From September 7 issue of the TREND letter

While the credit crunch, bank collapses and the housing crash have kept us busy analyzing what is next for the markets, we must reflect on the recent headlines of Russia’s invasion of Georgia. We feel that we need to study this event very closely as it confirms our earlier concerns expressed in our June 3, 2007 issue of the TREND letter.

In that issue we highlighted an Associated Press story where Russian Prime Minister Vladimir Putin at that time said that tests of new Russian missiles were a response to the planned deployment of U.S. missile defense installations and other forces in Europe, suggesting Washington has triggered a new arms race.

“In a clear reference to the United States, he harshly criticized “imperialism” in global affairs and warned that Russia will strengthen its military potential to maintain a global strategic balance.” “Putin described the tests of a new ballistic missile capable of carrying multiple nuclear warheads and a new cruise missile as part of the Russian response to the planned deployment of new U.S. military bases and missile defense sites in ex-Soviet satellites in Central and Eastern Europe.

He assailed the United States and other NATO members for failing to ratify an amended version of the 1990 Conventional Forces in Europe (CFE) treaty, which limits the deployment of heavy non-nuclear weapons around the continent.

“We have signed and ratified the CFE and are fully implementing it. We have pulled out all our heavy weapons from the European part of Russia to (locations) behind the Ural Mountains and cut our military by 300,000 men,” Putin said.

“And what about our partners? They are filling Eastern Europe with new weapons. A new base in Bulgaria, another one in Romania, a (missile defense) site in Poland and a radar in the Czech Republic,” he said. “What we are supposed to do? We can’t just sit back and look at that.” Putin and other Russian officials have repeatedly rejected U.S. assurances that the planned missile defense installations are meant to counter a potential threat from nations such as Iran and pose no danger to Russia.

So the warnings were very clear. What we cannot quite understand is why this situation was allowed to get to where it is today. From what we can see, the US has its hands pretty full with wars in Iraq and Afghanistan, the very real potential of trouble with Iran, and of course the destabilizing situation in Pakistan. Why does the west, especially the US, want to piss off the Russians – especially at a time when the US is in no position to act to intervene in a new conflict with a growing power?

Russia has some of the largest oil, gold, uranium and other natural resource supplies in the world. Its foreign reserves are growing at a phenomenal rate. It has an economic growth rate of over 7% in each of the past 6 years, it has no credit crisis, no housing crisis, and a declining inflation rate.

It seems to us that for reasons that we cannot quite grasp, the US led NATO has opened a new window to allow Putin to reassert Russia’s influence in the former Soviet Union and Europe. Make no mistake; the Georgian planned invasion of Southern Ossertia was not done without the full knowledge of the American administration. The United States is Georgia’s closest ally. They have over 140 military advisers in Georgia, in addition to many civilian advisers, and contractors assisting with Georgian government. There is no way that the Bush administration was taken by surprise by this invasion.

It would also be absurd to believe that US were not fully aware of the Russians forces that were deployed. If they were not aware, then one has to wonder what the American taxpayers are getting for the billions spent on U.S. technical intelligence. Did the US not believe that Russia would respond to such an attack?

While the US is still the world’s superpower, its military is very extended with all of the troops in Iraq and Afghanistan. While the US was heavily engaged in the Middle East wars, the US administration had not let up on its foreign policy mission of expanding democracy throughout the world. The areas that the US targeted included former Soviet Union states including Georgia and Ukraine. Not only did the US push for democracy and capitalism in these former Soviet states, they also worked to include them in NATO. These developments, plus the deployment of US missile bases in Europe and Asia was a tipping point for Putin and his new regime.

From Putin’s point of view, when the US began discussing including Georgia and Ukraine into NATO, this was a clear and present danger. To date, both George H.Bush and Bill Clinton had promised the Russians that NATO would not expand into the former Soviet Union Empire. In 1998,, that promise was clearly broken, when Hungary, the Czech Republic and Poland were accepted into NATA. We need to clearly understand the implication of the US wanting Georgia and Ukraine to be included in NATO. Under Article 5 of the NATO treaty, each country pledges to go to the assistance of a fellow member under attack. If Georgia was a full member when Russia attacked, then the US would be obligated to come to Georgia’s defense.

We also need to have an understanding that from Russia’s viewpoint, the Ukraine dominates Russia’s southwest border, so having it as part of NATO was a very clear threat to Russia’s defense against any real or perceived threat from the west. All of these moves from a Russia perspective, the US is engaged in a clear plan to strategically encircle Russia.

If the US really wanted to permanently throttle any opportunity for Russia to regain superpower status, it should have made its move in the 1990’s, not wait until after 9/11 and the war on terrorism. We are not military strategists, but does it make sense to wait until your military is fully involved in 2 wars, plus another potential war in Iran, plus a destabilizing Pakistan, to now start a new conflict with Russia? Back in the early 1990’s Russia was spent – today it is a wealthy, growing power with a very proud and strong leader.

Also, given the very real challenge that Iran has presented to the US,, the Americans have needed the Russian cooperation with sanctions. They have also needed the Russians to abstain from selling Iran advanced Russian war heads. It seems to us that these are all very good reasons not to piss off Putin and the Russians.

We are not clear as to what the objective of the US supporting Georgia’s invasions of Southern Ossertia was, but we are pretty sure that the result is quite different than the objective. What this action has clearly displayed for the world to see is that Russia is quite capable of mounting a successful military operation. This action has also demonstrated that the US is not in a position to intervene in any action in this region. And a third and very powerful result of Georgia’s invasion is that countries such as Ukraine, Belarus and Central Asia have been put on notice that Russia will take a dim view of these and other countries making closer ties with the US.

We are now at a point where the west, led by the US, has challenged Putin and Russia, and the Russians have responded quickly and decisively – all at a time when the US could not respond. We suspect that Russia will now push its new influence in this region, as to wait until the US resolves its conflicts in Iraq, and Afghanistan would seem foolish. But given the potential issues with Iran and Pakistan, it looks like Russia has time on its side.

What will be the outcome – we do not know for sure, but from what we can see there is no major win here for the US. Russia appears to be in the position of strength. They will most likely wait for the US to make the next move – but what move can the US make? The US wants and needs to get out of Iraq and they are going to need Russia’s help to calm down Iran. We are expecting the US to back away from pushing so close to Russia borders and backing off trying to get Ukraine and Georgia into NATO.

The next step would be to see if the US and NATO back off on their insistence on installing these anti-missile bases close to Russia. If the US backs off of its plans to place missiles in Poland, then things could get back to a level of calm, at least in the short term.

If this is not the action that the US takes, then we have to ask – does the American voting public really want to get into a war with Russia, over Georgia and Ukraine? We hope not!