Today is my birthday. I'm 40 years old. I'm part of the generation that was taught the following in school:
- The world is going to run out of oil, and
- the world's population will explode and go parabolic in some Malthusian nightmare.
I'm being serious. I remember a grade-school textbook that had a table of the major oil fields and a list of dates indicating when they would be depleted. Most of them were in the 1990s and 2000s. Here we are in 2014, and there is oil everywhere. What went wrong with the forecast? The people who wrote that textbook looked at the world in a static way. They failed to take into account the laws of economics. If the price rises high enough, people will have incentives to go look for more oil.
It's the same thing with the overpopulation problem. What we've learned is that, as affluence increases, people tend to have a much lower propensity to have children. In very advanced societies, like Japan, they are actually experiencing the opposite problem -- depopulation -- at an alarming rate.
So we walked in the door on Monday and Russia had invaded Ukraine, kind of, on the Crimean peninsula. That's scary, because people's first reaction is to think that Russian President Vladimir Putin is going to cobble together the old Soviet Union -- up to and including members of the North Atlantic Treaty Organization (NATO), such as Estonia. That, in turn, would presumably result in the next World War. It didn't seem obvious on Monday, but nothing of the kind is going to happen. Part of the reason for this is pure economics, or "freakonomics," to borrow from Stephen Dubner and Steven Levitt.
As it turns out, affluence solves most of the world's ills. People don't really want to fight each other as much if they're comfortable and happy. In just a short period of time since the fall of the Soviet Union, Russia has become a relatively rich country. So has Ukraine. Now, there are all kinds of history and subtext to Russia and Ukraine's frosty relationship, but putting that aside for a moment, can you imagine the spectacle of two rich, mostly free sort-of democracies killing each other by the tens of thousands in broad daylight, in a world of smartphones and cameras and Twitter, right next-door to Europe?
But there are other considerations. Putin, by some unofficial estimates, might be the richest man in the world. On Monday, the Russian stock market went down 10% and the ruble careened to new lows. The politically appointed muppet in charge of the Russian central bank raised its key lending rate by 150 basis points. This tells me that Putin was alarmed by the financial carnage wreaked on his country, and on his own personal wealth.
You see, a Communist Russia (or any other communist country, for that matter) has no such concerns. Divorced from global finance, it can start wars with whomever without fear of financial repercussions. But Russia is part of the global economy. Free and fair markets punished him for his decision. Small wonder that he was making soft, soothing sounds the following day.
As for the politics of it, Russia is fine with an "independent" Ukraine as long as Ukraine understands who is in charge. Viktor Yanukovych, the now-former Ukranian president, was Putin's man. Putin will work backchannel to get his own man installed as Ukraine's leader again. He doesn't want to annex the country. He just wants to influence it. There may be some occasional tape bombs until Ukraine's elections in May, but I would be shocked if a single shot were fired in anger between now and then. Trade accordingly.
At the time of publication, Dillian was long Market Vector Russia ETF Trust (RSX).