The Ukrainian Gamble

On the morning of Feb. 24, I woke up to about 60 messages. The first message I laid eyes on contained three words: “Russia attacked Ukraine,” from a friend in America. Scrolling down, I saw a message from an investment manager of an Australian fund for whom I consult which contained a terse “You were right.”

I wondered if Russia could have really have attacked. Rushing to my computer, I read news from Bloomberg and the Financial Times and realized, yes, Russia had attacked Ukraine. The Financial Times reported that Russian forces had stormed Ukraine along three axes from the north, south and east.

A few days earlier, my investment director friend, two business acquaintances and I had engaged in a heated debate over whether we should invest in oil at $91 a barrel as a precautionary measure in case Russia attacked Ukraine. At that moment, people still believed Russia would not invade Ukraine. Most people thought Russia would not dare because the economic damage would be terrible. I was also hesitant, but I was more worried about what would happen if Russia invaded Ukraine. My view then was that everyone was thinking about this, so I wondered what we would do if Russia attacked. Our investment positions could suffer heavy losses if we didn’t prepare for that situation.

In the end we came together and agreed to act defensively, increase our cash reserves and close out other investments we had made when we were betting Russia would not attack. We opened an investment position in oil at the distasteful price of $91 a barrel. Fortunately, I was correct.

But it doesn’t matter if I was right or wrong or if we made money or not. What mattered was that I have learned many things from this conflict in Ukraine.

The first thing I learned was that nothing is certain in conflicts like this. Before today said there was no way Russia would dare invade. President Joe Biden predicted an attack merely to put pressure on Russia and as a distraction, because this was a war no one wanted to fight. Biden was merely posturing.

When the financial markets breathed a sigh of relief after Biden announced moderate economic sanctions on Feb. 22, people believed the matter was finished, that the Ukrainian affair might as well be over and it would not further affect the market.

Barely two days after I read that assessment, Russia sent forces to attack Ukraine. The financial markets in Europe continue to burn.

People may reach certain conclusions based on the analysis of a few professionals sitting in an air-conditioned room thousands of miles away from the conflict zone, where they write about developments in Ukraine. Many researchers offer sophisticated political opinions that are worth considering, and I buy those reports, too. But I don’t completely believe one side or the other, and I also dare not reach final conclusions like they do.

For example, one of the reasons I was anxious Russia would attack Ukraine was based on the viewpoints of political scientist John Mearsheimer, which were translated by Nguyen Xuan Hoai and published in International Studies. The following point particularly caught my attention. “Russia does not want a Western bulwark on its doorstep, which is perfectly logical from Russia's perspective. I don't understand why so many in the West can't grasp this simple fact. We in America have the Monroe Doctrine, which states very clearly no great power may establish a military alliance with any nation in the Western Hemisphere and garrison troops there. The Russians have their own version of this doctrine and are currently trying to apply it. This crisis is the direct result of the foolish decisions of the U.S. and its allies planning for Ukraine’s accession into NATO,” Mearsheimer wrote.*

I am not a political scientist capable of commenting on the Monroe Doctrine, but I paid special attention to the point about “a Western bulwark on Russia’s doorstep.” The media all but ignored or downplayed this point, as did political and financial analyses I read. There may have been a word or two in The Economist before its writers turned to what the West was doing to prevent the war and the price Russia would have to pay if it attacked Ukraine.

So, the risk, based on analysis, clearly existed, but people just ignored it. Why?

I think we can account for this if you consider the views of psychologist Daniel Kahneman, winner of the Nobel Memorial Prize in Economic Sciences, in his book “Noise: A Flaw in Human Judgment,” co-written with Olivier Sibony and Cass Sunstein. One of the most powerful ideas in this book is that humans often make incorrect judgments or decisions because they are influenced by two factors: bias and noise, using a formula that posits “bias plus noise equals error.”

Since many people have biases about American power and NATO, because Russia feared doing damage to its economy, and with opinions and decision-making shaped by the news media and other commentary about Russia’s actions, there may have been decisions based on the wrong initial assessment, and the bias from the initial mistake continues to grow.

Preconceptions about Russia, about the U.S., about Russian President Vladimir Putin and about Biden mean that people are not looking at the problem objectively anymore.

As a result, people have made investment decisions, such as betting on Ukraine, when they should have reflected soberly about the fact anything could happen, and with that in mind, found appropriate ways to defend against risk.

Since I know how to be afraid, how to say I don’t know, and remain calm and keep cool, I firmly bet in one direction. It made a huge difference and helped me keep my money during this period.

The second thing I learned is even more important. You cannot rely on economic sanctions or the protection of a large military force in the hope that a major nation will not pick a war with small country in pursuing its own national interests. The Russian stock market fell by nearly half, the value of the ruble plummeted, and yet Putin still remained committed to invading, and NATO did not send troops into Ukraine. That’s the root of Putin’s bet on with respect to the incursion.

I say this to show that nothing can prevent an ambitious great power from doing the thing its leaders believe is in the best interest of the country, and no one can count on the West to play peace-keeper. The best way to defend one’s interests is to become powerful, and stand on one’s own two feet instead of relying on overseas investment and depending on preferential foreign aid. If you do that, no one will dare to repeat the gamble that was made in Ukraine.

*Editor’s note: Although accurately translated, this quoted material could not be independently verified.