- New Science in old markets -

On Russia

The markets have been responding to news developments from the situation in East Ukraine where the ebb and flow of military forces is further complicated by the conflicting statements from the protagonists, principally in the Russian government. In order to make sense of this, it is necessary to understand how Russians negotiate. There is a great deal of mystery about this to Western eyes and ears and the markets are equally puzzled. Cease-fires that are broken immediately, harsh words from the Kremlin followed shortly by something more soothing followed in turn by actions that seem warlike – we have seen all this and the markets rush to and fro like carp in a pond. There is some prior experience to examine and the puzzle may then be more easily solved.

It is not certain whether the particular strain of Soviet communism is to blame or some particular aspect of the Russian character, but foreigners have been remarking on the difficulty of negotiating with Russians for decades if not centuries. What George Orwell called double-think flourished particularly well in the Soviet Union - the spurious pairing of concepts such as War is Peace; Freedom is Slavery; Ignorance is Strength (all from 1984) or  ‘Compulsion is Voluntary’ (that one was Mao) that bent the minds of the population into such strange shapes that proper critical thought became impossible. This was mostly a rhetorical device for wrong footing opponents of course, although it closely resembles some aspects of French intellectual discourse to this day.

Now the same tradition endures in Russia in argument or negotiation. It takes the form of taking apparently opposing positions by turn until the other party is befuddled and confused.  After Truman met Stalin at the Potsdam conference he remarked in a letter to his mother that: “...the Russians are the most pig-headed people I have ever encountered.” He actually liked Stalin but found his negotiating techniques bewildering in that there was no give-and-take but only the dogged pursuit of what the Russian leader thought was his interests, even though they also seemed perverse.

Seventeen years later in the face-off between the Kennedy and Khrushchev teams over Russia’s attempted deployment of ballistic missiles in Cuba, the American side again found the Russians to be obdurate and their communications to be alternately threatening and conciliatory. The White House handled this tactically by choosing only to respond to the ‘nice’ ones, while ignoring the ‘nasty’. Once this alternate nice/nasty demeanour is seen as a manipulative ploy then some sense begins to form in the puzzle.

The current situation is quite easy to read, once this set of prior circumstances is considered. The aim of Putin (as others have covered extensively) is to restore ‘greatness’ to Russia. He openly considers the dismemberment of the greater Russian Empire at the end of the cold war to be a ‘catastrophe’ which is interestingly the same word used by Palestinians to describe the founding of Israel. This return to greatness involves restoring the vassal status of those countries that were brought to heel by prior Russian expansions in eighteenth and nineteenth centuries – long before Lenin got on his sealed train at Zurich bound for the Finland station.

This is the source of much of Putin’s popularity in Russia and it is his mission. To the expression “All’s fair in love and war” he might add “...and in re-establishing Russia’s proper position”. This is politics by any means possible and that includes war, the deliberate deception of opponents and naturally the usual Russian methods of confusion by double-speak, the first cousin of double-think.

So, when markets rally on ‘peace talks’ between Putin’s Kremlin and whoever happens to be in the opposite chair at the time – Merkel, Obama, the current Ukrainian leader or anyone else trying to get involved, be sceptical.

That doesn’t mean sell everything by the way - the loudest rattling of sabres by the Russians is just as likely to be a conjurer’s misdirection as the most soothing words; the menacing mention that Russia has lots of nuclear weapon, for example. Both should be taken as mere posturing designed to confuse until the Russians get what they want or are forced to stop trying. What we can learn from this is that the conflict won’t end with any ceasefires soon – the momentum to re-subjugate some or all of the Ukraine and other Russia-bordering regions is hard to stop. It didn’t start or end with Georgia’s re-conquest in 2008 and the same tricks are likely to crop up again and again - spurious referenda, denials that any Russian troops are involved in ‘spontaneous’ uprisings and constant assurances that Russia has no designs on territory. When markets respond by shooting up or down it is probably wise to ‘fade’ the move.

The blame for this may be placed at Russia’s door but some sense of history from Western leaders might have helped. A related part of the Russian psyche insists on seeing Russia as a victim, surrounded by would-be conquerors (this is not just a psychological flaw of course as both Napoleon’s and Hitler’s wars revealed.)  Recruiting parts of the former Soviet Union to the EU and NATO without at least pretending to invite Russia first was insensitive at best and stupid at worst. Now however, we have ‘a situation’ and must cope as best we can and this involves understanding our opponent, if only to avoid getting whipsawed while trading in markets.

To quote from a thesis submitted to a Scottish university by a Russian doctoral candidate:

Forced to make compromises, Russians will feel a subtle sense of defeat. The willingness to make compromises from the start without getting anything in return will be viewed as weakness and not as gestures of goodwill or flexibility, therefore, inviting them to squeeze harder. The achieved agreements are often completely reversed due to purely laughable pretexts, so that the negotiations can start from scratch.

And again: This reflects the Russian belief that a compromise is equal to unscrupulousness, lack of will, and that one person’s profits are always at the expense of another’s. Therefore all attempts to strive for a compromise are considered as negative (Prokhorov & Sternin 2007). Win-win solutions do not fit the Russian psyche well; it is rather a zero-sum game.

And lastly, even though the Soviet Union is history: ...the Marxist-Leninist doctrine of class struggle in the international arena degraded negotiations (with the Soviets) to the status of temporary tactical manoeuvres insignificant in the larger historical perspective”.

 

Times it seems, don’t change.