Common Cents & Trouble in Ukraine

This past week, I made two lunch presentations about the economy and the markets. If you read last week’s edition of this newsletter, you can imagine some of the bullet points and soundbites I gave. Yes, despite the recent unpleasantness in the investment markets, the positive continues to outweigh the negative when it comes to predicting the strength of the US economy.

However, one particular black swan has been swimming a little too close for some people’s comfort, and I don’t mean the Omicron variant. Nope, the swan in question is the imbroglio between the Russians and the Ukrainians. One gets the impression things could get worse before they get better.

But what is at stake for US investors, even in the worst case scenario? That is either a very easy question to answer or an impossible one.

According to the Office of the United States Trade Representative: “Ukraine is currently our 67th largest goods trading partner with $3.7 billion in total (two way) goods trade during 2019.” While that might sound like a lot of money, and it kind of is, in the grand scheme of our economy, our trading relationship is so many proverbial peanuts. As for US foreign direct investment (FDI), it was an estimated $596 million in 2019.

That puts it way down on the list.

To put these numbers into perspective, here are those same numbers for the Russian Federation: “Russia is currently our 26th largest goods trading partner with $28.0 billion in total (two way) goods trade during 2019.” Obviously, that is a lot more than our two way trade with Ukraine. The story is pretty much the same for FDI: “U.S. foreign direct investment (FDI) in Russia (stock) was $14.4 billion in 2019, a 2.6% increase from 2018. U.S. direct investment in Russia is led by manufacturing, wholesale trade, and information services.”

Make no bones about it, solely in economic terms, the Russians are far more important to the US than are the Ukrainians, by a sizable margin. Even so, our ‘interconnectedness’ with Russia is pretty minimal when compared to our larger trading partners like the remainder of the G7, Mexico, China, India, Brazil, Ireland, South Korea, the Netherlands, Taiwan, Switzerland, and even Vietnam.

As such, when it comes down to dollars and cents, what happens between Russia and Ukraine won’t hit our collective wallet very hard, as long as the situation remains between those two countries alone.

If and when “push comes to shove” and Russia invades Ukraine, the so-called Western powers are going to be in a real fix. After all, there is this huge intergovernmental military alliance called NATO whose primary purpose, for all intents and purposes, is to protect central and Western Europe from the Russians. However, Ukraine is NOT a NATO member. As such, an attack on that country is not tantamount to an attack on any NATO country.

Therefore, the United States is not necessarily bound to defend Ukraine from a Russian invasion. However, there is the issue of the “Budapest Memorandum on Security Assurances” with which to contend. I am sure more than a few people reading this have never heard of such a thing. So, let me give a quick primer.

After the implosion of the Soviet Union, some former Soviet republics were left with nuclear weapons within their territory: Belarus, Kazakhstan, and Ukraine. In order to get these countries to agree to ‘give up’ their weapons, the Russian Federation, United Kingdom, and the United States signed off on the following pledges/promises in the memorandum in December 1994, from Wikipedia:

  • Respect Belarusian, Kazakh and Ukrainian independence and sovereignty in the existing borders.
  • Refrain from the threat or the use of force against Belarus, Kazakhstan and Ukraine.
  • Refrain from using economic pressure on Belarus, Kazakhstan and Ukraine to influence their politics.
  • Seek immediate Security Council action to provide assistance to Belarus, Kazakhstan and Ukraine if they “should become a victim of an act of aggression or an object of a threat of aggression in which nuclear weapons are used”.
  • Refrain from the use of nuclear arms against Belarus, Kazakhstan and Ukraine.
  • Consult with one another if questions arise regarding those commitments.

Clearly, Vladimir Putin has not held up the Russian Federation’s end of the deal. No doubt Tsar Vladimir would argue Russia signed the document under duress from the West during a period of extreme Russian weakness. Even so, do these assurances bind the United States to defend any of those countries from attack OR does it just mean the US won’t attack them? It would seem the latter. Further, given Russia’s permanent spot on the UN Security Council, the fourth bullet is meaningless when it is Russia doing the invading.

So, if the United States doesn’t have significant economic interests in Ukraine and isn’t under any apparent obligation to defend Ukraine, why is this an issue for the US and why should we care?

Simply put, because our ‘allies’ in NATO appear to care, and we DO have both significant economic incentives and treaty commitments with them. The problem is, after two devastating World Wars in the 20th Century and decades living under a sizable American military deterrent, the remainder of Europe really isn’t in a position to defend itself from the Russians by itself.  Without US air power, Putin would be able to command air supremacy very quickly. What’s more, it doesn’t appear as though the average European cares, even if their politicians say they do.

Let me explain.

In 2015, the last time it did so according to the website, Gallup International conducted a survey which asked whether people would be willing to fight for their country. According to the website, here is the methodology: “A total of 62,398 persons were interviewed globally. In each country a representative sample of around 1000 men and women was interviewed either face to face (30 countries; n=32258), via telephone (12 countries; n=9784) or online (22 countries; n=20356). Details are attached. The field work was conducted during September 2014 – December 2014. The margin of error for the survey is between 2.14 and 4.45 +3-5% at 95% confidence level.”

The findings were pretty astounding. Here are the results of those people who responded for selected countries: Netherlands 15%; Germany 18%; Belgium 19%; Italy 20%; Austria 21%; Spain 21%; Czech Republic 23%; UK 27%; France 29%; the US 44%; Poland; Russian Federation 59%, and Ukraine 62%. Think about those numbers. Only 18% of those Germans polled in the survey were willing to fight for their country. Shoot; for the European members of the G7, a non-weighted average of 23.5% would fight, and a weighted average of 23.0% would. Really? And who would be the most likely country they would be fighting? Sri Lanka? Not hardly likely.

When you wrap all of this up, perhaps it isn’t all that surprising the average AMERICAN is also a little confused when we should care about what is happening in Eastern Europe. A recent YouGov poll commissioned by the Charles Koch Institute (admittedly a libertarian/conservative think tank), released on December, 17, 2021, paints a pretty appealing picture, if you are Vladimir Putin that is.

Let me cut and paste a few of the pertinent points straight from the website/press release:

Will Ruger, Vice President of Research and Policy at the Charles Koch Institute, had this to say about the poll’s findings:

“The United States has no vital interests at stake in Ukraine and continuing to take actions that increase the risk of a confrontation with nuclear-armed Russia is therefore not necessary for our security. After more than two decades of endless war abroad, it is not surprising there is wariness among the American people for yet another war that wouldn’t make us safer or more prosperous.

“At a time of record deficits, debt, and inflation, policy makers should not be surprised the American people want to see our wealthy European allies pay more for their own defense and for policy makers to prioritize challenges here at home. It makes no sense for the United States to continue to bear the bulk of the burden for the costs of maintaining NATO’s military power.”

Highlights from the poll include:

Domestic issues should be a priority for the country. A vast majority (73%) of respondents think the U.S. should prioritize domestic issues over foreign policy issues. Notably, this sentiment was shared roughly equally across political identities (70% Dem, 76% Rep, 81% Ind/Oth).

No appetite for a war with Russia. A plurality of respondents (48%) would oppose going to war with Russia should it invade Ukraine. Only 27% would favor going to war, and 24% indicated they didn’t know.

Limited support for more global military engagement. A plurality of respondents (40%) indicated they would like to see America less militarily engaged around the world, compared to only 10% who would rather increase our military involvement globally.’


This, then, begs the question(s): can a black swan event be a black swan event when: 1) everyone has seen it coming, and; 2) the majority of people don’t seem to care? Hmm. How about that?

In this instance, the black swan event is NOT Russia invading Ukraine, nor is it Russian provocations in general. That is just what they do and have always done. Don’t expect them to think and act like Americans, because they aren’t. They are Russians.

No, the black swan event is, frankly, the United States’ response to an invasion of Ukraine. As I type here at 9:32 am CST on January 21, 2022, no one knows with certainty exactly what Washington intends to do or is willing to do should the situation escalate further. All ‘we’ know is it will be reciprocal, severe, serious, and the like; at least that is what our politicians have been telling us. Okay…I guess.

If push comes to shove, how severe and in what form will our response be? Economic sanctions and a beefing up of defenses in Poland and the Baltics? After a few stressful trading sessions, the markets and the global economy will let out a sigh of relief and get back to the business at hand, albeit with caution. If it is a significant military response, all bets are off, but the world will undoubtedly love the 2-Year US Treasury Note, gold, and energy socks. Finally, IF the US, and it primarily is the US negotiating with Moscow over this, agrees to Moscow’s terms that NATO will never expand into Ukraine (which is doesn’t appear it wants to do anyhow), Putin will be able to save face, the Europeans can blame Washington for whatever comes next, and the Administration will be quick to claim the contemporary equivalent of:

“My good friends, this is the second time there has come back from Germany to Downing Street peace with honour. I believe it is peace for our time. We thank you from the bottom of our hearts. Now I recommend you go home, and sleep quietly in your beds.”

If you were to ask me to make a bet, at this point in time, what the probable outcome is, I would tell I saved the best for last in that paragraph. You can call it appeasement or kicking the can down the road or what have you. However, that appears to be the low-hanging fruit, and US investors probably don’t have to worry too much about this particular brouhaha. As Neville Chamberlain might say: “they can go home, and sleep quietly in their beds.”

…after all, despite the recent unpleasantness in the investment markets, the positive continues to outweigh the negative when it comes to predicting the strength of the US economy.


As always, I hope this newsletter finds you and your family well, and may your blessings outweigh your sorrows not only on this day but on every day (and don’t forget to listen to our Trading Perspectives podcast)!

John Norris
Chief Economist



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As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.