An Inconvenient Truth for Liberals: Vote Donald, Get Peace

Letter to my American friends. The Donald will reach an accommodation with Russia. The alternative could be too awful to contemplate. This thought has momentous importance for investors – and indeed anyone who cares about the future.

Now I know many readers may not like Donald Trump, and that he has offended people – women, Mexicans, Muslims, minorities of all kinds. And I admit that his programme, as sketched out in his acceptance of the Republican Party nomination in Cleveland on 21 July, was short on detail. (British understatement…) But there is one consistent theme of his campaign and of his thinking which I believe has been under-analysed in the media. Mr Trump is concerned that the USA has made an enemy of Russia at a time when we would benefit from their cooperation.

Just as he realises that the political elites who control the West have become disconnected from the people that they are supposed to represent, he has also understood that the entire states system constructed after 1945 has reached the end of its useful life. Nothing lasts for ever; history moves on. But it is a brave man who actually calls for substantial change.

That states system was designed to defend the West – particularly West Germany – from attempts by the Soviet Union to undermine it, either through ideological contamination or military conflict. The NATO alliance, under the leadership of the Unites States of America, succeeded in not just protecting the half of Europe that was not under de facto Soviet control but in bringing it prosperity too. The slow evolution of the ECC/European Union over time spread democracy through parts of Europe which had been proto-Fascist (Greece, Spain, Portugal) and then the former communist countries (Poland and the rest) that acceded in 2003.

This happy dispensation has in recent years been undermined by a number of fundamental developments in global geopolitics. The single largest threat to Western civilisation is no longer Soviet Communism but Islamic fundamentalism. With the rise of China, America’s strategic focus has swivelled towards the Asia-Pacific region. The European Union is being increasingly de-stabilised by, on the one hand, the inherent flaws within the currency union; and, on the other, by the “refugee crisis” which so many ordinary Europeans believe has been mismanaged by the dominant partner, Germany. (The issue of Islamic fundamentalism and mass migration – from largely Muslim countries – is obviously intimately connected.)

Moreover, since the financial crisis of 2008-09 the Europeans and the Americans have fallen deeply into debt, making welfare systems – always more generous in Europe than those in America – more difficult to sustain. As the European sovereign debt crisis (2010-13 – but still ongoing in Greece) unfolded, so defence budgets in Europe were cut back. This has meant that Europe, where anti-American sentiment is widespread, has become even more dependent on America’s protection – both in terms of the nuclear umbrella and conventional forces – while shouldering a diminishing proportion of its cost. Even though America no longer regards Europe as the key strategic arena.

The American Empire

Since the Iraq adventure of 2003 and its aftermath, and in view of the manifest failure of President George W Bush’s War on Terror to halt the spread of fundamentalist Islamic ideology, it was inevitable that America would need to reappraise its role in the world. Few Americans like to think of their country as an empire – it is fundamental to America’s image of itself that it is a nation which spreads liberty across the Earth. Yet Americans will also tell you that the world would suffer from a retreat of American power. There has always been a degree of contradiction between these two ideas.

In the forthcoming US Presidential election, Mrs Clinton represents the America of 1945-2008. This was an America which made wars for the sake of peace and was always on the side of the good guys. Mr Trump, in contrast, represents an alternative future. He has made clear that his would be an America which generally keeps its nose clean but which uses its military power in unashamed self-interest and works with whomsoever it shares interests. Mrs Clinton voted for the Iraq War when she was in the US Senate; Mr Trump (who has never held elected office, let’s remember) is on record as having opposed it.

President Obama’s administration has been effectively paralysed in the foreign policy arena by a reluctance to use American power. This is because the main lesson of Iraq and Afghanistan for Obama and those who influence him – amongst them Secretary of State John Kerry – is that any military intervention may have long-term negative unforeseen consequences. As a result, on Obama’s watch, the Syrian Civil War became the single most destabilising force in world affairs. It facilitated the rise of so-called Islamic State. It precipitated the refugee crisis; and it cemented an axis between Russia and Iran. It almost caused a war between Russia and Turkey. And yet the USA and its allies have been unable to articulate any effective tangible response.

Ditto Libya, where Mr Obama sat on his hands during an ill-thought out Anglo-French air campaign in February 2011; and then casually accused his allies of having created a failed state – without offering any remedy. The Black flag of IS now flies freely over the Libyan coastal town of Sirte – where the major economic activity is people trafficking. Yet, so far, the Americans, still reeling from the murder of their ambassador to Libya when Hillary Clinton was Secretary of State, have kept away.

The Russian Bear

During President Obama’s second administration, relations between America plus its European allies and Russia deteriorated dramatically. This was because President Putin evidently permitted Russian proxies to fight a dirty low-burn war on Ukraine’s Eastern border with Russia. And, because Russia seized the Crimea in March 2014. (I don’t want to go into the complex back-story to Russia’s claim to Crimea – but let’s just say it was a part of Russia until 1954. It is also strategically vital for the Russian navy.)

Mr Putin has been demonised in polite society in America and Europe and cold-shouldered diplomatically as a result; even while Turkey’s Mr Erdogan – a pricklier pear, in many ways – was courted and schmoozed. The Russian view of these developments is largely ignored by the Western media. You have to go to RT or talk to Russians to understand that there are at least two sides to this argument. Just consider developments as the Russians see them – you are free to use your own judgment.

First, the European Union, with American support, dangled the prospect of EU membership before Ukraine. Then they intimated that Ukraine could join NATO. This alarmed the Russians who calculated that NATO missiles placed on the Ukraine-Russia border would fundamentally tilt the balance of military power. Of course, the Russians consider Ukraine a Slavic sister nation (and natural junior partner) and they are incensed by the growing anti-Russian sentiment in some parts of Ukraine, some of which is whipped up by what they see as extreme right-wing forces.

There is a precedent here. Since, second point, the Baltic States (Estonia, Latvia and Lithuania, which were part of the Soviet Union until 1991) first became members of NATO, then joined the EU and then became militarised. At the start of the NATO summit in Warsaw on 06 July, outgoing Prime Minister Cameron, as a last gasp, announced the despatch of 500 British infantry to a new permanent base in Estonia – a country with which Britain has had no historical affinity. These tommies will be based about 150 kilometres from Russia’s second city, St. Petersburg. An additional 150 UK troops will be stationed in Poland and 3,000 army personnel in the UK and Germany will be put on readiness to fly to the Russian border. (Militarily, by the way, this is absurd, since the Russians have about 500,000 men available in the region – dangerous gesture politics.)

Third, in May this year, the US activated a US$800 million land-based missile defence station in Deveselu, southern Romania which will form part of a larger and controversial European shield[i]. The US says the Aegis system protects NATO countries from short and medium-range missiles, particularly from the Middle East. (Iran?) The Russians see it as a provocation on their doorstep. In fact, on 17 June, President Putin told a press conference of Western journalists at the St. Petersburg International Economic Forum that Russian intelligence has established that the Aegis system was not at all defensive, but had the capacity to launch the latest generation of offensive long-range missiles[ii].

Fourth, there is the low-grade economic war against Russia. This is not just the regime of sanctions that are still in place, by terms of which most major Russian companies are denied recourse to Western capital (which is still flowing into an increasingly aggressive China). Russia is being treated as a pariah at precisely the moment that its help is required in the most important arena of all.

These things are perceived in Russia as ratcheting provocations. They believe that America and Britain have refused to allow Russia to defend its legitimate interests in its historic near abroad. Russians will tell you that Mr Putin does not seek to conjure the Soviet Union back into existence – perish the thought – but that Russia must ensure that neighbouring states, including Ukraine, are not militarised to Russia’s strategic disadvantage.

Russo-American rapprochement?

In an interview with the New York Times on 21 July[iii], Donald Trump set out a few indicators of how a Trump administration will differ from previous ones in foreign policy. Firstly, rich NATO countries like France and Germany and also South Korea – which don’t spend enough on defence, yet hide under America’s coattails – must contribute more. Second, America needs allies but We’re not going to lecture them. Third, Trump said that he would like to get along with Russia if he is elected, and complimented Putin, saying he is more of a leader than President Barack Obama. Mr Trump believes, rightly in my view, that there will be no defeat of Islamic State without Russia on board.

If Mr Trump wins the race to the White House this coming November we may anticipate a rapprochement with Russia in 2017. This would probably involve the West’s recognition of Russia’s de facto control of Crimea in exchange for a softer Russian policy in Ukraine and the scaling back of Russian offensive weapons systems in Kaliningrad Oblast. (Kaliningrad – Prussian Königsberg until 1945 – is just 600 kilometres from Berlin.) A Clinton presidency, in contrast, would probably result in a further deterioration of relations with Russia.

What does all this mean for investors?

Just as the British and international elites tried to scare the British people out of voting LEAVE with warnings of economic Armageddon, so the American people will be bombarded with warnings and threats concerning a Trump victory in the months to come. Americans, like the British, do not take well to being threatened. A Trump victory would probably cause the US Dollar to wobble – uncertainty and all that – but the US stock markets would most likely be sanguine. Increased defence spending would boost major contractors like Lockheed Martin (NYSE:LMT). The day that Presidents Trump and Putin shake hands and embrace will see a surge of optimism in the markets. Market buoyancy would give the Fed greater scope to raise rates. Alternately, if Mrs Clinton wins and this unnecessary global geopolitical tension is allowed to increase further, there will surely be a moment of panic in years to come.

Another little item on President Trump’s “to do” list will be relations with China. Now that’s not quite so straightforward – but I’ll offer some thoughts on that shortly. Of course, my dear American friends, it’s entirely up to you.

[i] See: http://www.bbc.com/news/world-europe-36272686

[ii] Watch the video of Putin’s remarks (with English subtitles) at: http://russia-insider.com/en/politics/putin-loses-it-journalists-i-dont-know-how-get-through-you-people/ri15456  Actually, contrary to the press report, Putin did not “lose it” but was characteristically forensic in his analysis.

[iii] Transcript at: http://www.nytimes.com/2016/07/22/us/politics/donald-trump-foreign-policy-interview.html?_r=0