We have cited Paul Schulte, founder and editor of Singapore-based Schulte Research, a number of times. Paul has decades of experience in equity research and research on banks, financial technology, bank algorithms, and credit algorithms. He has taught at the graduate level at several universities. We’ve recommended some his books, and I read his analyses regularly.
Paul has graciously given us permission to share with readers his note from June 2, 2022. In “Russia’s invasion of Ukraine is all about eliminating a competing gas station,” Paul has followed the history of oil and money in Eastern Europe and Russia to draw conclusions about Vladimir Putin’s endgame.
Here’s Paul.
With the Orange Revolution in 2004, Ukraine turned its back on Russia. The 2014 repudiation of Russia’s puppet govt. in Ukraine deepened Russian hatred. At this time, there were large oil and gas finds in Ukraine — larger than Scandinavia and the EU combined.
At the same time, Russia was building pipelines from Siberia — via Ukraine and Belorussia [now Belarus] — to Eastern Europe. These pipelines then moved into Europe. Europe was happy because it reduced dependence on “unstable” Middle East regimes. Great!!
Shell, Exxon, and Chevron all became active in Ukraine to open up their own gas stations. This was a clear threat to the Russian monopoly gas station.
Ukraine had the capacity to reduce Russia’s market share by 50–60%. In fact, Ukraine could potentially have replaced Russia’s energy output. Where are these reserves? In the Donbas and Crimea!
The invasion and occupation in Ukraine of Donbas and Crimea caused the major oil companies to exit. And they certainly — at this point — will not come back in.
Putin and his cronies now get an oil price windfall as well as the elimination of competition from Ukraine by an invasion. He cares nothing about human life so is not bothered by the loss of 15,000–20,000 men (teenagers). He is saving his fortune and the fortunes of his cronies. They are all happy for this chaos to carry on even at the cost of thousands of Russian and Ukrainian lives.
But, long term, Russia has cut its throat. Its oil and gas supplies to Europe will be turned off over the coming years. Short term, it has a windfall. Long term, Putin’s greed has undermined the future of Russia. He does not care. He likely only has 2–3 years to live and wants to die the richest man in the world.
Putin and his successor will NEVER give up conquered lands in the Donbas to the Ukrainians in any cease fire. (This was the case in WW II — the Russians would never give up lands conquered in 1944 and 1945). They may negotiate for prisoner release and some reparations. Oil rights. But little else. Plus, Putin will conveniently use Russian ultranationalism to “cleanse” Ukrainian “nazis”. It’s all about money and imperial power in the end. Russian soldiers and Ukrainian people are mere pawns for the oligarchs around Putin.
At this point, it is in Putin’s interest to maintain a war of chaos and destruction to keep Ukraine out of the gas business temporarily (and hopefully permanently).
Putin still thinks he can create a Donbas victory, a federated Donbas, then a cease fire and then a treaty. He probably thinks Europe will forgive and forget. I really doubt this, but it’s not impossible.
A profound humanitarian crisis is erupting — and a global food shortage is emerging. The world must intervene to push Russia back, open up sea lanes or force a cease fire.
Neither side is exhausted. Both are revved up. Both are seeing isolated victories. Both have momentum. What we should conclude is that this will aggravate inflation. I don’t see a way to get out of this at the moment.
We thank Paul for sharing this with our readers. We want to add this comment from an authoritative source who prefers anonymity. –David
Unblocking Odesa requires naval security than can prevent Russia from taking advantage.
This means:
1) having the right to open fire on any threats to a convoy
2) more warships in the Black Sea and
3) more chance of direct conflict between Russia and NATO.
If Ukraine refuses to clear the mines that have been laid, Russia Can blame Ukraine for the blockade.
If Ukraine clears the mines, they make themselves vulnerable to attack.
At this point, there is no reason for Ukraine or anyone else to believe that Russia will act in good faith. ALL evidence is to the contrary. The Russian government deals in lies and deception.
The only way that grain can be shipped from Odesa is with merchant convoys that are heavily protected by a strong NATO naval force.
It's the only way to defeat Lavrov's lies. Trust left the party a long time ago.
Ps. The Russia - China split is occurring before our eyes. This took much less time than I thought.
Imagine. Only two years ago, Putin was brilliantly playing China off against the US. TODAY, he is losing his grip day by day. In utter isolation. I predicted in March Putin would be gone by summer. I stick to that view.
In closing, we wish for good luck to all fathers everywhere on this Father's Day as we think about the fathers up to age 65 in Ukraine who are defending their homeland while Putin is killing thousands of Russian teenagers who will never become fathers as well as those this Moscow monster has killed in Ukraine and elsewhere. –David
David R. Kotok
Chairman & Chief Investment Officer
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