The financial markets around the globe gyrated this week in line with the crisis in the Crimean Peninsula and the wider Ukrainian imbroglio. That is as it should be, and the recent spate of articles and programs about 1914 — marking the start of what is likely to be a prolonged media focus on the centennial of the First World War — provided an ideal backdrop for heightened concern about crises in Eastern Europe.
However, for most Europeans, and surely all Russians — but surely not most Americans — Crimea resonates for reasons that have nothing to do with the First World War, or even the Second for that matter, during which Stalin expelled the peninsula’s ethnic inhabitants. For Russians, British, French and anyone who is obliged to learn European history in high school, Crimea is a noun that is synonymous with war, as in ‘the Crimean War’.
This was fought in the 1850s, between the British and French on the one side and the Russians on the other. The Americans, at this early stage in their history, were busy conquering their empire in the southern and western areas of the rapidly-expanding United States, expelling the Spanish and Mexicans and exterminating the Indians — sorry, make that ‘Native Americans’. Back in the Old Continent, only the Russians were expanding geographically in the Eurasian land mass, so that the former rivals and enemies, Britain and France, now allied to support the crumbling Ottoman Empire and block Russia’s southward expansion.
Of course, forty years earlier, Britain and Russia had been on the same side, against the expanding Napoleonic Empire, and sixty years after that, Britain, France and Russia all fought together in the First World War against the new rising power in Europe, namely Germany. Because they did a poor job, they were forced into a rematch a generation later in which, after a very poor start, they went all the way to Berlin.
You can see why Americans don’t understand much European history — it’s messy, complicated and confusing. But Russians certainly do, which is yet another massive advantage Vladimir Putin has over Barak Obama. As for Russia’s erstwhile enemies of the Crimean War, Britain and France, they are barely bit players. In military terms, they were stretched to deal with the late Libyan dictator and required American logistical support to knock him over. When it comes to a confrontation with Russia in its own backyard, they are non-starters.
It is a sobering thought that in the 1850s, under Palmerston as Prime Minnister and at the very apogee of British global hegemony, Britain was able to contemplate, execute and almost win a war in the Crimea, despite the incompetent and bungling military leadership immortalised in ‘the Charge of the Light Brigade’.
In any event, in 2014 the only among the then-protagonists that is remotely comparable in shape, size and clout to what it was in 1851 is Russia. The comparison extends beyond the geo-political and military spheres to the financial and economic. Now, as then, Russia needs international capital to finance its imperial ambitions, and so must avoid cutting itself off from the global markets. Then the latter were centred in London, today they are more diffuse, but London, New York, Tokyo and Hong Kong share one trait — they are not inherently Russophile, rather the opposite.
The other restraint on Putin exercised by the markets is that the kleptocratic gang that runs Russia keep skimming off its profits and sending them overseas, mainly into real estate and other hard assets in London, New York and elsewhere. This makes them vulnerable at the personal-financial level — not a factor that the Tsar and his ministers had to worry about.
Given the near-impotence of the West in military terms when it comes to preventing Russia operating in its own immediate environs, the financial card is the best one that the Western powers have to play. But using it would mean destroying the attractiveness of their own financial centers for other countries — notably, but not just, China — who use London, New York etc. as sources of capital and as funk holes and safe havens for their own (usually ill-gotten) personal wealth. In other words, this is a nuclear option, something that you have and everyone knows you have, but that you really don’t want to use because it is so destructive — including, potentially, to yourself.
The financial aspect, and especially the illicit, personal, ‘black’, aspect thereof, is the truly ‘modern’ development that makes the current confrontation between Russia and the West different from not only the 19th century Great Power ‘Great Game’, but also from the Cold War and its ideological rivalry.
It is not clear if that difference will be important, but it should work as a moderating factor on all sides, especially the Russians (but not the Ukrainian people). That is why the market gyrations — which, as usual, have been more dramatic in the equity market, but are much more important in the bond and currency markets — are not merely reactions to the maneuverings of the politicians, but actually impact the outcome of the political and diplomatic developments. Stay tuned.