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Putin’s actions make no sense. That is his strength

 Tim Harford in The FT

Is Vladimir Putin mad? Russia’s president has launched a costly and unprovoked war, shocked his own citizens, galvanised Nato, triggered damaging but predictable economic reprisals and threatened a nuclear war that could end civilisation. One has to doubt his grasp on reason. 

Doubt is part of the point. In The Strategy of Conflict, written in 1960, the economist Thomas Schelling noted: “It is not a universal advantage in situations of conflict to be inalienably and manifestly rational in decisions and motivation.” 

A madman — or a toddler — can get away with certain actions because he cannot be deterred by threats or because his own threats seem more plausible. But Schelling’s point is more subtle than that: you don’t need to be mad to secure these advantages. You just need to persuade your adversaries that you might be. 

The idea is vividly illustrated in The Maltese Falcon, Dashiell Hammett’s 1930 novel and John Huston’s 1941 film. Our hero, Sam Spade, knows the whereabouts of the falcon, a priceless artefact. When the villainous Kasper Gutman tries to intimidate him into revealing the secret, Spade is not intimidated. If Gutman kills him then the precious falcon will be lost forever. 

“If I know you can’t afford to kill me, how are you gonna scare me into giving it to you?” Spade challenges Gutman. 

“That’s an attitude, sir, that calls for the most delicate judgement on both sides,” Gutman says. “Because, as you know, sir, in the heat of action men are likely to forget where their best interests lie and let their emotions carry them away.” 

Spade doesn’t seem too worried by this, perhaps because Gutman appears calm. Gutman might have had more success if he seemed unhinged. Then again, Gutman’s henchmen are pointing pistols at Spade and twitching with rage, so even if Gutman keeps his cool, the threat that someone might get carried away seems plausible. 

Schelling was a wonderful writer and thinker, but it gives me little pleasure to be dusting off his books. When I first encountered his ideas on nuclear deterrence, it was the mid-1990s. The cold war was over, the threat of a nuclear exchange seemed largely past and Schelling’s ideas could be enjoyed in much the same way as Hammett’s: as witty, surprising and reassuringly unreal. When Schelling shared the Nobel memorial prize in economics in 2005, it was with a sense that his clear-eyed ideas about nuclear deterrence had helped human civilisation dodge a bullet. 

That nuclear bullet is now back in the gun and Putin is waving it around unnervingly. He wouldn’t . . . would he? I don’t know, which is just the way Putin likes it. 

There was always something surreal about maintaining nuclear weapons as a deterrent. Surely such weapons could never be used, because the consequences were too horrible? And if the weapons could never be used, what sort of deterrent did they provide? 

Yet the deterrent is real enough because even a small risk of escalation is a risk worth taking seriously. That risk can come from a number of sources. There’s malfunctioning equipment: in September 1983, Soviet officer Stanislav Petrov’s early warning radar told him that the US had just launched ballistic missiles at the Soviet Union. He realised that was unlikely and ignored the warning. Petrov’s heroic inaction was made all the more remarkable because it came at a time of escalated tensions between the superpowers. 

Another risk is that a senior decision maker is insane, rather than merely feigning insanity. 

Then there is the risk of things getting out of control somewhere down the chain of command. During the Cuban missile crisis in 1962, the US decided to stop and search ships sailing to Cuba — a potential flashpoint if the result was the sinking of a Soviet ship. President Kennedy and defence secretary Robert McNamara asked the US Navy to soften this “quarantine” in a couple of ways. 

In fact, as the classic book Thinking Strategically explains, the US Navy told McNamara to mind his own business, and the blockade was riskier than Kennedy had intended. Unthinkable threats become thinkable in such circumstances. 

Putin holds a weak hand, except for the one card that no rational person would ever choose to play. But the essence of brinkmanship is to introduce a risk that nobody can entirely control. If the risk becomes intolerable, you may win concessions. I am 99 per cent sure that Putin is bluffing, but a 1 per cent chance of the end of the world is and should be more than enough to worry about. 

Faced with Gutman’s warning that someone may get carried away, Spade coolly responds, “then the trick from my angle is to make my play strong enough to tie you up, but not make you mad enough to bump me off against your better judgement”. That is the trick the western world is now attempting to perform. By Putin’s design, it is not going to be easy.

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China, Russia and the race to a post-dollar world

Rana Foroohar in The FT

Markets often react strongly to geopolitical events, but then later shrug them off. Not this time. Russia’s invasion of Ukraine is a key economic turning point that will have many lasting consequences. Among them will be a quickening of the shift to a bipolar global financial system — one based on the dollar, the other on the renminbi. 

The process of financial decoupling between Russia and the west has, of course, been going on for some time. Western banks reduced their exposure to Russian financial institutions by 80 per cent following the country’s annexation of Crimea in 2014, and their claims on the rest of Russia’s private sector have halved since then, according to a recent Capital Economics report. The new and more aggressive sanctions announced by the US will take that decoupling much further. 

It will also make Russia much more dependent on China, which will use the US and EU sanctions as an opportunity to pick up excess Russian oil and gas on the cheap. China is no fan of Vladimir Putin’s war. But it needs Russian commodities and arms, and sees the country as a key part of a new Beijing-led order, something Moscow is aware of. 

“China is our strategic cushion,” Sergei Karaganov, a political scientist at the Moscow-based Council on Foreign and Defense Policy, told Nikkei Asia recently. “We know that in any difficult situation, we can lean on it for military, political and economic support.” 

That does not mean China would break US or European sanctions to support Russia, but it could certainly allow Russian banks and companies more access to its own financial markets and institutions. Indeed, just a few weeks ago, the two countries announced a “friendship without limits”, one that will certainly include closer financial ties as Russia is shut out of western markets. This follows a 2019 agreement between Russia and China to settle all trade in their respective currencies rather than in dollars. The war in Ukraine will speed this up. Witness, in the past few days, China lifting an import ban on Russian wheat, as well as a new long-term Chinese gas deal with Gazprom. 

All of this supports China’s long-term goal of building a post-dollarised world, in which Russia would be one of many vassal states settling all transactions in renminbi. Getting there is not an easy process. The Chinese want to de-dollarise, but they also want complete control of their own financial system. That’s a difficult circle to square. One of the reasons that the dollar is the world’s reserve currency is that, in contrast, the US markets are so open and liquid. 

Still, the Chinese hope to use trade and the petropolitics of the moment to increase the renminbi’s share of global foreign exchange. One high-level western investor in China told me he expected that share would rise from 2 per cent to as high as 7 per cent in the next three to four years. That is, of course, still minuscule compared with the position of the dollar, which is 59 per cent. 

But the Chinese are playing a long game. Finance is a key pillar in the new Great Power competition with America; currency, capital flows and the Belt and Road Initiative trade pathway will all play a role in that. Beijing is slowly diversifying its foreign exchange reserves, as well as buying up a lot of gold. This can be seen as a kind of hedge on a post-dollar word (the assumption being that gold will rise as the dollar falls). 

New US limits on capital flows to China on national security grounds may speed up the financial decoupling process further. If US pension funds can’t flow into China, self-sufficiency in capital markets becomes ever more important. Beijing has been trying to bolster trust and transparency in its own system, not only to attract non-US foreign investment, but also to encourage an onshore investment boom in which huge amounts of Chinese savings would be funnelled into domestic capital markets. 

While sanctions against Russia herald more decoupling, it is also possible that the economic fallout from the war (lowered demand, even higher inflation) would push America and other nations into succumbing to pricing pressures that would favour Chinese goods. While there is likely to be a lot of political posturing on both sides of the aisle about standing up to Russia and China, it takes a long time to decouple supply chains. Policymakers in Washington have yet to get really serious about it. 

Beijing, on the other hand, is quite serious about the new world order that it is pursuing. In his 1997 book, The Grand Chessboard, Zbigniew Brzezinski, the former US national security adviser, wrote presciently that the most dangerous geopolitical scenario for the west would be a “grand coalition of China, Russia, and perhaps Iran”. This would be led by Beijing and united not by ideology but by common grievances. “Averting this contingency, however remote it may be, will require a display of US geostrategic skill on [all] perimeters of Eurasia simultaneously,” he wrote. 

Financial markets are going to be a major field of battle. They will become a place to defend liberal values (for example, via sanctions against Russia) and renew old alliances. (Might the US and Europe come together to forge a strategy on both energy security and climate change?) They will also be a lot more sensitive to geopolitics than they have been in the past. 

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