On June 29, 1914, the New York Times carried an opinion piece on the assassination in Sarajevo of Archduke Franz Ferdinand, heir to the house of Habsburg, under the headline: “Tragedy may alter politics of Europe.” Yet the point of the article was not as you might think to warn of the drum beat of war, but to argue that the assassination actually made conflict in Europe less likely, since the Archduke was a well-known war-monger. We were therefore well rid of him.
That misjudgment wasn’t universal. The French press was better at anticipating the dangers. The New York Times analysis nonetheless demonstrates just how bad the media can be at reading the runes of geopolitical developments.
Equally bad are financial markets, which theoretically reign supreme when it comes to the pricing of risk, be it economic or geopolitical; even after the Archduke’s assassination, stock markets sailed blithely on as if nothing of significance had happened. It wasn’t until the troops were actually mobilized that the panic set in.
The parallels with today’s standoff over Ukraine are obvious. Oil and gas prices have spiked higher, but stock markets remain insouciant at or close to their all-time highs. The prospect of a Third World War is not on anyone’s radar. Rising inflation and interest rates are viewed as the much more immediate threat.
Events to date have tended to vindicate this view. Wednesday came and went, and contrary to Western intelligence, which had confidently predicted that this was the day Putin would choose to strike, there was no invasion. Instead, we had the farcical pretense of troop withdrawal from some quarters even as the show of force was strengthened in others. You could almost hear the laughter emanating from the Kremlin. Vladimir Putin has been playing us for fools, and by the looks of it, he has succeeded.
In any case, the growing sense of panic among Western political leaders stands in marked contrast to the largely sanguine judgment of financial markets. The latter perhaps naively view the Ukrainian standoff as just another power game that will eventually settle itself without overt military conflict with Western nations or significant disruption to oil and gas supplies.
The starting point for this view is that, when push comes to shove, Putin won’t invade in practice because he knows it will unite Europe and Nato against him. Much better for him in the long term to have a divided than a united West.
More cynically, the view is that the West will cave, and end up giving Putin most of what he wants, killing off further EU and Nato enlargement eastwards into Russia’s supposed sphere of influence. For defeated Ukrainians that’s a crying shame, but it is their ancient geographical curse to be caught between the competing claims of Russian and Germanic tribes.
As Western leaders have already made clear, there is no possibility of direct military retaliation, even if Putin were to mount a full-scale invasion. Other than Russians and Ukrainians, no one is going to die for the sake of a sovereign Ukraine.
Even on sanctions, the West is thought likely to pull its punches. There is virtually no possibility of a ban on Russian oil and gas exports. Sanctions on oligarchs that interrupt the flow of other key commodities are thought equally unlikely. Commerce rules: witness the fact that the US lifted sanctions against Rusal when they began to interfere with supplies of alumina.
So cynical though it might be, the nothing-to-see-here attitude adopted by markets might seem to have some merit. That’s not to say that the situation is entirely without economic impact. The oil price has already strengthened quite a bit, and would no doubt surge to well in excess of $100 a barrel in the event of an invasion. This, in turn, would further reinforce the dilemma faced by Western central banks in attempting to get to grips with surging inflation.
Do they tighten further in addressing higher energy prices, knowing that this would deepen the cost of living crisis and might potentially push the world economy into recession? Or do they just ignore the inflationary consequences?
Either way, Putin sits pretty. The fear in the Foreign Office is as much about lack of resolution – months, if not years, of continued uncertainty – as it is of imminent invasion. Sustained geopolitical instability suits Putin just fine if it keeps the oil price high. It makes Russia richer, and Europe poorer.
Yet it also greatly increases the scope for accidents, and it is perhaps this risk that markets aren’t properly pricing. In the Great Illusion, a hugely influential book in the run-up to the First World War, the British journalist Norman Angell argued that the economic costs of war in Europe were so great that nobody could possibly hope to gain by starting one, and therefore wouldn’t. He was both right and catastrophically wrong at the same time. The irrational has always played a major role in history. Ignore it at your peril.