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Yesterday the Macro Team hosted a special “Behind the Curtain” conference call with Michael McFaul, one of the world’s foremost experts on Russia and Vladimir Putin. Until earlier this year, McFaul was the U.S. Ambassador to Russia and held closed-door meetings with Putin and his top lieutenants before finally stepping down out of concern for his family and his own safety.

If you missed it, click here for a full video replay podcast.

Below we offer key take-aways and summary from McFaul’s prepared remarks and a robust Q&A session (starting at 31:24).

  1. Putin is here to stay:  next election in 2018 and in 2024 he could change the constitution to extend term
  2. Sanctions are here to stay:  EU’s “re-approval” in Spring 2015 likely. Germany strong “yes” vote
  3. Future of Ukraine’s Eastern states is uncertain: expect region to come in and out of focus
  4. Economic forces working against Putin, but his popularity unlikely to wane materially

McFaul On the Big Question – Why are we having this conflict with Russia in 2014? 

  • How you answer this question will shape how you view the future:
    • The Rise & Fall of Great Powers:   we all just need to get use to a stronger Russia pushing around weaker neighbors. McFaul believes this theory is dead wrong! Years before Putin was focused on Eurasia Economic Union (with Ukraine as a key member), not annexing Crimea.
    • It’s all the West’s Fault:  Putin is saying this to his public (and the world) as justification for what happened in Ukraine. Noting America is the aggressor (expanded NATO, invade Iraq, etc.). Simply a policy response to America’s aggression.
    • The Big Switch Domestically (Putin takes over as President from Medvedev in late 2011): McFaul names this as the #1 reason there’s a conflict between the West and Russia.  Says differences in personalities of Medvedev and Putin were wider than he had originally realized. Medvedev showed signs of working with the West. However with the handover, Putin quickly cracked down on the opposition, and devised strategy to make the West (including McFaul personally) the “Enemy”. New narrative about the West’s aspiration to destabilize Russia and Putin’s regime. 

On Putin and Move into Crimea:  

  • Putin has a super suspicious view of the West but realizes he must cooperate.
  • Fundamentally he sees the geopolitical world as a “Zero Sum Game”, not a “Win-Win Game” that Obama and even PM Medvedev talk about.
  • Given Putin’s framework, the overthrow of Yanukovych in Ukraine was further confirmation of America’s aggression in the world, and Putin said he’s had enough.
  • McFaul say Putin acted very emotionally and reactively with his decision to go into Crimea.

East vs West on Policy:

  • Says a change in Western policy is not going to change Putin’s policy.
  • U.S. is not destine to be in power imbalance with Russia.
  • But, domestically, Putin needs the narrative that the West is the aggressor, and he’s in power to fight back the Western world, from physical standpoint, but more importantly ideological perspective.

On Ukraine:

  • Believes Ukrainian has no power to assert sovereignty on Luhansk and Donetsk.
  • Putin has upper hand to change the conditions at any point.
  • Views Crimea as very different vs Luhansk and Donetsk on a historical basis, alone (Khrushchev gave Ukraine territory in 1954 as a gift). 60% of Crimea are ethnic Russians (so popular appeal in Russia as well).  Luhansk and Donetsk, less neat line between divided ethnically Ukrainian vs Russian population. He sees the governments in these regions currently as “thuggish” and that they likely have a long road to gain sovereignty. Expect little to happen, if anything at all.  
  • One tension point likely to play out: who pays gas bill for Luhansk and Donetsk:  Russia or Ukraine?

On Sanctions:

  • Putin doesn’t like them (many of his close friends are personally suffering) but he believes this is a price worth paying.
  • Putin more recently has become more suspicious of economic relations with the West. Recent commentary on investors and markets are new – he didn’t speak about such topics before. 
  • Certainly he’s following the price of oil and economic conditions, but McFaul wouldn’t underestimate his staying power – he sees himself in a fight (East vs West) until the end of his time.
  • Believes we could be stuck in place (sanctions won’t escalate nor decrease) for a long, long time.  U.S. doesn’t want to invest more in escalation just over eastern states of Ukraine.  Conversely, Putin wants to maintain his narrative on the West.
  • Sanctions in the EU will have to be re-approved in the Spring 2015 (divided opinions... Germany very clear that need to keep them in place, whereas Hungary hinting that they admire Putin’s system of government and could consider leaving EU… Slovakia also partially in this camp).

Economic Challenges:

  • Ukraine:  If melt-down of Ukrainian economy can present opportunity for further intervention from Putin
  • Russia: McFaul believes it will take years for (poor) economic events to have a political impact.
    • Putin has a high approval rating, over 80%, but for perspective, U.S. President Bush had a 92% favorable president rating when he decided to go into Afghanistan and 75% when he went into Iraq. Both faded over time.  Would expect similar results in Russia, but to just take longer given controlled media.
    • Oil:  states Russia needs oil around $100 to fund the country’s budget. Borrowing of money is getting more difficult, so the sanctions do impact Russia’s ability to extend obligations and/or weather the price of oil. Sees 2015 as a tough macro year for Russia. Shoring up the Ruble will be no easy feat.

On Putin and Support:

  • How long will he stay as President?  Run again in election 2018. If he wins he will not have to change the Constitution until 2024, and most expect him to run again.
  • Putin gets approval rating above 80.
  • Levada Center asks:  if you had to vote for a President on Sunday, who would you vote for?
    • Putin fell below 50% for the 1st time just last week (says Levada is credible pollster) = suggests people like what he’s done but maybe less enthusiastic about him ruling forever.  Yet lots of runway before 2018

Could Moscow see Uprising Like in Kiev?

  • Major factor that differentiates Kiev vs Moscow = Russia earns a lot of money from its energy resources, Putin can use that money to buy off folks and create alliance with the regime.  Ukraine reaps money from its resources as well, but to a lesser extent.  In Ukraine, yes there are oligarchs, but there’s competition among them (unlike in Russia) and they have less ties to the agreements from the political leadership, and therefore they’re politically more flexible. The oligarchs in Russia, if they have divergent views, they’re kept quiet or repressed.

Russia Turning East:

  • For the last several years the Russians and Chinese have been in alignment.
  • Russia’s 30 year gas with China (worth $400B) – some say Russia got a bad deal but it’s a stable source of income. But it’s a loser deal for Russia over the longer term – it’s just an energy deal; Russia is not making or manufacturing anything above the value chain. Doesn’t bode well for future 20-30 years as Putin continues to stifle innovation.
  • Key to remember in the long run, the Chinese have an important economic relationship with U.S.  So this creates limitations on how far China-Russia access can go. 

Matthew Hedrick