Waddell & Reed

Market Perspectives

General Richard B. Myers: Russian economy may be the victim of Putin’s Crimean expansion

Story Highlights

  • Russia has significant internal issues, especially economic.
  • We still think equities are the preferred investment choice in relative value terms.
  • It is time for “quiet diplomacy” between the West and East

Russia’s takeover of Crimea has created the most contentious period in East-West relations since the fall of the Berlin Wall. With a struggling domestic economy, Russian President Vladimir Putin has focused on trying to reignite national pride and a return to what he likely perceives as the “glory days” when Soviet military might assured the nation a spot on the world stage.

The Waddell & Reed investment team continues to monitor events and evaluate potential impact on the global financial markets. As the situation continues to unfold, Waddell & Reed asked Former Chairman of the U.S. Joint Chiefs of Staff Gen. Richard B. Myers for his perspective on the issue and his outlook for Russia. Below we’ve captured his key thoughts in this Waddell & Reed Exclusive.

The first thing to understand is that Crimea is going to be a part of Russia going forward. Russia has national interests there with the Russian Black Sea Fleet based at Sevastopol in southwestern Crimea, which is a warm water port, and there is a substantial Russian population in the region. That means Crimea is not going to be brought back to the Ukraine, in my opinion. Instead, we need to turn now to how relations between Russia and the West will evolve with a focus on areas of mutual importance.

The issue for Russia for a long time has been the question of respect. Putin’s comments to the Russian parliament in conjunction with signing the Crimean unification treaty involved a lot of breast beating, criticizing the West on a number of issues and trying to convince people that Russia is on the world stage as a major player. Russia currently sees itself as the Rodney Dangerfield of nations – since the fall of the Soviet Union they can’t get any respect. A lot of Russians want to re-establish the respect they used to command during the Cold War.

However, my personal opinion is that Putin is going about it all wrong. The situation could turn out very badly for Russia in the long-term. Russia has a one-dimensional economy that is subject to the volatility of energy markets. As long as that is the case, Russia is never going to be a player on the global economic stage. And if they can’t be a player on the economic stage, they are not going to be a player in the geopolitical sphere, other than to act as the spoiler on occasion, as recent events have illustrated.

Putin doesn’t really need to save face within Russia on the specific issue of Crimea. He’s gotten what he wanted and did it pretty easily from the Russian perspective. A lot of what happens next in Russia is going to hinge on sanctions imposed by the West. Putin is facing a fairly unified front from the United States and the European Union. Parts of Europe depend on Russia for energy and goods, so European support of these sanctions may prove to be especially important. In terms of energy, there is no way to replace the Russian production that Europe needs over the short-run. So at least parts of those relationships may continue.

 However, keep in mind the Europe has very clear memories of a more powerful Russia. As a result, independent countries that formerly were eastern European nations will be firmly on the side of the U.S. in terms of sanctions. Germany, a key European economy, has historically been somewhat sympathetic to Russian concerns, but half of Germany also has very clear memories of life under Soviet influence. The Germans may not be as sympathetic as the Russians have seen in the past.

With Crimea now a part of Russia, the challenge facing the U.S. and its allies is to get Putin to understand that Russia has significant internal issues, particularly with its economy, and that recent events will make this situation worse. Russian officials have already said that their economy shows “clear signs of crisis.” By some estimates, Russia may see nearly as much capital flight in the first quarter of 2014 as it saw in all of 2013. Meanwhile, the ruble has continued to fall to new lows against the dollar and interest rates have climbed in a bid to keep money in the country.

Russia needs a lot of capital inflow from other nations. Can you find intersections that lead to cooperation between Europe, the United States and Russia? I think you can, but there needs to be some “quiet diplomacy,” not the kind of diplomacy that we see playing out publicly in the media. If you think you don’t get any respect and everybody is still beating up on you in public, then you are not going to change your world view.

The opinions expressed in this article are those of the Gen. Richard B. Myers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through March 20, 2014, are subject to change at any time based on market conditions or other factors, and no forecasts can be guaranteed. Waddell & Reed reached out to Gen. Myers due to his experience in world affairs and in his capacity as a retained speaker for Waddell & Reed events. He is not affiliated with Waddell & Reed Inc., in any investment capacity.

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