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Dec 2015: Geopolitical Outlook: Turkey-Russia Stand off, Middle East, Demographics

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By Christian Takushi MA UZH, 3 Dec 2015, Switzerland.

After recent events in Ankara, Moscow and Brussels we’ve updated our global outlook. Turkey may have shot down the Russian jet to contain the swift rapprochement between the EU and Russia after the Paris attacks. The gravity of the incident can hardly be overstated – it sets a dangerous precedent for many other conflicts. Many nations’ military jets touch and violate air space on a regular basis, also NATO.

Here some of our independent perspectives that contrast with current mainstream or consensus views:

1) Focus on the Middle East

The shoot-down of a Russian bomber over a rather undisputed border sets a dangerous precedent that brings back “Cuba Crisis Risk Elements” to the table. Our analysis leads us to assume the shoot-down of the Russian Sukhoi bomber was not a mistake nor a rushed reaction.

It was most likely a risk-weighted “Contained Offensive Action” with a strategic aim far beyond the Middle East theatre. The main goal: to prevent a too fast rapprochement between Russia and Western European powers. Thus, I don’t share Russia’s view that it was primarily to protect ISIS oil shipments. Although we can’t rule out this might have played a role. As it is often the case, a confluence of factors weighted in favor of that Contained Offensive Action. Thus, the interests of Turkey-allied forces in Northern Syria might have played a role too.

The shoot-down of the Russian bomber is having three important effects
Russian Air Defense: A S-400 missile is being fired. This modern system can engage a lrage number of enemy aircraft & missiles simultaneously.

Russian Air Defense: A S-400 missile is being fired. This modern system can engage a large number of enemy aircraft & missiles simultaneously.

(a) brings US and Turkey closer together – President Erdogan supports the Obama strategy and gets US support to pursue his multiple ambitious strategic interests,

(b) allows Russia to bring in powerful S-400 air-defense system (de facto air supremacy over Syrian airspace), but

(c) leaves Western Europe as the main loser, even more exposed than before. But this could be the pain that lets Europe wake up – and we see this unfold.

The shoot-down may have been perceived as necessary, because the Paris attacks changed the priorities in Western Europe, and French & Russian leaders were on course to form an alliance. After years of looking away, no French or German leader is asking Britain or the USA if -and how much- they knew about Turkish support for ISIS. The global embarrassment about the alledged Turkish role in the Syria-Iraq-ISIS conflict and NATO’s alleged knowledge of it, albeit denied officially, has further reduced global support for the NATO-only campaign. It has forced Allied Forces to strike harder at ISIS oil assets to make a statement “we are not sparing ISIS oil business”: Britain’s first strikes in Syria aimed at oil fields controlled by ISIS. But the damage in the global perception is done. Many analysts and observers are calling for a broader coalition with hopefully less conflicts of interests, to the delight of Russia and China. Thus, the call for a pragmatic “Realpolitik” solution in Syria as spearheaded by Moscow and Berlin is gaining track outside and inside the West. Here again, China is the biggest beneficiary of all current events in the Middle East. More and more European leaders are saying recently “we might have taken sides too early” and “the so called moderate rebels we are supporting in Syria have embarrassed NATO, they shouted and behaved to some extent like Jihadhists as they executed the Russian pilots in the air”. Shooting at parachuting pilots in distress is strictly forbidden by the Geneva Convention (Art. 48). The fact that our Western media did not expose it, doesn’t make our case in the world better: our allies on the ground commit war crimes and might not be as moderate as portrayed to our politicians.

Don’t blame the USA too early

Western European nations – after dismantling their military infrastructure for 14 years – sit in a multiple trap. Show of unity is the only thing left to do. Many in Europe were very disappointed at President Obama’s cold response to help Western Europe after the Paris attacks (nothing for Mr. Hollande except some warm words), but President Obama has two good reasons to make zero change in his course and military commitment despite the 13/11 attacks in Paris:

  • President Obama’s cautious policy has kept the US Homeland safe so far
  • Should the USA respond to France’s call to join a war against ISIS would make Europe only more dependent on US Military Forces and reward Europe’s reckless disregard for her own security. The U.S. State Department, the Obama Administration and the U.S. Congress have made it very clear that both Europe and Japan have to reverse course and do more for their own security and military defense. While Japan has begun to timidly take this seriously, Europe was in utter denial until November 13th 2015.

Europe has taken NATO to an extreme of a self-service institution where the USA bears the “burden and the dead”, thus Western Europe’s contribution is rather symbolic. To put it straightforwardly: Turkey, Poland and to a lesser extent Britain are the only credible military partners the USA has left in Europe or can fully rely on in case of a real military threat against the USA. Most European nations have embraced a radical pacifism like before WW2 that is in denial of the facts: nations and terror groups across the globe are in the most serious Arms Race ever.  It is clear that in an increasingly challenging military theatre of the Middle East the USA is prioritizing the strategic interests and security needs of her most reliable military partners, not just those feeding on the USA.

Rise of Turkey – did Ankara stretched its leeway too far?

sees itself as a Rising Power – and rightly so, while Western Europe is in a self-made trap and widely seen as in a structural decline. Turkey’s move is not without risks though: so far it has forged partnerships with every major power – practically unchecked. But now it has attacked the most ferocious and feared of all possible enemies: Russia. All other existing partners will realize they can be sacrificed too: Israel and Iran have taken notice. Fact is, no one has attacked Russia before, without paying for it and regretting it.

A Russian Air Defense S-75 (earlier version of the S-400) shot down the U.S. U2 jet as it flew deep into Cuba airspace during the Cuba Crisis. That day the world braced for an exterminating nuclear exchange.

A Russian Air Defense S-75 (earlier version of the S-400) shot down a U.S. U2 jet as it flew deep into Cuban airspace during the Cuba Crisis. That day the world braced for an exterminating nuclear exchange.

What our Western media hasn’t shown is that brief or near violations of air space are a very frequent occurrence all over the world since 1949 and no one shoots down a military plane purposely for touching one’s airspace for a few seconds. We would have a war every three weeks if that were so. To shoot down is rare: not even the staunch enemies Japan-China or India-Pakistan do that. In fact we’d have to go back to 27 October 1962 – during the Cuba Crisis and Almost Nuclear Holocaust – when the Russians shot down a U.S. U–2 reconnaissance military jet that intruded deep into Cuban airspace. While the recent shoot–down may have reached its goal (most likely cutting back France’s and Russia’s ambitions of working together), it sets a grave precedence for future conflicts: specially in the Middle East, India-Pakistan, China-Japan, China-Vietnam, South Korea-North Korea, China-Taiwan, Bolivia-Chile, Colombia-Venezuela just to mention a few. Ironically, the practice of flying over enemy territory was actually perfected and championed by NATO during the Cold War: US strategic bombers flew regularly deep over Russian air space to Moscow’s dismay.

Russia – condescendingly underestimated by the West 

Russia may have made a smart geopolitical move to de-escalate the global confrontation risk levels as it intervened in Syria and de-escalted in Ukraine, but Russian intelligence seems to have underestimated a key risk for Russia for the 2nd time in 4 years – or her warnings were not heeded. Turkey has in fact conflicting agreements with every player in the region: with the USA, Israel, Hamas, Russia, China etc. And in the past ten years it has never been denied by the West, Russia or China. Thus, a surprise shift in Ankara’s favor was a matter of time. Russia can take this setback though. For almost 15 years now, Moscow is quietly overhauling and modernizing its military complex: both defensive and offensive capabilities have been significantly improved. On the surface it looks like a degraded former Military Power, something Western analysts enjoy. While the West plays on big money budgets, the Russians have weighted their shortcomings relative to weak spots of NATO forces; and they’ve made their weaknesses almost a virtue. Their scientific and engineering prowess – given their limitations – can only be matched by Israel. As a result, Russia’s new technologies exploit to the max NATO’s vulnerabilities. Yet, one of Russia’s biggest advantages is that most Western analysts look down on it. Russia has been preparing for a world of complex geopolitical tensions and growing conflicts. Have we? Just to give one concrete example: Mr. Putin has smartly divided its military into four autonomous armies with ground & air forces each – with own chains of command. Speed and mobility are high. The war in Georgia showed the speed of their heavy armored units, considered “trash” by our military analysts till then. One stunned officer said: “we had not seen armored divisions move at such coordinated speeds since Field Marshal Rommel‘s 7th Panzer Division’s campaign in France and General Patton‘s 3rd Army rescue drive in the Battle of the Bulge”. How does NATO’s chain of command compare? Most NATO members have settled for a world of peace where armies are no longer needed, except for some peace-keeping operations. We see at least two wars in the horizon, both within the ballistic reach of Western Europe. Although Russia is not ready yet in several areas and under time pressure, it is in my analysis roughly ten years ahead of Western Europe in terms of military preparation.

Let’s be fair to Ankara

Turkey has never hidden her strategic ambitions, and neither the USA nor the EU have ever dared to stop Turkey for fear of losing big business deals or Turkey’s military shield. The West also has used Turkey’s growing might to project influence in the Middle East. Moscow needs to question its own intelligence assessment and whether it can be 100% sure the shoot-down order or suggestion didn’t come from outside Turkey. Our analysis shows: In Moscow, Turkish actions are seen primarily as a sovereign act of aggression by Turkey, not NATO. Therefore Paris, Berlin and Rome – the West European nations most vulnerable and barely able to defend themselves – should still be able to count on closer cooperation with Russia in common areas of interest.

To recap: A loose military cooperation with Moscow suffices the current US administration. Russia can help increase acceptance for the war on terror, something that had fallen to a vey low level recently outside the West. Ankara is simply advancing her strategic interests, using all means at her disposal. As all nations do – and let’s be fair, they do it as far as other nations allow it or tolerate it. Pragmatic yet cautious cooperation with Russia means trade and investments with the EU could normalize over 2016, boosting economic growth. Some things are looking up in Europe. Although our Global Geopolitical Risk Barometer is down slightly from 9 to 8.75 (10 being maximum), our LEV-AL Preparedness Level is still at 4 since July (i.e. disruptions are likely), thus the world remains in a highly vulnerable transition (2015-2018). I reiterate therefore the call to avoid unnecessary travel/risks, for elevated caution and basic precautionary measures.

2) Flying under the radar

The military industry is growing at a healthy pace thanks to strong export demand, but we expect it to accelerate further in Britain, France, Australia, Germany, USA, China, Russia .. etc in 2016. This, reflecting the unprecedented military build-up along rising tensions in many parts of the world. In other words, the decline in “trust in your neighbors” is leading to lower Potential Economic Growth, which we can’t see easily, because it is being cushioned by massive military spending. Market indices in benchmarks diffuse military activity by design.

The fact that only half of Germany’s fighter jets are operation-able, that France could mobilize barely 3’000 soldiers three days into a state of war, and that most European divisions and brigades exist only on paper, says everything about the tiny military forces of Western European nations. We are talking about a big failure in strategic assessment: a mis-judgement of great proportions that reflects a collective state of denial and lack of strategic vision in Western Europe. The world and the threats have been on this path for ten years at least, and not since the Paris attacks.

The Military complex is one of the biggest job creators in the world economy and it is on track to deliver a strong boost to manufacturing activity and GDP in key advanced economies in 2016. I see firms like ThyssenKrupp in Germany and DCNS in France (just to give examples) potentially winning large orders for defense infrastructure as Western European nations reverse their ill-fated military dismantling.

3) The demographic challenge still misunderstood

Screen Shot 2015-12-03 at 8.58.13 PMFew are aware that the tripling of the critical Age Dependency Ratios (above 65 years old vs working population) in all major economies will squeeze discretionary consumption. Some of the biggest shocks will be in China, South Korea, Italy etc. China will likely subsidize consumption and raise taxes to finance it. The government targets will be met even if a large part of it is government-managed and funded. Most young couples in China cannot afford a home and barely one child – this not only because inflation has been running at much higher levels than what Beijing has been reporting to us, but due to the dramatic increase in the costs for the elderly. In East Asia this is the burden of the children. Those who don’t look after their parents can end up in jail. China invested the profits from the fat years in prestige projects rather than a social security & pension system.

4) Underestimating the Global Summit in Paris (COP21)

and what is shaping up there: key institutions pushing for a breakthrough in supranational action and supranational governance. This is not just one more climate summit – we advise to take it seriously. Interestingly all changes in world climate are being singlehandedly blamed on human activity, this although the geophysical instability of the earth’s magnetic field and crust are significant as well. The latter can’t hardly be affected by humans, they need perturbation by forces of gigantic proportions. Many have accused the US military of doing this, but like most other Conspiracy Theories, we reject this one too. Climate instability can be explained by human activity, the short & long cycles of sun hibernation and geophysical instability. The push for cleaner energy could have far-reaching impacts on different economic sectors: it could go beyond a demand impact on solar panels and potentially lift the price of silver. It could lead to renewed investment activity and technological breakthroughs – again.

Aggressive Fixed Asset Investments and Technology Investments are the biggest victims of the current QE policies. It is cheaper to buy a smaller competitor with some technology. The controlling environment of gigantic firms stifles research and creative innovation that small firms offer. The zero-rate abundant money reinforces the tendency of big firms to possess knowledge and the people that have that knowledge. It does not foster creativity; it seeks to possess it instead, stifling it. A leap forward in Paris could bring a shift from “owning technologies” to “investing more in technology and offering access to it”. To tackle the gigantic global challenge under such time pressure an Open Access Architecture will be needed rather than selfish ownership & control for one’s own profit. This, too, could unleash investments and economic growth. Technology could be the greatest antidote against the demographic contraction of our Labor Force.

Christian Takushi MA UZH – Switzerland on 3 December 2015

An excerpt of our Update on 24 November 2015 after the shoot-down of a Russian Sukhoi SU-24 by Turkey:

I’d like to tell you that although today’s incident between Russia and Turkey is serious, Russia will avoid an overreaction. I believe forces within NATO (probably Obama administration, Turkey, Poland, Romania etc) are concerned about the growing rapprochement between Western Europe and Russia. Other NATO allies might also be worried about Russia’s direct bombing of ISIS oil transports and supply lines. At the rate of these bombings, ISIS could be severely impaired within weeks. 

Today’s shooting down of a Russian fighter jet was probably a deliberate act aimed at stopping this EU-Russia rapprochement, protecting Turkmen rebel forces in Norther Syria and – as some unconfirmed reports hint – possibly at shielding ISIS oil & supply lines. The EU has failed to pay attention to Turkish complex strategic goals: which include containing Kurdish influence and forces by all means. ISIS is the biggest threat to Kurdish forces. That could explain, why the Turkish military, the political leaders and Islamic leaders in Ankara are hesitant to implement NATO policy on the ground. The result, ISIS is fought, but not taken out quickly. Russia can stop supplying gas to Turkey and shock the economy, but I believe President Putin is smarter than this. The power he doesn’t use is more influential and lasting than the power he uses. I expect Mr. Putin to await the visit of Mr. Hollande. This is a marathon crisis period, not a quick crisis. 

The situation is fluid and several scenarios are likely, but overall we can conclude this evening that Russia shall not overreact to Turkey’s shootdown – at least not militarily. Russia will show strength in restraint and seek the closer cooperation with France and other European nations – possibly, Belgium, Germany and Italy. Putin can use this tragedy to take advantage of already growing divisions within NATO. Additionally we can assume France and Israel could be two links between the US–led campaign and the Russian campaign in Syria. Already now Israeli forces are coordinating successfully with Russia. Thus, behind the scenes, some coordination is already taking place between the West and Russia. Today’s events will make it more likely Russia will request (quiet) Israeli rescue support next time a Russian pilots is shot down. The recovery of the Ruble may be delayed, but I still think it could continue. Let’s await the French-Russian meeting. 

Christian Takushi MA UZH, Macro Economist, Switzerland. 

General Disclaimer: Global Macro and Geopolitical Analysis are highly complex and subject to sudden changes. No analytical method is without certain disadvantages. We may change our 3-pronged outlook within less than 3-6 hours following an event or data release. Global macro analysis can be extremely time-sensitive and the first 24 hours after an event are critical for the response of a corporation, investor or pension. Only qualified investors should make use of macro reports and treat them as an additional independent perspective. Every investor should weigh different perspectives as well as “opportunities & risks” before making any investment decision. None of our comments should be taken as an investment recommendation. Our focus is on geopolitical research.

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