Russia’s War on Ukraine: A New World Order

Russia’s War on Ukraine: A New World Order

First and foremost it is worth acknowledging that the demise of the Soviet Union was the greatest geopolitical catastrophe of the century. As for the Russian people, it became a genuine tragedy. Tens of millions of our fellow citizens and countrymen found themselves beyond the fringes of Russian territory.

In place of our usual Investment Outlook, we are devoting this quarter’s commentary to an overview of the Ukrainian conflict because of its global importance.

The world changed on February 24, 2022. That was the day that Russia invaded Ukraine. It changed even more dramatically on Sunday, February 27. That was the day that Russian President Vladimir Putin announced that he had ordered Russian nuclear forces on high alert. The last time that there were threats of nuclear war on the world’s stage was fifty years ago during the Cuban Missile Crisis, in October 1962. Most people in the West have been living under the assumption that wars between great powers were a thing of the past. No longer.

Many barrels of printer’s ink have been spilled over the past weeks on the war in Ukraine. Rather than recounting the last agonizing weeks of warfare, the purpose of this commentary is briefly to analyze how the war has progressed, and to provide a brief primer on the history of Ukraine, a portrait of the country, some possible outcomes of the war, and what it means for the U.S. and for investors.

The author of this piece, a principal at Bradley, Foster & Sargent, has some firsthand knowledge of Ukraine, as his son spent two years there in the Peace Corps fifteen years ago. The author spent several weeks in Ukraine, visiting both Kyiv (Kiev) and smaller cities and villages in central Ukraine. At that time, it was a rough, underdeveloped country with a high level of corruption and frequent incidents of intimidation by mafia-type gangs. It was still marked by the 1986 nuclear disaster at Chernobyl, which occurred when Ukraine was still part of the Soviet Union. But one of the salient characteristics of the people he encountered was a fierce sense of pride in Ukrainian independence and nationalism, which is now on display each night on the news.

Some Facts about Ukraine

Ukraine is a big country; it has a landmass 10% greater than France. It has over 2,000 miles of coastline on the Black Sea and a population of 43 million people, compared with Russia’s 145 million people. The largest city in Ukraine is the capital, Kyiv, with a population of 2.7 million. Kyiv is an old and beautiful city dating back to the ninth century. Ukraine is known as the breadbasket of Europe. Its rich, dark soil is perfect for growing grain and other food products. When part of the Soviet Union, Ukraine produced 25% of all its agricultural output. Ukraine supplies 50% of the corn imported into the EU and is one of world’s largest exporters of wheat and sunflower oil.

Ukraine has very rich mineral resources, with large iron ore, coal, and manganese reserves. It has important deposits of alunite, which is a source of potash. It also has extensive gas and oil pipeline systems throughout the country. Additionally, Ukraine produces more than 50% of the world’s neon gas, which is essential in the production of semiconductor chips. Neon is a byproduct of steel manufacturing, and two Ukrainian companies, one of which is located in Mariupol now under siege, are the main producers of neon. Both have shuttered production due to the war.

Ukraine has the second largest military in Europe with approximately 200,000 personnel on active duty, but this is dwarfed by Russia’s 900,000 active personnel. Russia’s 2021 defense budget was $45 billion; Ukraine’s was 10% of that. Ukraine has roughly 20% of the armored fighting vehicles that Russia has and less than 10% of its aircraft. But Ukraine has 900,000 reserve personnel to bolster its forces. Nonetheless, this is a David versus Goliath struggle.

History of Ukraine

The origins of the Russian nation state go back to 862 A.D. when Oleg of Novgorod founded the Slavic state of Kievan Rus. Twenty years later, Kyiv became the capital. Beginning in 988, Prince Vladimir the Great consolidated the territory from modern day Ukraine, Belarus, and Russia to the Baltic Sea into one state. He also converted from paganism to Christianity and spread the faith throughout Kievan Rus. The resulting Christian church was part of the Eastern Orthodox Church
with its headquarters in Constantinople until 1448, when Russian bishops began to elect their own Metropolitan (later called Patriarch). Thus, the Russian Orthodox Church was actually founded in Ukraine.

Fast forward four or five centuries, and what is currently modernday Ukraine was a territory controlled by Tsarist Russia, Poland, and the AustroHungarian Empire. In the midst of World War I, Ukraine declared its independence in 1917. Between 1917 and 1922, there was almost constant warfare between Ukrainian, Polish, and Bolshevik Russian forces with Kyiv being occupied off and on by armies from these states. In 1921, the PolishSoviet War ended with the Peace Treaty of Riga, and in 1922, Ukraine formally became one of the 15 socalled Republics that made up the Soviet Union.

One of the formative moments in Ukrainian history that has caused many of the Ukrainian people to despise Russia was the Great Famine. The Great Famine resulted from Stalin’s attempt to completely destroy the rich peasant (called kulaks) population in Ukraine and elsewhere. In 1929, Stalin pronounced: “In order to oust the kulaks as a class, the resistance of this class must be smashed in open battle and it must be deprived of the productive sources of its existence and development (free use of land, instruments of production, landrenting, right to hire labour, etc.). That is a turn towards the policy of eliminating the kulaks as a class. Without it, talk about ousting the kulaks as a class is empty prattle, acceptable and profitable only to the Right deviators.” What followed was the Great Famine of 19301933, when as
many as 67 million peasant farmers and their families were liquidated in the forced collectivization of the kulaks. They either starved to death, were murdered, or were deported to Siberian labor camps and worked to death. On his visit with a farmer in Ukraine in 2005, this author asked how the farmer’s family had survived the Great Famine. The elderly man began to weep, responding that his grandfather was one of nine siblings, five of whom had starved to death.

Recent Ukrainian History

Upon the dissolution of the Soviet Union in 1991, Ukraine held a referendum on independence. With 84% of the electorate voting, 90% voted for independence from Russia. Following the chaotic decade of the 1990s, Ukraine held a presidential election in 2004, in which Putin’s preferred proRussian candidate, Yanukovych, won amidst widespread allegations of voter intimidation and fraud. This spurred huge protests and strikes, which were dubbed the Orange Revolution. A new
election was held and prowestern Yushchenko won, causing Putin’s distress that Ukraine was looking to the West rather than wishing to stay within Russia’s orbit. Several months after this election, Putin decried the breakup of the Soviet Union as “the greatest geopolitical catastrophe of the century” (quoted at the beginning of this commentary). For the next several years, Putin sought to win over leaders in western Europe by promising to build a democracy in Russia and work with
the West, causing many, including German SPD leader and Chancellor Schroeder and Italian Premier Berlusconi, to see Putin as a friend and strategic partner.

Then in 2007, Putin gave his nowinfamous speech in Munich, in which he, among other things, spoke defiantly against Ukraine ever joining NATO. The U.S. and its European allies have always viewed NATO as a defensive alliance against Russia, which maintains a massive nuclear arsenal and the largest military in Europe. But Putin sees NATO as encroaching upon Russia’s traditional sphere of influence in Eastern Europe and a threat to Russia on multiple fronts. At the time, Yushchenko was requesting Ukraine be given a path to joining NATO, which President Bush affirmed. Neither Germany nor France would agree to this, seeking to placate Putin.
Despite this vacillation on the part of NATO countries, Putin was not mollified, calling Ukraine a “madeup country.” In effect, Putin sees Ukraine as part of Russia in the same fashion that Americans view the state of Pennsylvania or Virginia — as an original and founding colony of America. In 2008, a year after his Munich speech, Putin sent Russian forces into Georgia, which wanted to join NATO, exploiting tensions between Georgia’s government and Russianbacked separatists. The West effectively did nothing to counter this aggression.

In 2011, Yushchenko lost a presidential election to Russialeaning Yanukovych, who began to negotiate a trade agreement with the EU. This outraged Putin, who wanted Ukraine to join a customs union with Russia and Belarus. In 2013, Yanukovych suspended talks with the EU, citing Russian displeasure. Protests spread throughout Ukraine, culminating in huge crowds in Maidan, the independence square in Kyiv, where clashes with riot police became frequent. In February 2014, police snipers killed dozens of protestors. In his office, Yanukovych met with a Russian general in the FSB (successor to the KGB) who advised calling out the Ukrainian Army and crushing the protesters. Instead, Yanukovych fled from Kyiv to Russia in a helicopter. Within days, Russia invaded and annexed Crimea, which Russia had affirmed as Ukrainian in three treaties in the 1990s. Russia also hatched a separatist rebellion in Russianspeaking Donbas in the eastern and more industrialized part of Ukraine (a local war has gone on there for eight years and continues today where fierce fighting rages). Unfortunately, the U.S. and NATO once again gave a weak and tepid response to Russia’s annexation of Crimea, using mild sanctions against Russian interests but refusing to provide offensive military weapons to Ukraine to prevent further depredations by Russia. On the next page is a timeline of the path to Putin’s invasion of Ukraine, followed by the trajectory of the life of Volodymyr Zelensky, whom the world so greatly admires.

Volodymyr Zelensky

Elected President in 2019, Volodymyr Zelensky won the hearts of the world when Russia invaded, when he uttered these words, “The fight is here; I need ammunition, not a ride,” refusing a U.S. offer to move him away from reported Russian assassination teams to a more secure location. This was in stark contrast to Afghan president Ashraf Ghani, who fled Afghanistan to the UAE in August 2021. So, what kind of a man is this 44yearold comedianturnedleader of an embattled nation?

Zelensky was born into a Jewish family in a Russianspeaking part of Ukraine, which was still part of the Soviet Union. His father is a professor and computer scientist and his mother an engineer. His grandfather served in the Red Army in World War II, rising to the rank of colonel. His greatgrandfather along with three brothers died in the Holocaust. With this background, Putin’s repeated charges of neoNazis in the leadership of Ukraine is, indeed, difficult to countenance.

Zelensky earned a law degree at Kryvyi Rih National University but chose not to pursue a career in law. Rather, he chose to become an entertainer, performing until his late 20s as a comedian. He then became an actor, starring in a number of Russianlanguage films. His big break came in 2015 when he starred in a television series with 50+ episodes called Servant of the People. In the series, Zelensky’s character was a high school teacher in his 30s who won the presidential election of
Ukraine after a video, which went viral, showed him ranting against corruption

In 2018, members of his TV production company, Kvartal 95, registered a new political party named Servant of the People — the same as the TV show. At the end of 2018, four months before the presidential election, Zelensky announced his candidacy, running against the incumbent President Poroshenko. Zelensky’s campaign was almost completely virtual, as he used social media and YouTube to position himself as the antiestablishment and anticorruption candidate.

In the first round of the elections, Zelensky was the clear winner, and in the second and final round, he received 73% of the vote to Poroshenko’s 25%. He is one of only two Jewish presidents in the world, along with the president of Israel. In the July 2019 parliamentary elections, Zelensky’s political party, Servant of the People, won the first singleparty majority in parliament in modern Ukrainian history with 43% of the partylist vote. His party gained 254 of the 424 seats.

Zelensky has sought to make good his commitments to reform Ukrainian politics and culture through a series of laws and regulations, but has had only limited success. Throughout his term, he has had to deal with the ongoing territorial dispute and war with Russianbacked separatists in the Donetsk and Luhansk regions. There have been over a dozen ceasefires over the past years, but none of them have lasted.

Zelensky’s courage and communication skills have united much of the world behind him and Ukraine’s struggle to maintain its independence. He spoke virtually to the House of Commons in London, invoking Winston Churchill’s famous speech, “We will fight till the end at sea. In the air. We will continue fighting for our land whatever the cost. We will fight in the forests, in the fields, on the shores, in the streets.” He spoke in the same vein to the U.S. Congress on March 16, thanking the U.S. for its military aid and sanctions against Russia, but requesting greater support. He has spoken tirelessly to the West in efforts to move NATO and other friendly countries to provide Ukraine with the tools to defeat Russia.

How the World has Changed since Russia Invaded Ukraine

Since the collapse of the Soviet Union in 1991, many in the West have held the illusion that we were living in a “rulesbased world order.” The most salient example of this was Secretary of State John Kerry’s assertion in 2014 during Russia’s invasion and annexation of Crimea that “You just don’t in the 21st century behave in the 19th century fashion by invading another country on completely trumped up pretext.” Putin’s recent invasion of Ukraine has utterly shattered this illusion. He has
also demanded buffer states between Russia and the West — states that are not to be members of NATO. Some western leaders have been swayed by this argument because Russia was invaded twice — first by Napoleon in 1812 and then by Hitler in 1941. Most European leaders have also believed that strong commercial relations and expressions of good will with Russia would diminish Putin’s revanchism and distrust of the West. Accordingly, Germany, Italy, and other European countries
structured energy policies in which 50% or more of their gas and oil needs come in pipelines from Russia, thereby placing their economies at the mercy of Russia. This has turned out to be nothing but rank appeasement. And appeasing a dictator like Putin has been shown historically to be a deeply flawed policy that often emboldens the aggressor and leads to war rather than peace. As Churchill famously said, “An appeaser is one who feeds the crocodile, hoping it will eat him last.”

Russia’s invasion of Ukraine and its continued prosecution of the war has caused, among other things, the following changes in the world order:

Robert H. Bradley

Rob serves as chairman of Bradley, Foster & Sargent. He is a portfolio manager and member of the firm’s investment committee and its board of directors.

Rob founded Bradley, Foster & Sargent with Joseph D. Sargent and Timothy H. Foster. Earlier, he was president and CEO of Boston Private Bank & Trust Company, which he founded in 1985, and he spent 14 years with Citicorp, including 12 years in Europe, the Middle East, and Africa. Previously, he served as an officer in the U.S. Navy in Vietnam.

Rob served for seven years on the board of governors of the Investment Adviser Association, the national not-for-profit association founded in 1937 that exclusively represents the interests of federally registered investment advisory firms.


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