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DAVID KRUSE

By Staff | Feb 20, 2015

General Motors reported a very strong quarter with the exception of about a $400 million loss in Europe, most of which was associated with Russia.

its outlook was for more of the same coming from that business region. Is it worth the cost short-term in Russia for some long-term commercial benefit?

That has to be the only rationale for being there and doing business in Russia. I love risk management and do not shy away from short-term pain for long-term gain, but I think that risk, reward of investment in Russia, favors disinvestment and exit.

Russia may have a lot of ag production potential, but it is going to bleed John Deere so that Deere never profits from it.

Companies who have invested in Russia are essentially screwed at this point, not able to make it work and not able to divest without huge losses. The losses are unavoidable so they had just as well bite the bullet.

Bill Browder, founder of Heritage Capital Management, found out the hard way and explained in his Fortune Magazine article, “Why you shouldn’t invest in the Russian kleptocracy.”

He wrote, “When Putin invaded Ukraine, he had no idea how fragile the Russian economy was. The combined effect of Western sanctions and crashing oil prices along with what has been estimated to be at least a $1 trillion theft from the state by Putin’s cronies, has resulted in an economic crisis that’s worse than 1998’s.

“This won’t end well for anyone involved. There will be full-scale currency and capital controls in the future. When there’s still not enough money, Putin will start expropriating and nationalizing companies just as Hugo Chavez did in Venezuela. And when that doesn’t work, he will start printing money, creating hyperinflation.

“The only thing that can save him is $100-a-barrel oil. Ultimately, Putin’s days are numbered. It may be a year, two years, or more, but his brand of dictatorship is incapable of dealing with such a grave economic crisis in such a big and unmanageable country.”

Russia is in terminal decline and the measures needed to arrest the fall will not be taken by Putin. It is more likely, as Russian dissent grows, that Putin will form a Nazi SS-like organization and mechanism for controlling the narrative that the Russian people will be indoctrinated with.

A Gestapo is not far removed for a KGB man having already adopted a Goebbels-like propaganda machine to paint Russia’s entire problem as the will of the West, touting NATO as the new threat to Russia. Russia is already failed its attempt at democracy, but there is risk that conditions could denigrate into Russia becoming a failed state.

Russia is experiencing economic and demographic collapse. It did not industrialize and is essentially the gas tank for Europe that Europe will be able to soon get along without.

Putin’s belligerence to the West is part of the Russian culture that there can be no win-win situations. Only Russia can win while all others lose.

They will lie for it, steal for it, kill for it if need be to win. They hack computers rather than make them or write software. In 2015, life expectancy in Russia is 70 years versus 79 years in the U.S.

The economic collapse from sanctions and drop in oil values has produced a flight of capital. Russia is experiencing too low of capital generation to support infrastructure, education, market formation and labor productivity. Russia has the world’s largest landmass which is as much liability as an asset given the resources required to manage it.

Russians will be a minority within their own country by 2040 when ethnic groups such as Tartars, Bashkirs, and Chechens outnumber them, and Russians have given good reason for these groups to have ire with Moscow. Given the collapse in the birthrate, Russia’s population, now 142.4 million, will decline to 140.1 million by 2025.

The median age in Russia now 39.1 will grow to 42 by 2025 and 46.6 by 2040. There will not be enough children working relative to the number of elderly, even given shorter life expectancy, to support the standard of living. There will be less for the oligarchs to steal and even they hide their wealth in London and Zurich.

Attempts at new alliances such as with Iran, which has nothing Russia needs, and with China, which will take advantage of Russian weakness for any commercial gain, will not aid Russia long-term or change its terminal trajectory.

Putin thinks taking Crimea and sustaining hostilities with Ukraine is in his interest. What it will accomplish is to more quickly drain Russian resources.

Russia cannot afford foreign intervention very long. Poland, the Baltic trio and Sweden have no illusions concerning their eastern neighbor having experienced the true historical Russian nature that was not presented in the program at the winter Olympics.

Putin made a choice for Russia that the Russian people will have to live with. The West will have to manage the Russian decline that did not end with the collapse of the Soviet Union to contain any collateral damage.

We have never had to deal with a failed state with such a degree of offensive nuclear weapons capability before.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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