financial markets allow pieces of paper (today actually assorted electrons) to represent future claims on output, future claims on assets and services and allow them to be exchanged, valued and to provide an easy way of satisfying the universal desire for security. As long as there is no war, as long as the financial markets which promise the future access to resources still exist, as long as the pieces of paper can one day be turned into travel, houses, food and warmth. And there you have the secret of why, on Tuesday 4th March 2014, President Putin postponed or cancelled his rescue mission for the denizens of Donetsk. His investment portfolio had just fallen by 20% – and worse – how will the Russian ruling classes enjoy their wealth if they cannot get dollars, visit London shops or send their children to western schools and universities?
But the most significant problem he faced was that the entire prosperity of modern day Russia has been based on turning real assets – commodities – into financial assets – and investing them in international markets. The three-fold threat of falling values, of denial of access and of an end to creation of new financial wealth was the world’s defence, and it worked.