Outside the Box: The Colder War

 

The story of energy is the story of human expansion. From the days when we roamed the African savanna, we tamed first fire and then other forms of energy, using them as tools to control our environment and improve our lives. The control of energy has always been at the heart of the human story.

This week our Outside the Box essay is from my friend Marin Katusa, who has written a fascinating book about a part of that story, a subplot of intrigue and conspiracy. Under Putin, Russia has aspired to dominate the energy markets. Called The Colder War, Marin’s book is a well-written tale of the rise of Putin and his desire to change the way the world’s energy markets are controlled.

I sat down a few months ago with an advance copy, not sure what to expect. Marin is personally very colorful and entertaining, but would that charisma translate to words on a page? I started on a Sunday afternoon and finished before I laid my head on the pillow that night. The Colder War was an entertaining and gripping story of the rise of Putin and the shifting sands of the world of oil. It was also an insightful overview of the last century. I highly recommend it.

At the end of the day, I disagree with Marin as to Putin’s ability to achieve his vision. While Putin wants to displace the petro-dollar as the global medium of energy exchange, he will fail. But maybe that’s the hometown boy in me thinking my team will win.

But that is the last 10% of the book. The first 90% is an easy must-read. Warning: it is not written from a US perspective. Marin’s view of the events of the last century sound more like those I hear when I travel outside the US.

I took the liberty of checking his story with a good friend of mine, Jerry Fullenwider, a very successful Texas oil entrepreneur, who lived in Russia during Putin’s rise. He confirmed Marin’s tales and more. He has his history right. And what a history it is. Today’s OTB is the introduction to the book, and if you’re intrigued, you can listen to Marin talk about the book and obtain a copy here.

I write this note from the airport in Geneva, where I am waiting on a plane to return to Atlanta for a day and then home. It is hard to imagine a more perfect few days than I have spent here on the lake.

It has been an exhilarating week, full of thought-provoking lectures and conversations. I am ready to go home and meditate on what I have learned. As usual, I intend to work and write on my way back to the States, so that I am ready to go to bed when I arrive. You have a great week.

Your watching the dollar analyst,

John Mauldin, Editor

Outside the Boxsubscribers@mauldineconomics.com

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The Colder War

By Marin Katusa

I am going to tell you a story you’ll wish weren’t true.

Sometime soon, likely in the next five years or so, there is going to be an emergency meeting in the White House Situation Room. It probably will start in the wee hours of the morning, when the early risers among Europe’s oil traders and currency speculators have already begun to scramble out of the way of what’s coming. None of the worried participants in that meeting will have a good solution to propose, because there will be no way for the United States to turn without embracing calamity of one kind or another.

The president will listen as his closest advisers lay out the dilemma. After a long silence, he will say, “You’re telling me that everything – everything – is coming unglued.”

He’ll be right. At that point, there will be no good options, only less awful ones.

Don’t count on the wise and worldly who occupy the highest echelons of government power to know what they are doing when they sit in that meeting. Solving the puzzle of what to do will fall to the same kind of people who today are standing by and letting the disaster build.

Some of them just don’t know any better. They see all of mankind’s turmoil as cartoonlike conflicts between white hats and black hats. Others know that reality is more complex, but choose to feign ignorance – it’s so easy, and often politically convenient, to let everything boil down to good guys battling bad guys.

For years, political power players in the United States have joined their media allies in portraying Vladimir Putin as a coarse bully, a leftover from the KGB, a ruthless homophobic thug, a preening would-be Napoleon who worships men of action – especially himself. Even Hillary Clinton, who should know better, likened him to Hitler.

The ruthless part is quite real, but there is so much more to the truth. I’ve been studying Putin’s moves for as long as I’ve immersed myself in analyzing world energy markets – over a decade now. He’s a complicated man whom Americans have been viewing through the simplifying lens their leaders like to hold up. He is less of an ogre but far more dangerous than politicians and the media would lead you to believe.

It has been a terrible mistake for Washington’s political circles to dismiss him for so many years as just a hustler temporarily running a country, to cast him as a shooting star destined to flame out in the unforgiving world of Russian politics. It has been to his advantage that short people tend not to be taken seriously, even if, like Putin, they are martial arts champions and have a chiseled physique to display at age 62. And his less-than-dignified moments posing as He-Man have played into our readiness to treat him more as a clown than as a dangerous competitor.

But Washington should never have thought of him as a Cold War relic, any more than it should have thought of Russia as a once-lionlike country that had devolved into a goat. It should have seen that Putin has a long-range plan for Mother Russia – a map covering decades, not the four-year election cycles that dominate the attention of U.S. politicians – and both the vision and the resources to make the plan work. For 15 years, Putin has been formulating, bankrolling, and directing Cold War: The Sequel. Or, as I like to term it, The Colder War. He’s in it to win it.

And the way he plans to win it isn’t through the sword, but through control of the world’s energy supplies.

There’s no undoing the U.S. government’s failures to date. What I can do now is tell you the true story of the Colder War. I can trace the connections of world events you’ve read about and that only seemed unrelated. I can explain why Putin does what he does, so that you can anticipate what he’s likely to do next. I can show you the worldchanging power shift that is little recognized even though it is unfolding in plain sight, right before our eyes.

It’s all about energy – oil, gas, coal, uranium, hydroelectric power. Today, when you’re talking about energy, you’re talking about Putin. And vice versa.

Energy is what makes the world go round. For most of the past 60 years, the United States has prospered, largely because it has dominated the energy market but also because it issues the currency in which energy and other resources are traded – a nice monopoly to have. The United States has been top dog for so long, it’s a shock to imagine that things might soon be different.

Slowly but surely, however, U.S. strength has been ebbing as Putin positions himself for the final push. While the United States dithers over green energy, Russia has a Slavic tiger in its tank.

To understand where Vladimir Vladimirovich Putin is taking Russia, you need to go back to the country’s lost decade, the years after the collapse of the Soviet Union in 1989. If you were a Westerner, it was a time of prosperity and of self-congratulation for having won the Cold War. But if you were an average Josef Vodka caught up in the chaos that followed the demise of communism, it was a time of hardship, dislocation, and frightening uncertainty. And if you were Vladimir Putin, it was a time of anger and hardening – and preparing.

Given the country’s stunning rise since the 1990s, it’s easy to forget how bad things were.

It was 10 dismal years of lawlessness presided over by politicians who had been left bewildered by the task of bringing their country into the modern world. The sad decade was marked by the ascent of wildly profitable criminal syndicates and a coterie of oligarchs who fed on the government’s naïve plans for turning state enterprises into private ones. Operating as barely legal businessmen, they became billionaires almost overnight.

While the few celebrated, morale among ordinary Russians sank. They had just suffered through a long war in Afghanistan and its humiliating end. Then came the implosion of the Soviet Union, the grand empire they’d been told had been built for the ages. National pride had become a painful memory.

When the communist economy ground to a halt, no one in the government of the newborn Russian Federation knew what to do. Free markets were just beginning to emerge. Sizable and mature private businesses didn’t exist. There were no banks competent to judge credit risks. Almost no one understood stocks, bonds, commodities, or any kind of market other than the black one that had long flourished – and continued to do so. Property rights were a slogan with uncertain application. The ruble was worthless outside the country while internally inflation ran wild. Jobs disappeared, leaving millions unemployed. Infrastructure was crumbling. Millions of Russians fell into destitution.

It was the very definition of hard times. People’s prospects were so bleak that many clamored for a return to communism, the despised regime under which they at least knew where they stood (“We pretend to work; they pretend to pay us,” as the Soviet-era joke went). And the problems weren’t just with the economy.

There was, in particular, Chechnya. A secessionist movement of Islamic Chechens was reading the disorganization in Moscow as an invitation to press their bid for independence. They accepted the invitation, and in late 1994 the First Chechen War began.

Putin’s predecessor, Boris Yeltsin, was still in office at the time. Despite Moscow’s superior manpower, weaponry, and air support, the ragtag Chechen guerrillas fought Yeltsin’s mighty Russian army to a bloody, embarrassing stalemate.

By late 1995, Russian forces were utterly demoralized. That, along with a Russian public still smarting from the Afghanistan disaster and deeply opposed to the present conflict, led Yeltsin’s government to declare a ceasefire at the end of the following year.

Putin had been watching the debacle from afar, and it ground away at him. During most of the conflict, he was just another minor political figure in St. Petersburg, far removed from Kremlin politics. But he was filled with ambition and had already set his sights on higher office. To that end, he gathered together a circle of close confidants and in 1996 moved to Moscow, where a former colleague had invited him to join the Yeltsin administration.

Surrounding himself with loyal supporters was a shrewd strategy, or it might have been simply a matter of caution, given the hazards of Russian politics. Either way, it insulated him from potential enemies and would give him an unassailable base when he later moved to consolidate power.

Later came soon.

By 1998, Vladimir Putin – a formerly-obscure, low-level KGB agent – had become an ascendant political star to whom Yeltsin had taken a liking. First, in July 1998, Yeltsin had installed him as head of the Federal Security Service (FSB, successor to the KGB). Then, barely a year later, he appointed Putin to the office of prime minister.

In retrospect, it seems a meteoric rise. At the time, though, no one thought much of Putin. After all, he was Yeltsin’s sixth prime minister in eight years; it was a dead-end job. The new guy wasn’t expected to last longer than any of his predecessors.

Not for the last time, Putin was badly underestimated.

Becoming prime minister immediately drew Putin into the Chechen fray, which had heated up again. But rather than see it as a hopeless mess, he saw an opportunity to prove how different he was from the indecisive Yeltsin, whom he already felt confident he could replace. And the first milestone on that path was to engineer an ending very different from the first Chechen conflict.

Which he did.

In late September of 1999, newly-installed Prime Minister Putin ordered Russian warplanes to strike the Chechen capital of Grozny. A week later, Russian armored battalions that had been amassed on the border for months rolled across it. The Second Chechen War was on.

This time around, following a scorched-earth strategy, the Russian military turned its weapons on civilian targets. To avoid a repeat of the heavy Russian casualties sustained in the First Chechen War, they advanced slowly and in overwhelming force, using artillery and air power to soften Chechen defenses. Nearly 300,000 of Chechnya’s 800,000 civilians fled from the Russian advance and sought refuge in neighboring Russian republics.

The early success of the campaign in Chechnya positioned Putin perfectly for the stunner that came next: On December 31, 1999, Boris Yeltsin – whose approval rating had fallen to single digits – abruptly resigned. As provided in the Russian constitution, Prime Minister Putin succeeded Yeltsin and became acting president. Putin had jumped from an appointment as head of the FSB in July 1998 to an appointment as prime minister barely a year later, and then to acting president three months after that. It was an astonishing rise, unprecedented in Russian political history.

Had Putin expected to move so far so fast? Was it all planned? Of course we can’t know. But whether it happened mostly by design or mostly by chance, we can see that he played carpe diem masterfully.

He knew the kind of leader Russians had been pining for, so he gave priority to advancing his persona as the fearless tough guy. The one who pushed the take-no-prisoners approach in Chechnya. The one who would leave the president’s office to fly into the war zone to express his support of, and solidarity with, the troops. That was something Yeltsin never would have done.

The Russian people notice shows of strength, and they like them.

In an August 1999 poll, Putin had garnered less than 2 percent support as a presidential candidate despite (or perhaps because of) Yeltsin’s backing. By the time Election Day arrived in March 2000, his situation had changed entirely. Putin faced a lot of opposition. But none of the other candidates had a prayer. Russian troops had captured Grozny in February and the lightning victory in Chechnya was fresh in people’s minds. Putin was riding a wave of popularity. He took 53 percent of the vote and became president.

The reign of Vladimir Putin had begun. Like Peter the Great, the historical figure he most admired, he vowed to restore his country as a power of consequence. He knew that it wasn’t going to happen easily. But he believed he had been endowed with all the right qualities to bring it off: physical stamina, a keen intellect, a deep understanding of the ways of politics in the real world (and the role that energy plays), and an unwavering boldness of vision. It was time to tighten his hold on power by dealing with his enemies.

Next in Putin’s sights: the oligarchs.

Marin Katusa’s The Colder War is available here.

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