John  Browne

For those investors who have grown used to the relatively minor geo-political crises of the past few years, the developing situation in the Ukraine and the Crimea must come as an unexpected communiqué from the early 20th Century.There can be little doubt that the drama will impact financial markets.

While President Obama is doing his best to invert Teddy Roosevelt's "speak softly and carry a big stick" approach to foreign policy, the real issue is how Crimea's proposed secession from Ukraine will lay bare the opacity of international law with respect to issues of sovereignty. Recently, President Obama said, "Under international law, force can only be used in self-defense or by a decision of the U.N. Security Council. ..." But Obama considered using preemptive force in Syria without U.N. approval. Laying aside U.S. adventurism in the Middle East over the past 20 years, in 1998 President Clinton intervened militarily when Kosovo attempted to separate from Serbia.

Although the stakes are far lower, in many ways the current situation on the Black Sea parallels the Cuban Missile Crisis of 1962. Only this time, the roles of each player are reversed.

The threat posed by Russian missiles in Cuba was acute and targeted at America's vital interests. President Kennedy simply could not accept a Russian victory, even at the cost of all-out war. Popular and military support for a tough line against the Soviets, both at home and abroad, allowed Kennedy to go "all-in" to force the Russians to ultimately back down.

This time, it is Russia that has by far the most at stake. The threat to Russia's key warm water naval base in the Crimea, and the potential for an expansion of NATO into its traditional sphere of influence is acute. President Putin cannot accept defeat, even at the risk of war. And like Kennedy, he enjoys the support of his military and his people. Despite the relatively weaker economic hand being played by Mr. Putin, do not expect him to fold.

From my perspective, Putin may see six major geo-political weaknesses in the U.S. position. First, he recognizes that the U.S. military and the U.S. public have grown weary of ill-advised foreign interventions. Second, Russia's close trade and energy connections to Western Europe are causing dissension among NATO allies at the prospect of a Continental conflict. The potential for Putin to drive a wedge between the U.S. and wavering EU allies is a risk that Washington must consider.


John Browne

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.