Russia - The Threat of a New Cold War

in Russia

Quite often in our writings we focus on Big Brother in his guise as Uncle Sam. It's not that we are anti-American - quite the opposite in fact. We love the spirit and wording of the American constitution, and the freedom of choice and expression that America stands for - in theory. That's why we are saddened that the practical experience on the ground stateside today is rather different from the theory, and why we frequently choose to publish articles critical of the US government in the hope that this trend may be reversed.

However, we must not wear blinkers, and these we are seriously concerned about another Big Brother state which has a worrying and fast-expanding influence on the world stage. The Russian Bear, feared since the times of the Tsars, is again rearing its head. Today it's not just the Russian nouveaux riches invading flashy European resorts, but we see well-trained Russian troops carrying out meticulously executed attacks on the territory of other sovereign countries.

As I write, the first serious war on European territory since the break-up of Yugoslavia is taking place. I'm hopeful that the killing won't continue for long, and that a solution to this conflict between Georgia and Russia will have been found before you read this.

The conflict over South Ossetia has been "on ice" since the break-up of the Soviet Union. In the meantime the world forgot about it. Most likely, the world will soon forget about this brief revival of hostilities. But there is a more serious underlying threat here, which is the strength of Russia, and the emergence of a new, more subtle form of cold war. This will affect us all, particularly as global businesspeople and investors. Those of us who don't learn from the past are doomed to repeat it, as the saying goes.

Just a couple of weeks before the surprise outbreak of hostilities in South Ossetia, I and Peter Macfarlane wrote a piece for our blog, based on a report in Time magazine about increasing Russian influence in the Caribbean. President Hugo Chavez of Venezuela was present in Moscow to sign a billion dollar arms contract. Simultaneously, Russia announced that it was considering using its old ally Cuba as a base for refuelling war planes in America's back yard, sparking a feisty reaction from Fidel Castro who stated in effect that he didn't have to confirm, deny or justify anything. All this in turn came surprisingly close after the announcement of a US missile defence system to be built in what Russia considers its back yard, the Czech Republic. Meanwhile in Asia, July saw the signature of a milestone border demarcation agreement between Russia and China, no doubt seeking to build up influence in the orient as a counterbalance to NATO.

A recent article in the Financial Times (August 13th, 2008) opines that in attacking Georgia, the Kremlin has laid down a new challenge to the west. Analyst Charles Clover writes that by attacking an American ally and prospective NATO member and getting away with it, "Russia suddenly belongs to the elite group of countries that can write their own rules." He continues that "Few doubt that Georgia is the first in a series of moves to re-establish Moscow's control over the former Soviet Union."

Since the turn of the century, Russia has undergone a startling transformation which many in the west have failed to notice. While Europeans have been closer to the action, many across the pond have been so focused on the terrorist threat that Russia has risen unchallenged. The pro-western liberalism of the 1990s, when Russia was beholden to the west, is long gone - the new theme of the Russian government is "patriotism." The army has also been turned around and is now in much better form than a decade ago. Clover calls the Georgian campaign a "textbook example of modern warfare", apparently copied from the US campaign in Kosovo.

Russia now has the third-largest reserve of foreign currencies in the world, and a huge trade surplus. The source of all this wealth, of course, is oil and gas - and to a lesser extent minerals. We also see the spectacle of thinly-disguised attempted government takeovers of foreign investments in this area.

Worryingly, Western Europe replies on Russia for more than a quarter of western Europe's gas, without which many Europeans would be unable to cook and heat their homes in winter. Russia has a history of mysteriously reducing supplies due to "technical difficulties" or of fiddling with prices at short notice.

From an investment point of view, Russia is becoming an increasingly risky market. But we believe that commodity prices will remain high and this will give Russia the financial status it needs to expand its "patriotic" aims. Russia has substantial leverage to manipulate hydrocarbon prices, and even the gold price. There may be opportunities here, but there are also substantial risks. You can be better prepared for both by gaining a deeper understanding of the underlying geopolitical situation. Those investing or living in Eastern Europe or the Baltic boom states of Estonia, Latvia and Lithuania might want to consider getting a "Last Plane Account."

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Peter Macfarlane has 1 articles online

Englishman Peter Macfarlane is an author and lecturer on offshore finance, investment, due diligence and wealth creation matters. After fifteen years advising high net worth clients on offshore asset protection structures such as companies, trusts and private interest foundations, he decided on a career change and now mentors individuals who are interested in creating, preserving and growing wealth in a secure offshore environment. Peter defines wealth in the broadest sense, believing that money is worthless if you don't have health and happiness. He is now joint editor of The Q Wealth Report, a publication dedicated to publishing freedom, wealth and privacy information for a select audience. More detailed articles about wealth creation are available at the Q.

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Russia - The Threat of a New Cold War

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This article was published on 2010/04/04