Background
A year and two months into the Russian invasion of Ukraine and the war appears to have reached an entrenched stalemate. Against this backdrop, we’ve seen an ever-incremental (perhaps strategic) increase in U.S. and NATO ally financial and military aid flowing to Ukraine. However, as the U.S. begins gearing up for a presidential election and sorts through an ongoing banking crisis, the American political zeitgeist is experiencing headwinds against bi-partisan support of aid to Ukraine and, overall, against the long-termism required to find a decisive victory against Russia.
Critics of late have cast Ukrainian aid and the outcome of the war as a non-strategic American interest. We posit that one, the strategic American interest in Ukraine is the defense of American/Western ideals, and two, that ideals aren’t simply ‘fluff’ or intangibles a nation strives for but, in fact, have incredibly material impacts and ripple effects worth fighting for, spending on, and supporting.
Analysis
Why Ideals are on the Table in Ukraine
To get the obvious out of the way first – if we aren’t willing to offer more than lip service support to those fighting for the same ideals upon which we were founded, then what message does that send to our democratic allies, democratic dissidents living under authoritarian regimes around the globe, and most importantly to ourselves. Freedom and sovereignty are some of the highest-held and most revered ideals in American life. We have a national holiday celebrating our independence from British rule. As far as divisive topics go, this is about as non-partisan as it gets.
Easy stuff out of the way, let’s establish the timeline of events that put American & Western ideals on the table as a strategic interest in the outcome of the war – key events noted by red arrows.
Now, there are a number of smaller events that happened in between these points, but as a larger mosaic, these are the most prominent beats.
In 2014, our first major event occurs as the post-soviet interregnum period ends with a newly elected Ukrainian government seeking stronger ties with the EU as a result of popular protests. Days before Ukraine was to sign an agreement more closely integrating political and economic ties with the EU, the sitting president, Yanukovych, U-turns at the behest of Russia, declaring the deal dead. Popular protests followed (for visual learners, this is when the now famous pictures like the below cropped up), ultimately leading to an EU-brokered agreement between Yanukovych and opposition leaders that called for early elections and the formation of an interim unity government.
Running parallel to the Maiden protests, ‘little green men’ started to appear in Crimea, occupying airports and government buildings; Putin later admitting these were Russian troops in an attempt to justify deployment as part of his rationale that the newly installed unity government amounted to a coup.
So, let’s pause to break that down – the will of the people overwhelmingly supported greater EU integration, so much so that they are willing to protest and die for the sovereign right and freedom to decide in which direction to take their country. The New unity government that represents both sides says it will sign the EU deal, Russia seeing the writing on the wall, invades and soon after annexes Crimea with ‘little green men’ marking the first time since the end of WWII that a European state annexed the territory of another.
To sum, what we witnessed was an attempt by Russia to normalize the literal re-drawing of borders if the will of the people chooses too much freedom or a country’s sovereignty affords them too much autonomy. Essentially denying people’s freedom to choose and infringing on another state’s territorial integrity for making a choice.
Fast forward to 2022, Russia orders soldiers (little green men) to the Eastern Ukrainian regions of Luhansk and Donbas, fighting continues and escalates, Zelenskyy is elected president, and Russia lines up hundreds of thousands of troops along the Ukrainian border, bringing us to our next major milestone – the 2022 Winter Olympics in Beijing. It is here, on the sidelines of the Olympics and eve of Russian invasion, that Putin and Xi meet and issue a joint statement declaring a “new era” in the global order, a “no limits friendship,” and endorsement of respective territorial claims to Ukraine and Taiwan.
This was essentially a play at codifying the actions taken by Russia eight years prior – powerful states dictate sovereignty to smaller states, freedom to decide style of governance is not allowed, and the will of people is irrelevant when compared to interests of the state.
Soon after, the U.S. calls for a security council vote to condemn the invasion in, which Russia, unsurprisingly, vetoes, and China abstains. This key milestone has two sides. One, the United States wants to draw China out into making a clear position (anything other than voting to condemn puts the Chinese in a defacto position of supporting the war), and two, show the U.S. is leading, standing up against Russian aggression, and defending the charter of the UN.
The last two milestones bring us to today. First, China publishes a twelve-step peace proposal, and second the Putin-Xi meeting in Moscow in which Putin supports the peace plan. Starting with the Chinese peace proposal – there are three reasons why this is a farce. 1. Nowhere in the peace plan does Russia withdraw its military forces or give back captured land, thus making China a non-credible mediator, and the next point laughable 2. The first step of the Chinese peace plan is ‘respecting the sovereignty of all countries.’ So, the aggressor country doesn’t withdraw its forces and keeps captured territory, all with the backdrop of a possible Chinese invasion of Taiwan, yet the Chinese propose respect for sovereignty? Again, as we said, laughable. 3. The Chinese have very little expectation that the world will accept their peace plan, rather this is a strategy that both attempts to portray China as a global peacemaker made all the more potent if the U.S. doesn’t back it – casting America as a warmonger seeking to prolong the conflict and two, set the ‘legal’ groundwork for a potential Chinese invasion of Taiwan.
Our last main milestone event, bringing us to today, March 2023, the Xi-Putin meeting in Moscow. Nothing material of interest came out of this meeting, with one exception, Putin vocalized support for the Chinese peace plan. In a plan that, in fact, rewards the aggressor and promotes anti-sovereignty/freedom, this is unsurprising.
The throughline for all of these milestone events is the attempt to normalize and legally justify the abandonment of ideals. Highlighted throughout the timeline, sovereignty, freedom, and the will of the people are all immediately on the table in Ukraine. However, more broadly, 30,000 ft view, this is an attempt to, quoting China & Russia, build a “new era” in the global order – one that doesn’t abide by Western ideals as a whole. One in which authoritarians act at will and announce draconian preambles that serve as justification for any war, invasion, or crime against humanity, a world order in which there is no rule of law, except that which they would make on a whim.
Ideals are at the heart of what is at stake in the microcosm of Ukraine.
Why Ideals are a Strategic American Interest
Unfortunately, by the numbers, American support for longer-term Ukrainian aid and Russian sanctions has declined YoY. We see this broad-based decline as the result of the confluence of political messaging, inflation, and the phenomena of a shortening American attention span (de-sensation from the 24 hour news cycle, normalizing hyperbole in everyday events, heavy inundation of social media on voters, particularly younger demographics.)
Interestingly, we see support by political alignment broken out below. Without indictment of either side of the aisle, the broad YoY increasing trend of “too much” aid to Ukraine is worrisome for the political viability of the pro-aid position across the political spectrum, a position that will be required in the long term for a Ukrainian (and Western) victory in the war.
So, Western ideals are on the table in Ukraine and a voting American public is losing interest in providing aid to Ukraine. With the scene set, let’s dive into why, in Ukraine, ideals are material and thus a strategic American interest worth fighting for, spending on, and supporting.
First, some scenario planning. Let’s pretend the U.S., NATO countries, and Asian allies pull all economic, diplomatic, and military support to Ukraine, Russia solidifies its hold on all land captured since the invasion, Ukraine capitulates to China/Russia’s peace terms, and Zelenksyy’s administration is replaced with a Russian puppet. On the surface, NATO & and the West look weak and ineffective, China is positioned as a legitimate global peacemaker, and Western countries are left with an incredibly embarrassing ultimatum – either continuing a self-maiming mandate of not purchasing Russian energy or come hat in hand to Russia to bend the knee and try to re-build bridges to restart the flow of Russian energy.
This would drastically fuel diplomatic momentum and soft power gains for both Russia and China across the globe lending credence to their vision of a new era of world order that favors authoritarianism. Effects underneath the hood are wide-ranging and really where the rubber meets the road for material impacts. Strategically important partner countries – both for their locations and resources – become more “up for grabs” in their access and working relationships with major powers, think countries like the Philippines, Solomon Islands, Democratic Republic of the Congo, Ghana, UAE, Vietnam, and Moldova. Using the scenario above, the Philippines could rescind a deal granting the U.S. access to more military bases in the country, hampering strategic pivots into Southeast Asia to counter China’s influence. The Democratic Republic of Congo (DRC) controls more than 70% of the world’s cobalt supply – most of which is exported to China. For more than a decade, DRC was part of several mega infrastructure-for-minerals deals with Chinese mining companies as part of the Belt & Road Initiative, giving China heavy control of rare earth minerals supply in the country. This trend could feasibly continue across mineral-rich African countries, further widening the U.S.-China gap for control over global rare earth minerals supplies, which has implications for high-tech and defense capabilities as well as the energy transition.
Conclusion
This trend continues in the same fashion spread across these strategically important countries, but the headline is the same: a weakening in Western ideals as a result of a loss in Ukraine leads to restriction of access to materially important locations and resources. Keep in mind this scenario just plays out what a stalemate would look like in Ukraine. We see amplifying effects if Russia were to solidify further advances toward Kyiv or, more unlikely, capture the entirety of Ukraine. The downstream material effects in worsening scenarios don’t get any prettier for the U.S. and the collective West. This is why we believe it is imperative that the U.S. continue providing diplomatic support, economic aid, and military backing for Zelenskyy’s government in Ukraine.
Themes
- Defense & Aerospace
- Rare Earth Minerals miners & manufacturers
- Small-cap tech
- Semiconductors
- Green technology
- North American O&G
So, making capital markets sense of all of these inputs – how does the way forward shape up?
We believe in building investment strategies that both hedge for and can win in any scenario and have a long-time horizon. To that end, we see defense & aerospace names in a win-win position. As the West has relocated older generation military assets to Ukraine, NATO alliance members (30+ countries), including the U.S., will need to re-stock quickly depleting inventories. Additionally, in an increasingly multi-polar geopolitical environment, we’ve seen military spending by countries around the globe (not just NATO allies) continually increase, with U.S. defense names being on the receiving end of these tailwinds. Lastly, U.S. defense names are able to battle test their weaponry in Ukraine – for weapons manufacturers, this is an invaluable asset for products and valuation.
Rare earth minerals again play a huge role as the building blocks for modern and future consumer and military technology. Access to and control over rare earth minerals supplies will dictate the speed at which countries can move up the technological sophistication curve – this, among other reasons, is why you see the U.S. taking drastic action to block China’s access to high-end semiconductors and semiconductor manufacturing equipment – the thought being if you can’t entirely control the building blocks of chips, i.e., the start of the supply chain, then you can bottleneck the end of the supply chain. That said, until the day comes that modern-day technology can run on anything other than semiconductors, the space is primed for decades of relevance, and, as we see, decades of valuation gains. Additionally, we like both the miners of rare earths and, importantly, the manufacturers of these minerals. While establishing producing mines remains a long and capital-intensive business picking the right names that have displayed long-term capital discipline will win in the space. On the other side of this coin, manufacturers play an incredibly important role in taking the raw material and turning it into a usable product to be implemented by the ASML’s, TSMC’s, and NVDA’s of the world. Lastly, while we’ve seen U.S. tech of all market caps be continually bruised in valuation, we believe the micro-small cap names in the space have the most room to run. The key to positive ROI here will be choosing issuers that have management able to operate strongly in a non-ZIRP (Zero Interest Rate Policy) environment, display capital discipline, and have a unique value proposition (i.e., unique product or service.)
Out of this mineral/technology cycle, we see a long play coming into scope for retail investors. Green technology is sourced heavily from many of the same base minerals that current consumer tech and defense are powered by. Governments around the world have offered and are currently offering tax incentives for investment in clean energy/green technologies. In the U.S., this takes the form of the IRA (Inflation Reduction Act) and in the EU, appropriately titled Europe’s Green Industrial Plan. The space as a whole is volatile as technologies with widespread commercial applications remain a tiny pool, and winners/losers rise and fall rapidly. However, the macro trend is here to stay. We believe the world won’t reach net zero carbon emissions by 2050 it’s nearly a quantitative impossibility. However, we will get there eventually (think in the year 2100+). That said, this is a theme that is growing in importance (moving toward regulatory requirement in some countries) and is here to stay as climate change both hastens and worsens.
Hedging for any scenario, we see North American oil and gas as a major winner in a Ukrainian win or loss. Exposing a huge reliance on Russia, the EU is likely to never go back to purchasing Russian energy like they were before the war. Of course, purchases still occur, albeit in much smaller amounts – and the U.S. has stepped in to fill that void. Let’s take liquefied natural gas (LNG) as an example.
Center for Strategic & International Studies
In either case, the trust is gone between the EU and Russia. Nordstream-esque pipelines will no longer punctuate the energy landscape in Europe. Thus, we see North American (US & CA) energy as continuing to take up more EU market share.
Sources:
[1] https://www.reuters.com/article/russia-putin-crimea/putin-admits-russian-forces-were-deployed-to-crimea-idUSL6N0N921H20140417
[2] https://foreignpolicy.com/2023/03/06/china-russia-war-taiwan-ukraine-peace-plan-xi-putin/
[3] https://www.theguardian.com/world/2023/mar/21/putin-welcomes-chinas-controversial-proposals-for-peace-in-ukraine
[4] https://time.com/6252750/philippines-us-military-agreement-china/
[5] https://www.orfonline.org/expert-speak/chinas-scramble-for-africas-rare-earth-elements/
[6] https://www.csis.org/analysis/united-states-running-out-weapons-send-ukraine
[7] https://www.visualcapitalist.com/ranked-top-10-countries-by-military-spending/
[8] https://carnegieendowment.org/2022/10/27/biden-s-unprecedented-semiconductor-bet-pub-88270
[9] https://www.epa.gov/green-power-markets/inflation-reduction-act
[10] https://www.csis.org/analysis/getting-real-inflation-reduction-act#:~:text=Europe’s%20Green%20Deal%20Industrial%20Plan
Website Disclaimer:
The information in the Blog constitutes the authors’ own opinions (and any opinions expressed by that of our guests) and it should not be regarded as a description of services or opinions provided by Pickering Energy Partners LP.
The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this Blog constitutes investment advice or any recommendation that any security, portfolio of securities, investment product, transaction or investment strategy is suitable for any specific person. You should not use this Blog to make financial decisions and we highly recommend you seek professional advice from someone who is authorized to provide investment advice.
Leave a Reply