Chris’ note: This week, I’ve been highlighting opportunities to profit amid the unfolding bear market on Wall Street. But that doesn’t mean I’m not concerned about the risks we face as investors in 2022.
One troubling story is Russia’s war in Ukraine… and its spillover effects on global food markets. That’s why you’ll hear today from geopolitical expert Peter Zeihan.
He’s an author and a former analyst for Austin-based geopolitical intelligence firm Stratfor. He’s also one of the best explainers of the situation in Ukraine I’ve come across.
If you’re a Legacy Inner Circle member, you can catch my full conversation with Peter here. Below is an extract from our conversation, edited for flow…
Chris Lowe: You look at the world through the lens of geography and demographics. From that perspective, why did this war start?
Peter: Russia has always been an insecure state. Around Moscow there’s a tapering “V” of population going from west into east toward Siberia. It’s surrounded by a lot of flat land that isn’t particularly useful. But you can easily move military forces across it.
Since the reign of Catherine the Great in the late 18th century, Russia has been trying to expand its reach beyond that “V” until it reaches a series of physical barriers that can block outside armies.
Most of what Vladimir Putin has tried to do since he first became president of Russia in 2000 is position Russian troops to plug the gaps. Unfortunately for Ukraine, two of those gaps are immediately on the side of Ukraine that doesn’t border Russia.
It’s not that Putin won’t stop until he conquers all of Ukraine. He won’t stop until after that. He has another war to fight after this one.
Chris: That’s why you’ve called this the Middle War. Can you expand on that?
Peter: In the last couple of decades, Russian military incursions have gone into Armenia, Azerbaijan, Georgia, Crimea, and Kazakhstan. Ukraine is just the next step.
On the other side of Ukraine is the historical region Bessarabia in Eastern Europe. It leads into Romania, Bulgaria, and ultimately Turkey. Then there’s the Polish gap. It goes farther west into Poland and Germany.
Chris: Russia expected to take the Ukrainian capital, Kyiv, in two to four days. But it failed. What happened?
Peter: The Russian population is crashing. After the collapse of the Soviet Union in the early 1990s, Russia’s birth rate roughly halved… and its death rate roughly doubled.
This is the last generation of young men Russia has left to fight a war. This population pressure is even more intense in the upper echelons. The Russians stopped the general education of its population during the late Soviet period.
The youngest people in Russia with full technical awareness and training are now in their mid- to late 50s. So Russia has a weak officer corps.
Chris: How is this affecting Putin’s war in Ukraine?
Peter: We saw this in action with a 40-mile Russian convoy that went from Russian ally Belarus to Kyiv early in the war. After one day, the Russians ran out of fuel. On day three, they ran out of food. The soldiers had to leave their vehicles and hike back to Belarus.
It was a seminal moment for the U.S. Department of Defense. At first, U.S. generals were saying, “We can take the Russians in a war.” After seeing the chaos in Ukraine, they’re now saying, “Holy crap! We can totally take the Russians in a war.”
If there’s ever a showdown between U.S. and Russian forces, we’d obliterate them. Putin would then have to order a humiliating strategic withdrawal back to Russia’s core territories – which would be the beginning of the end of Russia as a people and as a state – or bring nukes to the party.
The U.S. and NATO policy now is to do everything they can to avoid a direct conflict and stop Russia from facing that choice.
That means forward positioning as much military equipment as we can in Ukraine. Any kind of weapons you can put in the back of a truck… drive… or carry on your shoulder are going into Ukraine right now.
If we do that successfully… and if the Ukrainians use this stuff effectively against the Russians… there’s a chance we can avoid a direct NATO-Russia confrontation.
Chris: But even if the Ukrainians stop the Russians, there will still be some major spillover effects. What are they?
Peter: We’ll have a food shortage. It’ll be three or four times more intense than the crisis that set off the Arab Spring uprisings in the early 2010s. So it’ll bring a lot of political instability in its wake.
The Middle East is the part of the world that most depends on food imports from Russia and Ukraine. It’ll suffer the worst effects of the food crisis.
The World Food Program – the food assistance branch of the United Nations – gets half its grain from Ukraine. So it’ll suffer greatly too.
We’ll also have poor yields in South Asia thanks to brutal heatwaves. March and April were the hottest or near-hottest months on record there. That will add to the crisis.
And Sub-Saharan Africa partly depends on Ukraine for food fertilizer.
But this is about more than just price spikes and shortages in agricultural commodities. It’s about other key commodities, too.
Copper, aluminum, titanium, pig iron – these will run extremely low moving forward.
Russian commodities exports are at the base of every industry we have. They provide the raw materials we need to add value elsewhere. There aren’t enough places in the world to replace all this. That means higher prices ahead.
Chris here – As I’ve been showing you, one simple way to protect yourself from rising food prices is to buy shares in the Invesco DB Agriculture Fund (DBA).
It tracks the prices of wheat, soybeans, corn, and eight other commodities. As prices for these commodities rise, so does the value of shares in DBA.
It’s just one of the “hard asset” recommendations I passed along in these pages earlier this month.
If you’re interested in hearing more from Peter, you can sign up for his free Zeihan on Geopolitics newsletter here. It’s become a favorite around the Legacy Research office.
And next month, Peter releases his new book – The End of the World Is Just Beginning.
It’s about the collapse of the world order. Peter says everything about our interconnected world – from how we manufacture products, to how we grow food, to how we keep the lights on – is about to change. You can preorder the book on Amazon here.