Podcast Episode 88: Deep Dive: Uzbekistan and the Future of Eurasia
April 30, 2023
Hello and welcome to the Deep Dive, I’m Jacob Shapiro, and this is Uzbekistan and the Future of Eurasia.
In this episode, we’re diving deep into the geopolitics of Uzbekistan – one of only two double-landlocked states in the world. In other words – Uzbekistan is one of only two states in the entire world that whose access to the world’s oceans is blocked by two states in all directions. (The other is Lichtenstein – hopefully when COVID-19 is over that piece of trivia will be useful to our listeners.)
From the standpoint of economic opportunity, most of “Eurasia” is played out. There are very few opportunities left like the one offered by Russia after the Soviet Union collapsed, for example. Uzbekistan, however, is one of the few remaining frontier opportunities in Eurasia, and unlike other potential opportunities, like North Korea and Turkmenistan, Uzbekistan’s politics is in flux, and against all odds, and the predictions of most experts, that flux is doing good things for Uzbekistan, politically, economically and socially.
Even so, the story is not all rosy here. Uzbekistan is a crossroads, once the linchpin of the Silk Road and a necessary link in the reemergence of an interconnected Eurasian continent, if one is to emerge. That puts Uzbekistan in the middle of numerous foreign powers, each with their own interests in bending Uzbekistan’s behavior to their favor. China, Russia, the EU, Japan, India, South Korea, the United States are all deeply interested in and fighting over Uzbekistan’s and Central Asia’s future.
Hopefully, by the end of this podcast, you’ll get a sense of Uzbekistan’s opportunities, its internal and external risks, and why the future of Eurasia depends on how those opportunities and risks evolve in the coming years. So kick back, get yourself a bowl of plov (Uzbekistan’s national dish), and prepare for a six part geopolitical dive into Uzbekistan. Feel free to skip around and listen a section at a time, or to dive in for the whole story if you’ve got the time.
Section 1 introduces Uzbekistan as both a risk and an opportunity.
Section 2 focuses a little bit more on the word “Eurasia” – a murkier and more politically fraught concept than you might think.
Sections 3 and 4 look at foreign interests in Uzbekistan. Section 3 focuses on China and Russia’s interests, as these are the two powers most concerned with developments in Tashkent. Section 4 takes a more cursory view of European, American, Japanese, Indian, Iranian, Turkish, and South Korean interests.
Section 5 is all about Uzbekistan – its domestic reforms, its domestic challenges, and what Uzbekistan needs to do in order to avoid becoming another epicenter of jihadist political Islamism.
Section 6 tries to chart Uzbekistan’s path forward by laying out what Uzbekistan could do and how it will behave – and how that will impact Central Asian states at large.
Uzbekistan and the Future of Eurasia
Chapter 1: The Situation Report: A Risky Opportunity.
In this section, we answer the burning questions you’ve always had about Uzbekistan: What is it? Where is it? Why should I care about it? And what is changing?
Uzbekistan is a contradiction. On the one hand, Uzbekistan is arguably the most isolated country on the Eurasian landmass. Only tiny Lichtenstein can lay claim to sharing Uzbekistan’s status as a double-land-locked state. The country does not even share a land-border with either of its two most important trading partners, China and Russia.
And yet, despite its relative isolation, Uzbekistan is also the linchpin of the entire Central Asian region. Indeed, Uzbekistan is the only country in Central Asia that borders all four of the other Central Asian states (five if you count Afghanistan). As a result, Uzbekistan’s national interests are defined by a constant interplay between isolation and accessibility.
After the break-up of the Soviet Union in 1991 and Uzbekistan’s subsequent declaration of independence, Tashkent’s policies were primarily shaped by the former of these conditions, i.e., its insularity. Under President Islam Karimov, Uzbekistan turned inward and focused on securing the basic conditions necessary for maintaining its newfound independence.
Karimov’s death in 2016 coincided with changes in the global balance of power which made continuing down an isolationist path untenable. As in the 19th century, Central Asia is once more becoming part of a “Great Game.” But Karimov’s death also led to huge changes in Uzbekistan itself, as one of the most isolated and insular states in the world is now finally opening itself up to the world.
The original Great Game was a Eurasian competition between the British Empire and the Russian empire for who would secure the trading routes to India. The 21st century version of this Great Game is an attempt by rising Eurasian powers to more deeply connect Eurasia physically and economically overland than ever before in world history.
As a result, the future connectivity of Eurasia will hinge on political, economic, and cultural developments in Central Asia. Uzbekistan, in turn, will play a major role in determining the nature of direction of these developments.
For almost three decades, Uzbekistan has “punched below its weight” as Central Asian states have generally struggled to find stability in a post-Soviet Union world. That is no longer an option. The question now is not whether Uzbekistan will begin to exert more power in Eurasia, but how Uzbekistan will use its geographic position and relative size to shape Central Asia’s future.
As Uzbekistan does so, it will also be indirectly shaping the future direction of Eurasia’s connectivity, namely, whether it will be for the economic benefit of all Eurasian nations, or for the political and strategic benefit of a few. As a result, Uzbekistan is a land of untapped potential and opportunity – as well as an incredibly risky battleground between global geopolitical forces that are reshaping the world. As we said at the beginning: Uzbekistan is a contradiction. The Central Asian steppes have never been for the faint of heart.
Chapter 2: What is Eurasia?
In this section, we analyze what “Eurasia” is – as a word, as a continent, and as a political concept – and conclude that how you conceive of Eurasia usually says something about your own political motives.
Before we can understand Uzbekistan, we have to understand Uzbekistan’s context – its position as a double land-locked power in the center of Eurasia.
What is Eurasia? At the simplest level, “Eurasia” denotes the physical area of the combined European and Asian land masses.
A maximal definition of Eurasia in these terms might conceivably describe a vast continent stretching from Portugal in the west to China in the east; from the southern tips of Yemen and India in the south to the Arctic regions of the Russian north.
There is unfortunately, however, very little agreement that this is actually the geographic region to which the term “Eurasia” refers. The Foreign Policy Research Institute, for instance, uses “Eurasia” as a stand-in for the countries of the former Soviet Union. Professor Saul Bernard Cohen, one of the foremost American experts on geopolitics of the 20th century, defined Eurasia as all of the former Soviet Union states minus the Eastern European ones – which he instead terms the “Eurasian Convergence Zone.” The Journal for Eurasia Studies defines Eurasia as “the region that encompasses Central Asia and the Caucasus” – and throws Turkey and Southwest Asia in for good measure. That serious scholars now argue that Africa might also be included suggests the term “Eurasia” has become so malleable as to be almost meaningless.
The definitional ambiguity would be problematic enough if it was confined to a disagreement over what territory constitutes Eurasia on a map. But the situation is made even more complex by the fact that “Eurasia” is not – and never has been – a value-neutral word.
For instance, the famous English geographer Halford Mackinder wrote in his most famous work in 1919 that “Euro-Asia” – i.e., “that vast area…which is inaccessible to ships but in antiquity lay open to the horse-riding nomads,” is the “pivot region of the world’s politics.” This “pivot region,” of which Central Asia is clearly a part, was a source of great concern for Mackinder because he feared a potential Russian-German alliance that would conquer the pivot, and then, the rest of the world. As a result, MacKinder advocated for British policies to prevent this from happening as a result. The very definition of “Eurasia” for MacKinder was a manifestation of British imperialism.
Meanwhile in Russia, around the same time Mackinder was developing his ideas on “Euro-Asia,” opponents of Bolshevism, searching in vain for a rival ideology with which to contest Communism, developed their own idea of “Eurasianism.” This new ideology imagined the existence of a unique Eurasian civilization – which it only made logical sense that Russia should dominate. “Eurasianism” did not take root in the Soviet Union, but there are signs that it is increasingly defining Moscow’s world view today.
The most significant country affecting Eurasia today of course is China. China does not have a long tradition of thinking about either itself or the lands to its west as “Eurasia.” Indeed, unlike Great Britain, Russia, and to a lesser extent the United States, China does not have a history of imperial conquest outside of its immediate surrounds. The Qing Dynasty, reflecting previous Chinese dynasties, conceptualized itself as the “Middle Kingdom” – literally, the center of the world.
Historically, for China all other countries and kingdoms were, by definition, peripheral countries. China had little interest in conquering peripheral regions as long as they did not pose a security threat and paid sufficient tribute. At the height of Qing power in the 18th century, Qing Emperors defined their challenges as emanating either from the northwest or the south – or from a specific threat – missionaries. China was civilization and the rest of the world was barbarian, and as a result China had no use or need for a concept of “Eurasia.”
To a certain extent, this is still the case, but Chinese foreign policy has begun to change during the administration of President Xi Jinping, as for the first time in its long history, China is being forced to expand beyond its immediate surroundings to secure its national imperatives. China still does not view itself as a “Eurasian” country – but rather as a unique cultural and civilizational force upon whom it is incumbent to connect the far-flung regions to its west by rail, sea, and cellular networks. China’s goal is simple: to return China to its proper place at the center of the geopolitical universe by connecting Eurasia to China.
China presents this as win-win cooperation, but in practice, Chinese chauvinism has already caused a backlash in Central Asian countries like Kazakhstan, where protests against China’s unwillingness to employ local workers has plagued the country in recent months. This is to say nothing of China’s harsh and far-reaching crackdown on its own Muslim Uighurs in Xinjiang province – an area which culturally belongs more to Central Asia than to Han China.
When China uses the term “Eurasia” in the same breath as its “Belt and Road Initiative,” it is doing so with the intent to build a vast network of tributary or vassal states to its west. Eurasia, in effect, has simply become the politically correct term for “the barbarians.”
As a result, thinking about Uzbekistan’s role in Eurasia is doubly complicated. Which Eurasia and whose Eurasia? These are rarely if ever the same thing. Uzbekistan’s role in Eurasia as seen through the perspective of the United States is very different than Uzbekistan’s role in Eurasia as seen through the perspective of China. Both of these are different still from how Uzbekistan might define its
own conception of what “Eurasia” means and what kind of policies might best benefit Uzbekistan and its fellow “Eurasian” countries.
Chapter 3: Between the dragon and a bear
In this section, we look at the emerging competition between China and Russia for influence in Uzbekistan.
As a result of its recent history and its geographic position, Uzbekistan has had very little say over the development of its current role in Central Asia and Eurasia in general. This remains the case today. There are at least seven major actors present in Central Asia whose divergent interests and appetites are setting Central Asia up to be a major zone of global competition: China, Russia, the European the United States, the European Union, India, Iran, and Turkey.
China
China’s presence in Central Asia has gradually increased since Xi Jinping announced the “Silk Road Economic Belt” during a speech made in Kazakhstan in September 2013. In truth, though, China’s emergence as the second largest economy in the world had resulted in gradual expansion into Central Asia long before Xi was explicitly linking his regime’s foreign policy goals to Eurasian connectivity. In 2018, China surpassed Russia as Uzbekistan’s top trading partner in terms of both imports and exports, and the importance of China in not just Uzbekistan’s economy but in the economies of all the Central Asian states will continue to grow. As a result, the economic performance of countries like Uzbekistan will increasingly depend on maintaining a productive economic relationship with China.
China’s Belt and Road Initiative attracts most of the headlines, but the Belt and Road Initiative is mostly smoke and mirrors, a brilliant marketing campaign designed to build China’s international reputation and to mask China’s ambitions. Far more significant is China’s unnamed attempt to use its recently acquired economic heft to satisfy explicitly strategic and political ends. To be clear, not all, or perhaps even most, of China’s intentions are nefarious. China’s state-led, export-driven economy has developed major structural inefficiencies. The change in China’s behavior is at least partly reflective of an organic process of economic growth through which any country attempting to shift from an export-driven to a domestic-consumption based economy must pass.
But the high degree of control exerted by the Chinese Communist Party means that separating natural economic processes from top-down political imperatives is practically impossible. The CPC, and even President Xi himself, will remain in power only so long as they continue to guarantee China’s independence, prosperity, and societal harmony. These are not issues the Chinese government can or will leave to chance.
To that end, Uzbekistan is a major exporter of two resources China needs to secure access to: natural gas and food. China’s demand for natural gas will increase by 82 percent in the next 12 years, reaching 510 bcm in 2030. Despite the fact that China is expecting to double its annual gas production by 2040, demand is projected to outstrip domestic output by over 40 percent by 2040. (These projections assume that China will succeed in tapping into China’s own shale gas resources, an assumption which geological challenges specific to China are already undermining.) Uzbekistan cannot quench China’s thirst for natural gas – relative to some of the global heavy weights, Uzbekistan is a relatively modest producer of natural gas, with proven reserves estimated at around 1,200 bcm and production of roughly 53 bcm in 2018. Moreover, Uzbekistan still consumes most of its domestically produced natural gas – Uzbekistan exported just 17 percent of natural gas produced in 2018, as domestic demand accounted for 80 percent of consumption.
The sheer magnitude of Chinese demand however means that China cannot afford to turn down any potential source of natural gas, especially one so close by. The importance of maintaining and improving the Central Asia-China gas pipeline will only increase for China in the coming years.
China is also increasingly concerned about securing access to feed a population whose eating habits are becoming more demanding as the population becomes wealthier. Eating meat, for instance, has become a status symbol in China. The recent decimation of China’s pork industry as a result of African Swine Fever arguably posed a greater challenge to decision makers in Beijing than did U.S. tariffs. In the past, the Chinese Communist Party has emphasized food security and especially grain self-sufficiency. This has recently begun to change as China cannot feed its population with its current resources. The Chinese Academy of Agricultural Sciences and the International Food Policy Research Institute recently published a report which claimed China would achieve food security and grain self-sufficiency by 2035 – but tellingly, “food security” in this context does not just mean emphasizing structural reform on the supply side of Chinese agriculture, but also in realizing China’s Eurasian ambitions. The Uzbekistani government has attempted to taken advantage of this by making it easier for farmers to sell produce directly to foreign partners. China has also already promised to invest over $500 million in Uzbekistan’s agricultural sector, and considering Uzbekistan’s global leader as an exporter of various fruits and vegetables, there will likely be more to come.
It is not possible to overstate how significant these developments are, not just for Uzbekistan, but for Eurasia at large. China conceived of itself as the “Middle Kingdom” in large part because it
could. Centuries of Chinese dynasties did not go empire-building in the West because they did not have to. China was self-sufficient and had everything it needed at home.
That is no longer the case – and that is a historically unprecedented shift. There is very little one can glean from the past that will help inform precisely how China will manage these challenges. This is a theme we will return to constantly in future Geopolitical Dives.
In the 19th and early 20th centuries, Japan faced a similar problem that China is facing today, albeit on a much smaller scale. For Japan, managing this dependence and vulnerability manifested in a program of conquest, as Japan fused its own cultural feelings of superiority with European-style imperialism. There is a very real risk that China’s own development could mimic the Japanese model.
To its credit, China has thus far tried to resist this, perhaps in part due to its own intimate experience with European, American, Russian, and Japanese imperialism. China has instead sought to look back to its own history (e.g., “The Silk Road) for a more symbiotic system that will obviate the need for the People’s Liberation Army to go and “liberate” others. For the next decade, Central Asia, – and Uzbekistan in particular – will function as a laboratory for how China will pursue its national interests.
Russia
Russia remains the dominant foreign power in Central Asia. Even as China is displacing Russia’s economic influence in the region, in the realms of security and culture, Russia enjoys an elevated status in Central Asian states. Russia maintains military bases in Kazakhstan, Kyrgyzstan, and Tajikistan, all three of which are members of the Russian-led Collective Treaty Organization (CSTO).
Uzbekistan has been an active member of the CSTO twice, withdrawing for the second time in 2012. Rumors that Uzbekistan is considering rejoining have thus far not come to fruition.
Kazakhstan and Kyrgyzstan are both members of the Eurasian Economic Union (EAEU) as well. Uzbekistan, long eschewed interest in the EAEU, decided in April to approve observer status in the EAEU going forward. Despite the decline in its overall power, Russia remains a center of gravity for both Uzbekistan and Central Asian geopolitics.
Russia’s interests in Central Asia are less clear-cut and are at least in part vestigial. Indeed, there is evidence of an ongoing internal debate inside Russia about what the current guiding force of Russian foreign policy is.
One faction seems to emphasize Russia’s relatively limited ambitions, reflective of its ethnic homogeneity and the obsolescence of the Soviet Union’s global historical mission. This approach to Russian foreign policy emphasizes Russian nationalism – the importance of countries like Ukraine and Belarus to Russia are justified not just by their strategic import but by their significant Russian populations. (Uzbekistan, with a population that is just 6 percent Russian, hardly qualifies.)
There is also, however, a faction which views “Eurasia” as territory Russia must reclaim. This faction, like the opponents of the Bolsheviks in the 1920s, thinks of Eurasia as Russia’s natural sphere of influence and emphasizes Russia’s unique Eurasian – as opposed to European – identity. For this faction, the EAEU’s mission is to “facilitate the economic integration of former Soviet republics into a single economic entity” – to, in effect, turn back the clock of time to before the Soviet collapse, which Russian President Vladimir Putin has repeatedly referred to as the “biggest catastrophe of the century.” According to this line of strategic thinking, all Russian behavior in Central Asia is part of Russia’s “Greater Eurasia” plan.
There is some logic to this line of thinking. After all, the Soviet Union was organized to function as a single, economic whole. Central Asia’s endlessly contested borders are a direct reflection of the U.S.S.R’s attempt to create independent economic provinces that were to function as parts of a larger common good. Though it has been almost three decades since the Soviet Union collapsed, the economies of the Central Asian states still reflect elements of the synergistic relationship they were designed to have with Russia.
In addition to these strategic imperatives, Russia is still Uzbekistan’s second largest trading partner, Uzbekistan is the larger recipient of worker remittances from Russia, equivalent to roughly a third of all Russian-origin remittances, and hundreds of Russian companies, especially in the oil and gas sector, retain their leading positions in the Uzbekistani economy.
Russia has suffered as much from its dismemberment as the countries that split off have suffered from their separation from Russia. If Russia is to remain among the world’s global powers, it is imperative for Russia to be the driving force for the economic and security integration of the former Soviet states.
Where this leaves Russia’s relations with China is uncertain. Thus far, Russia and China have cooperated with each other in Central Asia. After all, both Russia and China face more pressing geopolitical challenges from the United States, and as a result, neither have the resources or will for a conflict in the Eurasian borderlands between them.
At the most basic level, howeer, Russia and China also both want the same thing: the integration of Eurasia into a broader framework that would be beneficial not just to the region, but to the Russian and Chinese economies. The issue is that both Russia and China ultimately view themselves as the center of gravity of that broader framework, and at a certain point, this strategic goal becomes a mutually exclusive one.
In the short-term, China has little interest in challenging Russia’s deep ties to Uzbekistan. China instead is playing a long-game, whereby it expects that overtime, the sheer weight of its economic heft will create a fait accompli, orienting not just Uzbekistan and the Central Asian states towards Beijing, but Moscow itself.
The deeper question is whether Russia can accept this. If history is any indication, it will be difficult for both sides to maintain the compromises necessary to prolong the current spirit of Sino-Russian cooperation. Either way, Uzbekistan is of immense importance to Russia’s overall goals for Central Asia. This has always been the case, which is why Uzbekistan more than any other Central Asia state aside from perhaps Turkmenistan has kept Russia at an arm’s length during the post-Soviet years. There is now a growing realization in Tashkent that a closer relationship with Russia could have benefits for Uzbekistan, especially as it feels the need to balance against China’s vision of Central Asia’s future.
Chapter 4: The Others
In this section, we look at the other external powers with interests in Uzbekistan: The US, the EU, Iran, Turkey, India, Japan, and South Korea.
The United States
The democratic nature of U.S. politics often reflects itself in the inconsistency of American foreign policy. New administrations often jettison the policies of the previous administration. This phenomenon has never been more prominent than in the shift from the Obama Administration to the Trump Administration, especially in their disparate approaches to dealing with Iran, China, and North Korea. Despite this inconsistency, however, U.S. grand strategy has been remarkably consistent for the last 121 years and can be summed up in a single clause: Preventing the emergence of a Eurasian hegemonic power. The U.S.’ participation in World War I, World War II, and the Cold War all took place in service of this larger goal – and it is the primary strategic impetus for the U.S.’ budding rivalry with China. For the first time since the collapse of the Soviet Union, the U.S. sees not just a potential challenger, but one that could marshal the resources of the entire Eurasian continent.
U.S. grand strategy demands that the U.S. refocus its efforts from lost causes in Iraq and Afghanistan and pivot to Asia to rein in China’s expanding economic power. The Obama Administration wanted to do this with the Trans-Pacific Partnership and the Trump Administration is attempting to do it with blunter instruments, like tariffs and trade wars. The U.S. is also pressuring allies like Japan, Germany, and Australia, to take on a greater share of the burden that comes with maintaining the security of the U.S.-led international order.
And yet, simultaneously, as a result of domestic politics, the U.S. is also demanding that U.S. friends and enemies alike completely reorient their economic relationship with the United States. The economic benefits that came with aligning one’s country with the United States are the glue that holds the U.S. alliance network together, and yet even as the U.S. needs those alliances more than it has in a generation, it is undermining their very basis with an aggressively protectionist trade policy. In that sense, President Trump is both author and symptom of the U.S.’ internal inconsistencies and their concomitant effect on American foreign policy.
What this means for Uzbekistan is that the U.S. is not a reliable partner upon which to base its national security strategy. After the collapse of the Soviet Union, the United States sought closer relations with Uzbekistan for two reasons: to cooperate and coordinate with the U.S. war on its war in Afghanistan and to lecture Uzbekistan on its human rights record.
In the future, the U.S. will have a single, overarching priority when it comes to dealing with Uzbekistan and with Central Asian stages in general: preventing the region from aligning itself too closely with China.
The U.S. however will not commit its military forces to ensuring the independence and sovereignty of Central Asian states. The U.S. will instead try to provide an alternative to Chinese investment and, to a lesser extent, Russian-led attempts at regional integration. The U.S. will be joined in this endeavor by a number of its key allies, especially Japan, South Korea, and Australia. South Korea in particular has already developed a significant economic relationship with Uzbekistan, and with the U.S.’ blessing will continue to deepen those ties and provide alternatives to China.
Why South Korea? This requires a brief tangent. The reason South Korea has such a close relationship with Uzbekistan is because Josef Stalin decided in 1930 to transfer ethnic Koreans living in the Russian Far East to Central Asia – especially to Uzbekistan. Russia was scared that ethnic Koreans would serve as Japanese spies, and so over 200,000 Russian Koreans were deported to Uzbekistan, tens of thousands of whom died along the way. A Westerner flying to Tashkent today can get there from basically three cities: Moscow, Tashkent, and Seoul.
Back to the main point however, which is that Uzbekistan has relatively little reason to align its policies with that of the United States beyond attracting investment and attention. Uzbekistan’s economy is linked to that of its neighbors. Regional integration is a good thing for Uzbekistan, and if cooperation or even coordination with China and/or Russia helps advance regional integration, that is something Uzbekistan will pursue. The U.S. is not in a position to make any serious demands on Uzbekistan because it is not willing at this point to contribute the resources and make the overall commitment that would be necessary to entice a country like Uzbekistan to turn its back on China and/or Russia.
As a result, though Uzbekistan will attempt to maintain friendly relations with the United States and use that relationship as much as possible to provide a balance against both China and Russia, there are limits to how effective a balance the U.S. can provide, especially as domestic politics will exert a deeper hold on the American psyche than foreign policy for at least the next election cycle.
The European Union
China is now the second largest national economy in the world. But the European Union, with a GDP of just slightly less than that of the United States ($18.8 trillion), has a combined economy over 40 percent larger than the Chinese economy.
The European Union offers a compelling example for the former Soviet states of the Caucasus and of Central Asia. The Eastern European states that were behind the Iron Curtain are enjoying immense economic success despite the EU’s struggles to recover from the 2008 financial crisis. Indeed, Eastern European states continue to exhibit persistently high economic growth rates relative to the overall EU average. Countries like Czechia, Poland, and Romania have succeeded at leveraging their highly motivated and well-educated labor forces to drive economic growth at home.
One of the byproducts of this success is that significant segments of the German supply chain were relocated to Eastern European economies. In that sense, the EU has been doubly successful, as it has managed to integrate Germany so deeply into the success of the European economy as to eliminate the historic geopolitical threat posed by a united Germany.
For the status quo to continue, however, the European Union must continue to grow. That is, perhaps, the EU’s greatest weakness. If the economic benefits of being an EU member disappear, the entire structure could unravel, and the economic benefits of being an EU member have become disproportionately based on an unsustainable economic model of endless export growth. Even now that the EU has realized it and is making changes, it needs new markets to help in its transitionary phase.
Unlike China and Russia, and even the United States, the European Union does not always pursue a consistent foreign policy. Even so, the EU has begun to train its focus to the east. Despite strategically fraught relationships with both Russia and Turkey, the EU feels a natural impulse to expand into Eurasia, the mirror image of China’s impulse to expand into Eurasia from the opposite direction.
When the EU looks at Central Asia, and especially at Uzbekistan, it sees a young, cheap labor force and a potentially lucrative potential export market. The EU also looks favorably on recent political reforms designed to improve the business climate and the overall predictability of doing business in Uzbekistan. The EU’s recently published “New Strategy on Central Asia” spells out the EU’s hopes for its future relations with Central Asian countries relatively bluntly. The EU wants more regional cooperation in Central Asia. It is fairly agnostic about how this regional cooperation comes about – but the EU does want to ensure that regional cooperation and Central Asian strategic contributions to promoting “Euro-Asian connectivity” are “sustainable, comprehensive, and rules-based.”
That is a fancy way of the EU expressing its suspicion toward Chinese and Russian attempts to influence Central Asia. Like China and Russia, the EU has its own political ends, which includes a insistence on strengthening things like “democracy, human rights, and the rule of law.” The EU supports “rules-based connectivity” and “free market economy” because those are the conditions under which the EU has the best chance to prosper from the enhanced connectivity of Eurasia and of greater regional cooperation in Central Asia.
In that sense, the EU looks to Uzbekistan as a potential leader, and that is why the EU agreed to open negotiations with Uzbekistan on potentially signing an upgraded Enhanced Partnership and Cooperation Agreement in November 2018, the first round of which were held in Tashkent in 2019. Unlike Russia and China, connecting Central Asia to Europe is a much harder proposition, one that must inevitably involve Russia. But even so Brussels – like Moscow and Beijing – sees immense potential in Central Asia and is attempting to solidify a relationship with Uzbekistan that will help further its own interests in the region.
The Others: Iran, Turkey, and India
There are three other minor players in Central Asia worth mentioning in passing: Iran, Turkey, and India.
Iran’s interests in Central Asia are twofold. The first and most practical is that increasing the connectivity of Central Asia could allow Iran to export oil over land to China. In the same way that China views Eurasia as a potential solution to its inability to guarantee its maritime trading routes against the threat of U.S. naval power, Iran sees alternate land routes as a meaningful way of reducing its own dependence on maritime trading routes in the Persian Gulf.
There is more at stake in Central Asia than just trading routes and markets, however. Though Iranian power in Central Asia belongs to a more distant history than Russia’s conquest of the region, Iran views itself as the heir to the great Iranian Empires of the past. Much of the land encompassing western Iran and much of Central Asia was known for centuries as “Khorasan,” Iran’s cultural capital and the home of many important medieval artists, poets, scholars, and philosophers. The Central Asian region still bears the marks of Persian influence and culture. As Iran seeks to restore what it sees as its proper place in the global order, its extension into the Shiite-majority areas of the Middle East is as important to Tehran as into the once-Persian oriented hinterlands of Central Asia.
Turkey has a similarly nostalgic desire to assert its interests in Central Asia and has been attempting to do so since the collapse of the Soviet Union, to varying degrees of success. Turkey’s ambitions in the 1990s were extensive, as Turkey imagined that its linguistic, cultural, religious, and ethnic links to the Turkic peoples of Central Asia would result in the emergence of a “Turkic community that would fall under [Turkish] leadership.”
While Turkey’s efforts failed in this regard, it has maintained an interest in the Central Asian region, reflected by its status as a top-five trading partner for every Central Asian country besides Kazakhstan. Uzbekistan and Turkey have enjoyed cordial relations in recent years, with reciprocal presidential visits and promised of investment deals in the billions of dollars and deepening trade ties.
For the time being, as much as Turkey would like to assert itself in Central Asia, Ankara has more pressing issues, including managing structural economic issues and asserting its leadership in the Middle East region, especially in Syria, where it opposes the regime of Bashar al Assad and views the interference of Russia and Iran as unwanted. As Turkey’s power in the Middle East deepens, so too will its influence in both the Balkans and Central Asia, where in the meantime, Turkey aims to preserve and deepen its current ties.
India also has geopolitical interests in developing deeper ties with Central Asia, as reflected most recently by the most serious India-China border spat since the two countries fought a war in the Himalayas in the 1960s.
In 2019, India participated in the first India-Central Asia Dialogue in Uzbekistan which featured the Foreign Ministers of all five Central Asian states. Like China, India is a voracious consumer of energy; indeed, the growth in Indian demand for energy now surpasses China’s considerable appetite. India also has a special degree of concern for managing the potential spill-over from the failed U.S. invasion of Afghanistan, which India has tried to link into its broader plans for its “Connect Central Asia” Policy, first announced in 2012.
India’s engagement in Central Asia relative to the other actors involved has been relatively paltry – but India’s interests are no less pressing in the long-term than China’s or Russia’s. India views the leadership of Uzbekistani President Shavkat Mirziyoyev as having ushered in a new energy and political will into integration projects in Central Asia, which India will support as much for its own interests as to ensure that China’s position in particular does not become overly dominant.
Chapter 5: Opportunities and Risks
In this chapter, we examine Uzbekistan’s recent political reforms, as well as its domestic challenges, especially the one posed by a young, growing, and eager Muslim population.
Uzbekistan is the most populous country in Central Asia, accounting for roughly 45 percent of the region’s population. Uzbekistan is also at the very beginning of a roughly 20-year period during which it will enjoy a substantial demographic dividend. Uzbekistan’s labor force is projected to increase by 3.9 million by 2030, which would make Uzbekistan the fifth largest labor force in Europe and Central Asia. Uzbekistan’s population is also extremely young, with almost 30 percent of its people under the age of 14.
Uzbekistan is in just its fourth-year of a wide range of market-oriented reforms that are reshaping the country’s labor market. As Uzbekistan’s working-age population has increased by roughly 3 million people in the last decade, the number of formal sector jobs has remained relatively constant. The informal sector is still responsible for employing over half of all Uzbekistani workers, and there are ongoing concerns about the quality of jobs available and the match between worker skills and job requirements.
Uzbekistani migrant workers, roughly 4 million of whom reside in Russia, make up almost a third of the Uzbek labor force. Due to an inability to find quality jobs at home as well as international demand for Uzbekistani labor, one in five Uzbekistani males is an international migrant – and the rates are higher for younger workers. This would be a problem in any country: but is especially a problem in a country like Uzbekistan, which is located at the
the center of the Eurasian landmass and the all-important land bridge and Muslim buffer zone between European and Asian civilizations. Uzbekistan is the geographic center of the Islamic world.
Uzbekistan’s young, growing, hard-working, intellectually curious population is one of its greatest assets. It is also the source of Uzbekistan’s biggest risks. Uzbekistan is a Muslim majority country where religion was banished Soviet style to the back of the bus for almost a century. Combine religious awakening, political liberalization, and lack of professional opportunities and you have the same sorts of conditions that led to the rise of the Muslim Brotherhood and the ideology of jihadism in general in the Arab world in the 1970s an d1980s.
Case in point: Economic migration is “the single most important factor for Central Asian recruiting” to jihadist and fundamentalist Islamist groups. Based on the information available, Central Asian states have accounted for the third largest source of Islamist foreign fighters in Syria and Iraq in recent years. These estimates indicate a political environment that contributes to the radicalization and subsequent recruitment of a significant number of Central Asian Muslims.
Uzbekistan’s position, however, is far from hopeless, and to understand why, we need to understand Uzbekistan’s role in Islamic history.
During the first centuries of Islam’s emergence, Central Asia was the spiritual and intellectual wellspring of the Islamic world, the source of incredible advances in mathematics, philosophy, medicine, theology, and Islamic jurisprudence. The flourishing of Central Asia in the 8th and 9th centuries was the inevitable result of the flourishing of the Islamic world in general. But this geographic centrality cut both ways – and the instability and conflict that eventually tore the Islamic world apart and brought it to its knees also had an outsize influence on events in Central Asia. The American “war on terror” has been fought mainly in Afghanistan, Iraq, and Syria – but the risk of spillover into Central Asia, and especially into Uzbekistan, which shares a border with Afghanistan – has always been high.
Uzbekistan is no stranger to the threat posed by Islamist fundamentalism. The immediate period after the fall of the Soviet Union and the first years of Uzbekistani independence were fraught with both religious and ethnic conflict, which are often inextricably linked. Uzbekistan’s independence led to a grass-roots Islamic revival, as Uzbekistani citizens were able to rediscover Islam and Muslim culture and reestablish connections with the broader Muslim world, which had for so long been blocked by the Soviet government (the Iron Curtain was not just a European phenomenon).
Indeed, 1992 marked not just the first full year of Uzbekistan’s independence, but the year that the Qu’ran was translated into Uzbek for the first time. Let that sink in for a moment. It would be like if Polish Catholics had experienced the New Testament in Polish for the first time in 1992.
On the other hand, Uzbekistan’s independence also gave space to Salafi-inspired radical groups, which had been imported by Soviet authorities to weaken local ties to the more indigenous Hanafism and Sufism that had historically defined Uzbekistan’s more tolerant Islamic religious outlook. In the late 1980s and early 1990s, the Uzbekistani city of Namangan, and the Fergana Valley in general, became a haven for foreign Islamic missionaries and for the rise of vigilante groups which attempted to challenge the power of the nascent Uzbekistani state. The Uzbekistani government had little choice but to enforce a broad crackdown, which in retrospect appears to have been largely successful if at times overzealous.
At the time, though, success was hardly a foregone conclusion. The emergence of the Islamic Movement of Uzbekistan, marked by a February 1999 bombing attack in Tashkent in which 16 were killed and over 120 were injured, seemed to suggest that Uzbekistan’s government might not be able to keep the fundamentalists at bay. Another series of attacks in March 2004, claimed by the Islamic Jihad Union of Uzbekistan, reportedly killed 47 people, and cast further doubt on whether Uzbekistan’s repressive policies were having the desired effect.
The following year, Uzbekistan’s crackdowns on potential sources of Islamic unrest, both real and imagined, led to difficulties in Uzbekistan’s relationship with United States, especially after a particularly harsh government crackdown on popular unrest in Andijon, which Uzbekistan accused of being orchestrated by a local branch of Hizb ut-Tahrira al-Islami (HTI). The same fear that caused the Uzbekistani government to crack down so hard on domestic unrest even cursorily associated with Islamic ideology also led to cooperation with the United States on its war in Afghanistan, which has played a critical in daily U.S. operations in Afghanistan for almost two decades.
Karimov’s successor, President Shavkat Mirziyoyev, has taken a different approach to managing the challenge posed by Islamist fundamentalism to the Uzbekistani state. Even as Mirziyoyev’s government has insisted on maintaining the preeminence of secular values, especially in the educational and political spheres, it has announced the formation and sponsorship of new Islamic academic and centers, like the Imam Bukhari International Scientific Research Center, the Islamic Culture Center, and the Islamic Academy of Uzbekistan.
Mirziyoyev’s new strategy sees repression as one arrow in a more well-stocked quiver – one that must be accompanied with a positive, alternative version of Islam to combat the violent, totalitarian one peddled by Wahhabist groups and ISIS. In Mirziyoyev’s own words, the goal of these measures is to “explain to the public, especially to the youth, that the essence of [Islam] is peace and compassion.” The goal appears to be to promote a uniquely Uzbekistani form of Islam, one that serves to legitimize rather than challenge the authority of Uzbekistan’s secular government.
Mirziyoyev’s strategy is both risky and bold and will require more than platitudes and sponsoring cultural and religious centers to succeed. Uzbekistan’s historical approach to Islam has indeed been more moderate and open-minded than the sorts of ideologies that have taken root in Afghanistan, Pakistan, and Syria. Uzbekistan also has centuries of authentic and indigenous traditions upon which to base a meaningful Islamic alternative to the current approaches towards balancing Islam and secularism in the political life of majority-Muslim countries.
But as crucial as the educational component of this strategy will be Uzbekistan’s ability to create jobs and prosperity for Uzbekistan’s young and growing population. For Uzbekistan’s strategy to work, it will not be enough to teach principles of peace and compassion whilst propping up the secular state – these approaches much be accompanied by a marked increase in the ability to provide realistic prospects of a more prosperous future for the country’s burgeoning young population. The battle for hearts and minds begins at the dinner table, not at the mosque. The battle only moves to the mosque when there is nothing to nourish the body and satisfy the spirit at home.
If Uzbekistan’s new strategy is successful, it could offer a potential model for not just Central Asian states, but for other Muslim countries to emulate. It is a high-stakes strategy, but Uzbekistan has little choice; the past decade in the Middle East has shown what happens to governments that respond to the demands and hopes of their people too late, if at all.
Chapter 6: The Road Ahead
In this chapter, we try to put all the pieces together to give some scenarios on how Uzbekistan will behave in the future and how this might affect the future of Central Asia.
Central Asia is a region where the interests of numerous global and regional powers are beginning to converge. Indeed, for countries like China and Russia, Central Asia has become the key to unlocking the vast economic potential of “Eurasia,” which could in turn lead to the development of a multipolar world where the power and influence of the United States and the “West” in general is reduced from its current primacy to a more equal and proportional status.
Uzbekistan is the most populous country in Central Asia. It is not the richest, nor can it lay claim to being the most powerful or the most trusted by its neighbors. Even so, Uzbekistan is the natural regional power of the Central Asian region, and Uzbekistan has a role to play as a regional leader and partner. Divided, the Central Asian states will be subject to the economic interests and political intentions of external powers, who see Central Asian geography as something to be overcome in order to realize their Eurasian ambitions. If, however, the Central Asian states can combine their resources, they stand a far greater chance at pushing back against external powers and forcing their policies and ventures to offer something to Central Asian states in return.
The relationship between states in a defined geographic region like Central Asia is often most influenced by the most powerful or most influential state(s) in the region. If a regional power is a zero-sum power looking to dominate its neighbors – other countries in the region will look to block the regional power and protect their sovereignty. If the regional power seeks a cooperative arrangement based on mutual respect of sovereignty and shared interests, even the most violent of regions (like, for example, Europe), can transform into a relatively peaceful and prosperous whole. How Uzbekistan pursues its national interests will therefore have ramifications on Central Asia as a whole, but also on how external powers interact with the region as well.
Uzbekistan’s role in Greater Eurasia faces three main challenges in this regard:
1. There is no model for how this works.
Central Asian states embraced their independence after the collapse of the Soviet Union while simultaneously recognizing the fragility of their recently gained sovereignty. Everything about political life in Central Asia – from how the borders were drawn to the quality of transportation and manufacturing infrastructure, from the organization of the security forces to the role of tradition and religion in everyday life – had to be redefined and imagined in a post-Soviet world.
This was doubly difficult because Central Asian states had no model to follow. What worked for Eastern Europe could not be copied in Central Asia because domestic conditions were simply too different. The U.S. approach to liberal democracy, while admired and perhaps even desired, could hardly be applied in such a different political and socioeconomic environment.
And so, with relatively little exception, Central Asian states relied on top-down, authoritarian political structures, seeking to safe-guard sovereignty, consolidate national identity, and defend from potential threats, whether from greedy neighboring countries, underlying socioeconomic problems, or a resurgent Russia.
Uzbekistan, long viewed internationally as one of the most repressive of the Central Asian states, is now experimenting with reforms that, if successful, could offer a blueprint for meaningful political and economic structural change in neighboring Central Asian states. The death of long-time President Islam Karimov did not upend the political stability of the country, as many outside observers feared a battle over succession might. Instead, under new President Shavkat Mirziyoyev, Uzbekistan has embarked on an extremely ambitious reform program designed to improve domestic conditions in the country by discarding the insularity of Uzbekistan’s previous policies and embracing the country’s potential as the connective tissue of the entire Central Asian region.
To that end, the power of the state security services has been downgraded. The government’s approach to religion has moderated. Visa restrictions for visitors from foreign countries have been lessened and a number of measures have been passed to make it easier for businesses to operate in the country. There is increased emphasis on embracing free market forces, on encouraging private enterprise, and educating a growing workforce with the skills they will need to secure quality jobs.
These reforms will not be easy, nor will their adoption be painless. The government’s willingness to endure criticism will need to be matched by a responsiveness to the people’s needs. By going through these growing pains, other Central Asian countries will be able to learn from Uzbekistan’s mistakes and capitalize on Uzbekistan’s successes.
There are few growth opportunities like Uzbekistan left in Eurasia. North Korea and Turkmenistan, whenever their respective regimes collapse, will offer similar opportunities but their regimes will likely last decades more. Uzbekistan has been in a protective crouch for almost three decades but now is emerging and embracing a more open and interconnected Central Asia.
2. Water is scarce and it is a problem.
The most pressing issue facing Uzbekistan and the Central Asian region as a whole is the issue of water scarcity – which provides both an excellent example of the type of regional leadership Uzbekistan can employ and an indicator of how difficult this opening-up process could be.
Central Asia, while blessed with many other natural resources, is a water-scarce region. That scarcity is being exacerbated by climate change, mismanagement, and population growth.
According to the World Bank, if Central Asia’s population continues growing at 1.5 percent annual, the region will reach the World Bank’s threshold for being designated “water stressed” and “water scarce” by the end of the century – which in practical terms three times less water per capita available per day.
According to the United Nations, Uzbekistan and Turkmenistan already meet the threshold for water stress.
Complicating matters further is that under Soviet rule, the water resources of the entire Central Asian region were part of an integrated and cooperative whole. Rather than give any one of the “stans” all the resources necessary to become a formidable modern industrial power, each Central Asian state was given one or a few important resources – but never all of them.
Uzbekistan, though it inherited population centers, natural gas, good farm land, and important trading routes, is not blessed with water resources. Uzbekistan relies on the water from the Amu Darya and Syr Darya Rivers, the sources of which are in Tajikistan and Kyrgyzstan. This creates the potential for geopolitical conflict.
Making matters worse is acceleration of the melting rates of the glaciers that provide most of the water for the Amu Darya the Syr Darya. In addition, Tajik and Kyrgyz have plans to tap into the rivers as a potentially lucrative source of hydroelectricity, which is a direct threat to viability of the Uzbek state.
Despite these threats (and unlike, say Egypt, as we discovered last month,) rather than confronting its neighbors, Uzbekistan has taken first steps towards compromise with Tajikistan and Kyrgyzstan in an effort to improve relations and smooth over water issues. Uzbekistan and Kyrgyzstan agreed to address border issues between them in a Declaration of Strategic Partnership in October 2017, and though minor border clashes continue to occur, the two sides have agreed to minor land swaps and the channels of dialogue remain open and more cooperative than ever before. Uzbekistan and Tajikistan meanwhile signed a landmark border demarcation agreement in March 2018 and the two sides are working together to find ways to improve transport links and ease visa requirements.
Uzbekistan has even hinted it could withdraw its opposition to hydroelectric dam projects like at Kambar Ata and Roghun, especially if Uzbekistan was affored an opportunity to purchased surplus hydroelectricity and reconnecting a regional power grid. These are good first steps, and Uzbekistan can continue to push the momentum forward by encouraging more regional cooperation and coordination. Central Asian states can maintain their independence and sovereignty while cooperating on shared issues that affect the entire region – and Uzbekistan showing that it is willing to do so and even make compromises because it is better for everyone will lead to more integration.
Water is the most pressing matter upon which Central Asian needs to coordinate their policies, but Uzbekistan’s policy shifts in recent years offer an example of what Uzbekistani leadership might look like on a number of different levels. Because Uzbekistan is operating from a position of relative strength, when Tashkent reaches out, it affects the behavior and possibilities in the other national capitals of the region.
3.
Starting from scratch
Uzbekistan’s most important role is also its most obvious. Because Uzbekistan is double-landlocked, it is in the unenviable position of being disproportionately affected by the political and economic developments of neighboring countries. If the countries with which Uzbekistan shares borders do well, then Uzbekistan also does well – which means that pursuing greater integration and connectivity throughout the Central Asian region is in Uzbekistan’s interests.
In order to become a major force for economic growth and political stability in Eurasia, Uzbekistan needs to invest (and needs foreign investment in) improving transportation infrastructure, creating digital infrastructure necessary for the 21st century economy, and creating transport corridors that are secure and reliable.
Because so many of the connectivity projects in Central Asia will depend on Uzbekistan, Tashkent will have a unique power and opportunity to demand that local sovereignty and traditions be respected. Central Asian countries, especially Kazakhstan and Kyrgyzstan, have already experienced difficulties at the bilateral level with China over these very sorts of issues, and Uzbekistan can work together with other states in the region to pool their resources and project a more unified front in relations with stronger and often politically motivated external powers.
This will be difficult in practice. Uzbekistan must resist aligning itself politically or economically too much with any one country, such that another country begins to interpret that relationship as a threat. Uzbekistan must try to resist zero-sum strategic calculations and instead insist that all those traversing its territory and hoping to hire Uzbekistani workers or sell to Uzbekistani consumers must look at Uzbekistan and Central Asia as neutral ground. The ancient Silk Road, after all, did not have a nationality, and its success derived from the fact that it was not possessed or owned by anyone, but rather was a valuable transportation corridor that allowed a mutually beneficial exchange of goods.
Conclusion
For understandable reasons, Central Asia states have jealously guarded their independence and sovereignty in the wake of the Soviet Union’s collapse. Even so, the geographic logic of the region pushes not towards insularity or isolation, but towards cooperation and coordination. Uzbekistan is not the largest country in Central Asia but it is the most populous. Because Uzbekistan is the only country in the region that borders all the others, it could become the circulatory system of a 21st century silk road.
There are major risks involved, some domestic, and some geopolitical, but also tremendous opportunities as well. Since Karimov’s death in 2016, Uzbekistan has undertaken major economic and political reforms that afford incredible opportunities for growth. At the same time, those same reforms come with huge domestic risks, as do the geopolitical forces that surround and threaten Uzbekistan on all sides. Thus far, things have gone well for Uzbekistan as it cautiously opens up to the world, but it has quite a long way to go, and nothing less than the future of Central Asia hangs in the balance.
Jacob Shapiro: Hello listeners and welcome back to another episode of Cognitive Dissidents. As usual, I'm your host. I'm Jacob Shapiro. I'm a partner and the director of Geopolitical Analysis at Cognitive Investments. Happy to welcome simak, the Chief Military Analyst at Force Analysis back onto the podcast. Sims episodes are always among the most downloaded and most shared episodes that we have, and that's because sim offers. Extremely rigorous and extremely good analysis of what is happening with the Russia, Ukraine war tactically, but also in general with security conflicts around the world. And we delve into some of that in our conversation as well. So thank you Sim for making time out of your busy squash schedule to come on the podcast. I appreciate it. Listeners, if you haven't left a radio or review of the podcast and you like the podcast, please consider doing so. We have a lot more listeners at this time last year right now, this year than we did at this time last year. So if you haven't done that, take a few seconds out of your day. And do that for us. It really helps us and it just takes you a few seconds of your time. Otherwise, you can write to me@jacobcognitive.investments. If you have questions about the CI research knowledge platform, which we rolled out, which Rob and I talked about last week, you might want to get in touch about that. If you want to talk about our wealth management services or if you just want to tell me interesting things about what you think about the world. All of those things are fair game. I enjoy corresponding with all of you that write in. So without further ado, cheers. See you out there. Cognitive Investments LLC is a registered investment advisor. Advisory services are only offered to clients or prospective clients where cognitive and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website@www.cognitive.investments. The information provided is for educational and informational purposes only, and does not constitute investment advice, and it should not be relied on. As such, it should not be considered a solicitation to buy or an offer to sell a security. That does not take into account any investors particular investment objectives, strategies, tax status, or investment horizon. You should consult your attorney or tax advisor. All right, SIM welcome back to the podcast. Thanks for making some time to be with us. I wish we were playing squash and having this conversation, but a last, the best we can do is look at each other through screens and talking to microphones. How's it going, my friend? Sim Tak: Everything's well. Thanks, Jacob. Thanks for having me again. Jacob Shapiro: Sim, where is the vaunted Ukrainian counter offensive of 2023. We're recording on May 17th. It's a Wednesday. This will come out on Monday. Will the offensive have begun by the time this podcast posts? Has the offensive already begun in a sneaky way that I'm discounting? Do you believe Zelensky when he said I forget if it was earlier this week or last week, where he was like we don't have enough weapons quite yet, so maybe if you want this counter offensive, we need some more weapons. It seems to me like there's been a lot of buildup towards a counter offensive and it's not there yet, and it's getting late enough in the year to where Okay, like it's summer now, like winter's not that far away. Yeah, take that question in whatever direction you want. Yeah, Sim Tak: There's a lot to unpack there. A lot of the things you said, like they're all different things that are happening simultaneously and affecting the way that this offensive comes together. So first off I think in the conventional sense of what people are expecting to see in this offensive, we're not seeing that yet, right? We're not seeing the big pushes. We actually have quite a bit of information on how Ukraine is. Putting this offensive together in, in terms of units contributed to it through the the leaks that came out some time ago. And that's also telling us that those units that will make up the main offensive force are not yet on the front lines. We can say in a very binary sense no, the offensive isn't happening yet. But at the same time, and as I told someone recently as well the offensive is both happening and not happening, right? Because there's different phases to this kind of an offensive so that, that. The tanks rolling across the line. That's not happening yet, but that's just one part. Actually probably more a part near the end of the the offensive process where initially there's going to be a lot of preparation in terms of intelligence gathering, preparation of the battlefield, shaping the battlefield through. Preparatory artillery fires, deep strikes and I think those are the kind of things that we're already starting to see. Especially with the arrival of the storm shadow, which has expanded Ukraine's reach for those kind of deep strikes into Russian occupied territory again. Jacob Shapiro: What is the storm shadow? Help me there. Sim Tak: Yeah, that's a good question. That's, I figured that was a topic we were going to dig into today. So the storm shadow is a, Air launched cruise missile essentially. It's a weapon that that the UK has delivered to. Ukraine, it's been integrated on Ukrainian s u 20 fours allegedly. Soviet aircraft getting Western weapon reinstalled on them. That's not always as straightforward as a. Just putting them on the aircraft they were designed for. But essentially these missiles have a range potentially upwards of 300 kilometers. There's different versions with different ranges depending on, the original versions, export versions, et cetera. But, we can assume that whatever version Ukraine has a range over 300 kilometers, which compared to the high Mars, if you remember, that sits somewhere around 70 to 80 kilometer in range. So that's a significant increase of reach for those kind of strikes. Also quite powerful. Weapon quite a bit of explosives packed into it with a capability to even penetrate bunkers, underground targets and things like that. Not that's something that occurs that often currently in, in the conflict with Russia, but it's a, it's a capability you have. It's better to have it. And not to need it, then the other way around. So yeah they've gotten these these storm shadows very recently. The process of integration is probably going on since last year. But we've seen a couple strikes especially in the luhansk area that do appear to have been conducted with these storm shadow missiles and we're certain to be seeing more of those in the near future. And I think those strikes which are targeting Russian logistics operations farther away from the frontline, those are going to help shape that future offensive. They're going to help degrade Russia's capabilities and, Fighting off the offensive, if that makes sense. Jacob Shapiro: I, I have this, you're talking about, British missiles on Soviet aircraft, and I'm like thinking of, when you have to plug in your laptop charger and you need an adapter when you're going from one country to another country, is that what this actually looks like? Do you need the adapter to put the British missile onto the Soviet aircraft, or is it much more complicated than that? Sim Tak: In a physical sense, yes, there is that element. Like you, you have to. Be able to physically attach and detach the missile in its intended manner. And of course, the, the parts that are created to launch a storm shadow aren't created to fit onto an s u 24. I think that's usually the more. The easier part of integration that still needs to be developed, tested. Things have to be safe. You don't wanna be flying around with missiles that get randomly disattached or don't disattached when they should. Sure. A lot of problems can occur but there's also a level of integration into the avionics of an aircraft and that, but that depends on how a missile actually interacts with the aircraft. Because in the case of the storm shadow, and I think previously we've had a similar example when the. The harm missile. I don't know if you're familiar with that, but that's an anti radiation missile. So a missile that homes in on radio frequency emissions. So radars, essentially that's the main goal. But earlier in the conflict US harm missiles were integrated in some. Former Soviet or former Russian aircraft that Ukraine is flying as well. But the advantage with these kind of missiles is that you can actually set their targets before you take off. So you don't have to set the target from the plane, which means that you can skip some of that direct integration of the computer systems of the aircraft with the missile. So they, they might not necessarily have to communicate at that level. In the air. And then sometimes it can be just a mechanical integration where you need to, be able to tell the missile that it is being launched, that it should launch and then physically release it. But, I'm not an expert in the exact configurations of these missiles and aircraft. But that's, as far as I understand the kind of levels of integration that happen there. Jacob Shapiro: Maybe you're not the expert on this particular thing, but you've forgotten more about this than I'll ever know in my lifetime. And I love this idea if somebody has to go make the converters that you have to use to put British missiles onto Soviet airplanes. I, it's big business Sim Tak: actually. If you think about prior to this conflict the NATO integration of Eastern European countries that were initially all equipped with former Soviet equipment A lot of times it was a lot cheaper to start to develop ways to fit western munitions into Soviet weapons than to, get new fighter jets or new air defense systems altogether. There's some similar work going on that could help Ukraine as well, for example modifications that would allow. Western anti-aircraft missiles to be fired from S 300 systems, for example. So things like that can massively extend the utility of those systems that Ukraine has but can't get the ammunition for. Jacob Shapiro: Yeah, I know it's big business and we'll get to this in a little bit cause I want to ask you about the German military aid package that Shoals announced, I guess it was last weekend, cuz it sounds to me like, like the German military industrial complex just realized that, oh, we actually have a big opportunity to sell weapons, not just to the revamped German army, but to the Ukrainian army as well. But before we get to that broader stuff, On the storm shadows. I'm not a weapon specialist, but I do know that the first step with analyzing weapons and their usage is what are you actually gonna use that weapon for? So you talked about, destroying bunkers or they hit targets in luhansk. What is Ukraine gonna use the storm shadows for? What is the goal here? Is it take back Mort's territory in Eastern Ukraine? Is it push Russia all the way back to the border? Is it we want to take Crimea while we're at it? Wh where do you I guess the question is, what do you think the goal is for a Ukrainian counter offensive, and how should we think about what their goals are based on the weapons that they're receiving and asking for? Sim Tak: There, there's a lot of ways that can go right, and I think there's two main two main likely objectives that that Ukraine can be playing with. And I've got my own opinion on, on, which is the the smarter or more likely one here, but essentially a lot of people have talked up until a few weeks ago actually. It seems to have quieted down now, but a lot of people have been talking about Ukrainian offensive in the direction of Crimea with the the goal being to reach Crimea and to get really close to eventually recovering control of Crimea. There are some advantages to an operation like that because you're essentially attacking in a direction that is not currently the center of mass of that Russian military capability that is inside Ukraine. So it might be an easier offensive, but no of offense was truly easy at this scale, of course. Just wanna caveat that But I think it also raises some questions. Okay if you are going to push to Crimea, and that means along the way places like Mil Tok, and. Would be liberated. It, it would remove that whole land bridge element from the from the equation. The only connection from Russia into the into Crimea would be the Kirch Bridge as well as naval transport. So an air transport. So really complicating that logistical connection. But then when you sit there, when you sit at the bottleneck on northern end of Crimea, you're gonna face a situation where, Troops are very concentrated of both sides. And where there's going to be some questions about how well Ukraine might be able to stand up against Russian air power in a situation where they've just positioned themselves much closer to all of those air bases in Crimea, right? Which is something that increases the potential sorting rate by the by the Russians, et cetera. So in that kind of an offensive, to help back to your initial question about the storm shadow. How do you use that? How does it fit into these operations? In that kind of an operation? Having the storm shadow means that you can use that to suppress that air power artillery and other kind of operations that Russia might run inside Crimea to target those concentrations of Ukrainian forces around that bottleneck. So essentially it means, you can target all of the logistics inside and around Crimea. So you can also target the Kurz Bridge again and try to shut that down. But you can also directly target the air fields. You can target any kind of concentration of Russian Forces, headquarters, et cetera make it really difficult for Russia to hang on to Crimea. So that's one, one big idea I think that people are looking at. Now the other one and personally I think it, it is on the longer term, the more probably the more fruitful one. Would be to focus on that eastern front where Russia has gathered that that mass of forces around the areas like Bmu, but also as far south as Vlada where fighting is still continuing as well of the ika between the two. And then north of north of Buch you've still got heavy fighting going on around places like Mina Ions, et cetera. This is the area where Russia has been focusing that winter offensive. It hasn't been a very convincing offensive in any part other than the streets of Bmu itself. But by focusing and offensive in that direction, the goal would be not necessarily to make this. Symbolic gain of opening the door to retrieving control over Crimea. But instead the goal would be to destroy that capability that Russia has left. If Ukraine were to be able to take out of the equation, all those different units, including Wagner that's fighting there, including the 76th V D V and including a whole number of forces. The Naval Infantry has got some. Some allegedly higher quality forces in those areas as well. If you can take those out of action that increases your probability of success down the line as well, because Russia will be even more limited in which capabilities it can shift around how it can fight you in other areas. It might make an eventual offensive in the direction of Crimea easier as well. Now and in that kind of. Offensive, of course. The main goal of using the storm shadow or other similar weapons would be to directly assist in destroying that Russian capability. So it takes on a similar shape and targeting logistics in targeting command structures maybe even air defense depending on how tactical they want to go in the use of these kind of weapon systems. But essentially the use of the system would then be focused on disrupting the specific Russian unit's ability to counter that offensive rather than making the area of Crimea a living Jacob Shapiro: hell. It sounds to me like you think the latter is what Ukraine is aiming for. Am I reading Sim Tak: you right? I honestly don't know. I've gone back and forth trying to. Read indicators of where they might be going. Sometimes I I was seeing indicators for a while that suggested they might actually be trying to push towards Crimea. I think now more recently, seeing those storm shadow strikes in Luhansk that might rise the idea of maybe these are preparations for an offensive in the eastern direction. But if tomorrow we see storm shadow strikes in Crimea that whole indicator gets wiped away again as well. So it's I think obviously Ukraine is going to keep these plans very close at hand. We'll see it when it starts developing. And it's even entirely possible that we might see Ukraine probe in both these directions and Decide to commit to whichever one chose the most potential at that time. That's Jacob Shapiro: actually a very reassuring thing you just said because I was a little concerned because it seemed like everybody and their mother knew exactly when the Ukrainian counter offensive was coming and everybody knew what was gonna happen and that you are reading the teas here and not sure which avenue or which direction Ukrainian military is going for. I assume the Russians aren't sure either, and Ukraine is trying to make sure that the Russians don't have an idea of where they're actually gonna leverage their forces. Before we turn to the Russians, cause I wanna spend some time talking about the Russians. But I was listening to a War on the Rocks podcast with Michael Kaufman. And one thing that he's been great, since the beginning of this conflict. He got a lot of things right in the beginning that I didn't get right. But one thing he said on that podcast recently that really stayed with me was he talked about how, Ukraine has been training all of these units for a counter offensive, and then Russia has been, bringing up conscripts and soldiers and trying to reposition all these other things. And his point was basically just, this is chapter two of the war. In some ways this counter offensive, we're gonna see. Soldiers on both the Ukrainian side and the Russian side thrown into the battle who haven't fought before. These are fresh troops, troops that really haven't faced each other. So you, everything we've learned in the past year about these armies yes, you have to keep that in mind, but these are also new armies and there's gonna be new forces to deal with there. And I guess the question that I'm searching for is first of all, do you agree with that framework and then before we leave the Ukrainian forces, how do you rate the quality and effectiveness of Ukraine's army? It's been, over a year that this war has been going, probably Ukraine's biggest disadvantage is the numbers. They just numerically can't take the kinds of losses and can't pull up the kinds of reserves that Russia can throw into a meat grinder conflict. How do you rate the quality of Ukraine's forces here over a year into the conflict with all this training, all of these weapons that they've gotten? Yeah. H how are, what is the quality of the Ukrainian force right now? Sim Tak: First off, let me say definitely al also a fan of a lot of the things that Kaufman has been doing. He's a, he is putting some great material out there and I tend to agree with that assessment of, this, we could look at this as a new war with new armies facing each other. I think one of the challenges for each side is going to be managing to just how much of a degree that will be the case. And what I mean by that is that as new forces are being trained you're going to want to transfer all of that institutional knowledge, everything that has been learned before and throughout the conflict to those new forces. So some of the things that are being done there, for example is taking troops from existing units and redeploying them in these new units where they are operating together with new recruits and things like that. So the more successful they will be in Kind of mitigating that freshness effect of these new units the more effective they will be on the battlefield. And I think I would assume, and maybe that's a little bit of a dangerous assumption, but I would assume that Ukraine supported by NATO and the training programs where a lot of native countries have extensive experience in, in training foreign forces in, in a very Very intelligent manner. They understand the pitfalls of training these new units and I, I think that level of support and the way that Ukraine is tackling this will put them in a better position to field a fresh army that still has a significant amount of institutional knowledge carried over while when we hear the stories about Russian mobilized forces getting almost no training, if any. Even barely able to use the weapon systems that they receive, if they receive any. So those kind of stories make me think that the Russians will not be very effective in bringing that kind of institutional knowledge to the frontline. And I recently was told by someone, some of the examples of how it, it seems that in a lot of Russian units commanders at the levels of colonels and majors. So essentially commanders of companies and battalions and higher up that those are responsible to actually go down to the tactical level on the front line to tell forces exactly how to take up their positions, how to conduct certain operations. Things that normally in a Western army you would have. Your junior officer corps your lieutenants and captains be responsible for. So that also tells me that in the Russian Army, they have a real problem as they're pushing more and more people in to maintain that level of institutional knowledge. Because it, it seems that most of it tends to exist at the ranks. That are not directly engaged in combat at this point. Jacob Shapiro: And this is a good segue, I think, to turn to Russia's forces. While you're talking, I can't help but think about the historic and, historical analogies are limited, but I can't help but think about the Korean War. Which the Korean War it's a terrible name for that war. I've said this before in the podcast. It was really, there were two wars there. There was the Korean War, which lasted about three months, and then there was the first US China War and. What China had was just millions of people that could be cannon fodder and like you said, throwing soldiers in without training them in some times without weapons, but just so they could get millions of people charging the hill against the United States, which, which had inferior forces, but better technology. It sounds to me like you're describing a situation where Russia has su superior force, even if the force is not of particularly equality. Ukraine has the better technology, and I bring up the Korean War first US-China War example because, That ended in stalemate. The demilitarized zone today is just about where, the demilitarized zone was in 1950 or 1951, whenever the war started. Russia's forces you alluded to this quote unquote counter offensive. It's been one mistake after another. And we've even got these reports of, the guys with Bogner. Challenging Putin in public and all this dissension within the Russian military ranks here. Can Russia keep this up? Is Russia in danger of getting beaten back or does Russia have the advantage of superior forces and it can just throw people into this meat grinder and is probably betting that it can throw people into it longer than Ukraine can either throw men into the battle or have enough weapons from the west to fight the battle. Sim Tak: So Russia has a tremendous resource in its population that provides it, that mass on the battlefield. But I think we need to be very clear about how that is not an infinite. Resource. And especially if we're comparing that to historical conflicts the value of that kind of mass reduces over time because the level of sophistication of warfare goes up, right? Strictly mass translates into less and less advantage on the battlefield. If that mask cannot be trained if it is not skilled or e even simply, able to use basic modern technology like like cell phones and, applications to control drones and things like that. The more intelligent your mask, you're mass as the more trained it is the more capable it is going to be on a modern battlefield. So I think in that regard A lot of that mass that Russia has is being negated by the level of skill that is being developed on the Ukrainian and extensively supported by its Western allies, obviously. And that kind of leads to your point about, is that a stalemate? Do those two elements lift each other? But what I wonder about is where does that ability for Russia to keep mobilizing people, to keep pushing that mass into the battlefield? Where does that end? Because we know for a fact that it can't be infinite. There, there is some stretch on Russia's ability to force people to join the military, but at some point, the people, and even in Russia, sometimes the people revolt. And when they like the Kremlin is constantly going to have to be assessing how far they can push things without risking things, getting out of control. We also have to keep in mind 2024, we have a presidential election coming up in Russia now. I know what everybody listening is shouting at me right now. I understand it's not a real election. Putin's going to win by default and things like that. And that may be true because the Kremlin does control the the electoral legislation to a significant degree. Even if they don't commit voter fraud they're going to select who is allowed to run. So that already makes you win before the ballots open. But. The elections are still going to be a very significant reflection of the kind of stability that exists in Russia, the kind of support that the government has, and that is something that will reflect on the position of that government. Towards the other power brokers in Russia. So when we're talking about the economic elites, the the security factions, et cetera they are constantly putting their trust in Putin and those around them to run the country in a way that is favorable to them. I think a lot of that trust has been degraded due to the current conflict. But if there start to be real concerns about. Potential popular dissent and things like that. I think some of those factions might start to withdraw their support from Putin, start to look for ways to get rid of him, and that's where that Russian political system. Despite the electoral realities where that Russian political system can get very very sensitive. And I think that's something that you were already alluding to when you were talking about Prigozhin sending his his harsh messages to Moscow out on the the worldwide web. It's clear that there is tension between those elites in Russia. It's clear that some kind of conflict is brewing. I think so far it doesn't look like anyone's actually been willing to to take up arms and do something about it at that level of of Russian politics. But anything that, that the current government does That could push it further that way is going to be something they're gonna think very hard about. So all that is to say, just to bring it back to the point I was trying to make is I think, I don't think Putin has an endless source of mobilization. And at some point he's going to have to say, no we can't force people out of their homes, recruit them into the military because People are gonna come after me. Jacob Shapiro: I feel like the conventional wisdom has been that the longer the war goes on, the more it favors Russia because they have those numerical advantages and they can, endure more suffering. I've made that point before with audiences and clients and also on this podcast before. It sounds to me, look the, it sounds to me though that sort of what you're saying actually would challenge that idea, and this is where I want to bring in, let's get outside of Russian Ukraine right now, because I thought That three what was it, 2.7 or 2.8 billion euros. I think it was 3 billion US dollars military aid package that Germany announced last week. That's basically, the amount of support that Germany's offered in the entire war up to now in one fell swoop. And, what a. What a progression we've seen from Germany. It's been probably too slow for lots of observers and certainly too crow for the, too slow for the Ukrainian government. But just go back to January, 2022 when right before the war started, Germany was sending helmets because they didn't wanna send weapons to Ukraine because they still had this idea that they were gonna be able to have Nord stream two and have relations with Russia, but be in NATO and do all these other things. Now we've got all off sho saying, yeah we don't need anybody to tell us we need more tanks and more of all these other things. We're gonna have German. Military, industrial companies, we're gonna start JVs in Ukraine, we're gonna start building weapons systems there, and all these other sorts of things. That to me, sounds and Marco Pich cousin Marco has been on the podcast a few times. He's talked about how he thought eventually, the Germans would take the natural gas from Russia and the conflict would turn around and I was always arguing with him. I think things have changed a little bit, but Shoals and the German government always made me doubt myself because they were so limp risk about their support for Ukraine. But, It looked to me like that military aid package that was Germany coming out and saying, Hey, we're like when the defense minister says, we're gonna do whatever it takes to help Ukraine win this war. That sounds like it's whatever it takes. And if Germany is committed here and Germany's gonna build. Ukraine weapons and supply them with all the technology they're gonna need and things like that. That to me says maybe time is actually on the side of the Ukrainians. Maybe as the Russian forces eat themselves alive it's really Ukraine that can draw this out, and maybe Ukraine doesn't have to do the counter offensive right now. Maybe Ukraine can just drag this out and get stronger and stronger and let the Russians tear themselves to pieces. Tell me what you think of that emerging narrative. Cause I'm trying it on for size. I'm not even sure if I believe that story I just told myself, but how does it sound Sim Tak: to you? No, there, there's some big thoughts that I definitely agree with. Just to tackle onto what you were saying at the end there, in, in terms of Ukraine being able to stretch out this war and just wait until it gets bigger and bigger I don't think that's an option. Because every weapon system that they wait for, Is resulting in a number of deaths on the battlefield that they have to accept because they haven't ended this war yet. So there's, I think the capacity the human capacity that the Ukrainian military has. Runs out long before they reach that kind of overwhelming force through various different armament schemes from their allies. So I, I don't think that's an option to wait for it. I think to a certain degree, even the current or currently anticipated offensive it's going to be a very important marker in just how much support Ukraine can expect to continue to receive from the West. I think. People have been putting a lot of resources in there. You mentioned the example of Germany, which made a tremendous turnaround during this whole conflict. But the us, the uk, France Spain, Denmark even Belgium Meadowlands, everybody. Is jumping on this and I, I forgot to mention a lot of the Eastern European I need to go through the list to make sure everybody is thanked in order here. But the but the reality is ev everybody in NATO and around NATO has really come together to, to support Ukraine's capabilities. But if that doesn't translate into some kind of success, I think a lot of that, the political support. For the massive amount of resources that goes into that is going to start to withdraw at some point. And I think we talked about that last year as well, which was something that I was really afraid of happening during the winter for that western support for Ukraine to start to wither and essentially cause Zelensky to be out there on, on on his own. I think that's still a risk. We'll have to see what happens with all of these current packages of support that are delivered. This offensive is something a long time in the making. There's a lot of effort that has gone into it, not just in, in terms of material resources, but also training programs, different kinds of integration. There's it's a really massive test case for everyone to see. Whether the support can be sufficient to make Ukraine successful. So I think we'll have to see it at some point before the winter, cuz then everything will shut down again. So I don't think they can afford to wait. Jacob Shapiro: And Mother, just to stop you there though, I think the risk is bigger with the United States and we're seeing that with Biden decided he needed to cancel a meeting of the quad, so the India, Japan, the United States, Australia, he decided he needed to cancel a quad meeting of the leaders of the quad because he had to come home and deal with the debt ceiling negotiations. I, I think us support is very precarious, but just listen to what we've talked about here. We've talked about this German military aid package. We started off talking about storm shadows from the uk. I'm sure Macron doesn't want to be left out, so he'll come up with something French that he can claim is better than what both of those sides are coming through. It sounds like Europe is at least ponying up and Europe has a lot of capacity. It has to rebuild before it can do that at scale, but. Maybe it's the best case scenario for Ukraine that as the United, as support from the United States might start to wane because of the domestic political cycle in the United States, that European countries are now starting to step up and they've had a little bit of time to think about this and maybe direct some investment that way. That's, ultimately in the long term, if Ukraine has any sort of viable path to independence and being rebuilt, it's through the eu. It's not through the United States or anything like that. Sim Tak: Yes, exactly. And that's exactly where I wanted to go actually with the the upcoming US elections as well. We talked about Russia having that election in 2024, but the US has one as well. And waning support from Biden might be the most positive outcome Ukraine can hope for, depending on how that election in the US turns out. And I think, in the event that Trump gets elected president again, things are looking very poorly for Ukraine. So that's something that, that they're gonna have to be aware of. The fact that was actually, Jacob Shapiro: no. Hold on. I wanna play with the two. Do you do you think that would be bad for you? DeSantis I think is very clear. He's his stake deposition as, I'm not gonna support Ukraine indefinitely and I care about things like Disney and debt and blah, blah, blah. Trump. I have no idea to parse what he thinks. On the one hand, at that town hall, he was like, oh I'll fix it in 24 hours. But at the same time, like he also. Trump hates looking weak. And so he would probably relish the opportunity to quash all the, oh, I'm with Russia and golden showers and this, that other thing. No, I'm coming in, I'm gonna finish the war. I'm gonna really finish. I, he's a total wild card to me. So I guess from the sense that yes, he is, Ukraine would have to be worried about the volatility there. But I don't think, if I was in Moscow, I don't think I would be sitting there like looking forward to a Trump presidency, cuz God knows what he would do for all we know. He might go. 180 degrees the other direction, and he can, because he's the one in the Republican party that can say one thing and do another and not get punished for it. Sim Tak: No, that, that's a very fair point. It's not guaranteed which way a Trump presidency would would affect the war. But I think that the fact that you have a wild card like that in the, or a loose cannon, let's call it that, or the fact that you have a loose cannon in the, a loose storm in White House. Yeah. That itself is a great source of. Instability for Ukraine. I think yeah, without wanting to make a call about which, which US candidate is better for Ukraine or anything like that I don't mean to try to Send out electoral advice based on the situation in Ukraine there. But but the reality is that can shake things up. And the us you know, despite all of the Europeans ponying up as you were saying the US is still by far the biggest supporter of this entire Ukrainian capability. When you express it in dollar amounts. They are massively larger than anyone else combined. When you are talking about specific weapon systems like the high Mars munitions javelins there's very key technologies that are coming from the US that Ukraine would miss very dearly if they couldn't get their hands on them anymore. Jacob Shapiro: Yeah, no, that's a fair point too, that also raises, I think the issue of China, and I know this is a little further afield, but the Russian, I don't think the Chinese, correct me if I'm wrong, I haven't seen evidence that China's supporting Russia in a military way, but the Russian economy such as it is, would not be standing of China. Wasn't there buying, Russian commodities and having trade with Russia and things like that. But that's another really dis disturbing signal I think for Russia over the past couple of months. She. Finally had that phone call with Zelensky, and I think China maybe is looking at the map and say okay, how? How do we position ourselves if Ukraine does win this war? We don't want to just be stuck in the, we supported Russia camp in general, and if you get any kind of. Weakening of I, I don't think we can call it support, but if China becomes less ambivalent about the war and more, Hey, Russia, you really need to figure this out because we don't wanna see state collapse on our borders and you can't win this war, so figure out what you're gonna do. Or we're gonna have to make our own decisions. It seems to me like that's another thing that has to weigh considerably on how Russia's thinking about proceeding forward here. Sim Tak: Definitely, and I think that. China has been very careful in positioning itself all the way since the beginning of the war. I don't think that China has ever really shown itself to be supporting Russia's military operations in Ukraine. Not materially, but all, not even politically. Like they, they have tried to maintain a relationship with Russia. As you mentioned, they have a very strong. Economical intertwinement. But I think that China is very careful in not putting itself in the same bucket that Russia is in as being the aggressor upsetting the international order in this way. And it, it's a bit odd because at the same time we are constantly talking about the potential risk of conflict around Taiwan which would see China do. Or undertake similar actions as Russia did against Ukraine. But I think we can probably learn something about how China is thinking about situations like Taiwan. If we look at how it is positioning itself relative to Russia in this conflict with Ukraine. I, and I'm not a, I'm not a China specialist but to me from the little. Bits and bobs that I get here and there. It seems to me that China is trying to to stay out of the role of being a belligerent. Jacob Shapiro: Yeah. This is a good, we can do a two minute tangent on this. Do you actually worry about China attacking Taiwan over, let's say the next two to three years? Is that a scenario that worries you? I've I'm on record as saying it doesn't worry me at all, and it doesn't worry me at all because I look at China's capabilities and an amphibious assault against a hard target like Taiwan with Japan and. The United States and Australia and all these other countries sitting there to support doesn't seem to me like China has the capability to even be thinking about that and diluting itself into victory. And until Chinese decision makers and military officials can make the case that no, we stand a very good chance at winning a war like that, it, it feels to me like that's not gonna happen. So it's more like a seven, 10 years from now thing for me, rather than worrying about it in the next one to three years. Is that also where you're at or do you think I need to re-look at my assessment of the capabilities of the Chinese military? Sim Tak: That's the exact reasoning that I had. And I think you were following as well about Russia last two years ago. Jacob Shapiro: Yes it was, but and this, this gets down to where Putin and individuals matter in geopolitics because even though Russia didn't like you were right, like Russia didn't have the forces to do this. I was right. It was strategically a really bad idea. But Putin locked himself in that room with the really long table during Covid 19, and somehow told himself this story that it was good, and he had absolute power in Russia. And he basically said, all right, we're gonna do this. And people blindly followed him. China has many virtues. It has many disadvantages. It doesn't seem to me like Xi Jinping has ever shown that kind of capacity for self delusion. At least he has. He hasn't shown it quite yet. But I take your point that if Xi Jinping locks himself in the room and starts believing that China really could do that, that it would go that way. But that would end in the same way that we're talking about now. Like it wouldn't end with Chinese conquest of Taiwan. It would end with. An embarrassment for China, and I don't think the Chinese Communist Party could last as long as this Russian government has lasted if it was losing a war in trying to reunify Sim Tak: with Taiwan. I think what you're, what you raised in the beginning of that response is exactly the thing to be looking for the, what is the essential difference in styles of decision making in China and Russia? How does that. How much power does he really have? How much influence does he really have over this kind of decision making? How much how much input do military specialists have in that kind of decision making and how well do they know their job to be able to inform that kind of decision making effectively? If we were to assume that yes, that is radically different in China than it is in Russia, like then yes, I, I could very easily support a line of thought that says yeah it's not that likely for China to suddenly go at Taiwan. But again I don't know that to be the case, so I, yeah, I have to assume that it is at the very least possible. Jacob Shapiro: Yep. All right. We'll put the tangent aside and let's say, last question, get you outta here on this. All right, so it's May 17th, 2023. Describe the battlefield as you think it will be on December 31st, 2023. Sim Tak: That's a very tough one not knowing where the Ukrainians are going. But let me put it this way. So if let's assume that the Ukrainians are going to focus on on eroding that Russian military capacity of those core units around, around Eastern Ukraine. Then I would say by December we'll be in another kind of winter calm down following an offensive expansion of territories controlled under controlled by Ukrainian forces. So I think we might see additional parts of the Russian border secured by Ukrainians. At that point. We might see a number of places that were lost over the past year of fighting. Bmo Seve, donk places like that might be coming back into Ukrainian hands. Possibly. We might even see the pressure start to rise on Don Nets itself, the city of Don Nets because we have a lot of important battlefield that are essentially along the different edges of the city itself. And. Eventually recapturing the City of Donuts, which has been in the hands of Russia or pro-Russian separatists since 2014. That to me is perhaps an even bigger challenge than Crimea. So yeah I think that's where we might end this year essentially having territory recovered and Being in a position where the pressure is being raised towards either those, the city of Donnas or perhaps Crimea, if that's the direction they go into. But I, I don't think that we'll see the full recovery of the occupied territories within this year. I think that would require an immense collapse of Russian military capabilities or complete political abandonment of the operation Jacob Shapiro: altogether. And that, that's the, so I hear you on the Ukrainian side. So you're also saying there that you're not expecting though a collapse of Russian capabilities over the next six day months, even though we are seeing some of that tension brewing within Russia Sim Tak: itself. I think significant attrition on the battlefield but I don't think that we'll see a, a. Full stop to Russia's ability to mobilize at, within this timeframe within the next few months essentially. Cuz the forces that'll be on the battlefield by December are forces that are being recruited now. So I, I don't think that's going to cause any big shortages, any big changes. The only real big qualitative change that I could see on the Russian side is if the political The political factions completely turn around when it comes to the offensive, if they were already invasion, rather if they decide that they're no longer supporting it, that they're no longer willing to carry the cost of it that might put things to an end, but I'm also not expecting that to happen so quickly. Honestly, I think whatever the Ukrainian offensive causes on the ground is going to. Take months, if not longer, to reverberate into all of those political decisions. Jacob Shapiro: Yeah. I know I said that was gonna be the last question, but one more. Sam, I know, you and I usually talk about the Russia, Ukraine war, and that's what I've relied on you here on for the podcast. But you're not just a Russia Ukraine expert. You're a military expert, security expert in general. There's a civil war in Sudan. Yemen is still sitting there. What is. An example of another conflict that listeners maybe are not paying attention to, that they should be paying attention to that may be crowded out by debt, ceiling news, or any of the, any of these other things. Or is it really just, Hey, it's the Russia, Ukraine war and that's where you should be focused from a security perspective in Sim Tak: the world right now? So I'm actually still very interested in the direction that the security situation across the entire Sahel is is evolving. Just to try and keep it brief, not to go into an entire additional hour of discussion because we could talk about this a lot. We can Jacob Shapiro: definitely have you on for a whole nother episode and that, so how about you te tease up the next episode where we just do the style? Oh, that's a great Sim Tak: idea. But essentially between the conflicts in Mali Nigeria central African Re Republic and other, the Civil War in Sudan and the continuing conflict in Libya. There's a lot of conflicts in that area that have a lot of different local ethnic elements playing out in them that have a a jihadist element playing out into it. And then it's it's essentially something where. It's been dealt with in, in separate operations, separate approaches in different parts of the Sahel neither of which has been really successful. We've seen over the past year France getting pushed back little by little being being kicked out of countries that are actually aligning a little more. Towards Russia. So this is all tying into that whole Russia, Ukraine, Russia versus West discussion that we were having earlier, of course. Just to wrap up the idea there the big question is will we be able to actually restore some kind of stability there? Or is this going to be another perpetual. Conflict against pockets of extremists in different countries, potential terrorist states rising. I think when the United States was able to finally get out of Afghanistan out of out of Iraq to a great degree the expectation in Europe was that we'd be able to wrap up those operations in the Sahel in a similar way, but it's it's just not heading that direction. Jacob Shapiro: No, not at all. And as you said, there's a lot there to unpack and it's getting worse and this affects markets in ways I think that many observers don't understand. And I mean everything from, Nigeria is a great example. Nigerian oil production continues to dwindle because the Nigerian state just cannot in enforce the rule of law. And stability on a basic level there. Angola just overtook Nigeria actually as Africa's largest oil producing country. Countries like Ivory Coast, Burkina Fasu, places like this that you may not have even heard of some of these countries, but if you're thinking about the price of chocolate and when you're buying candy at the store and things like that, this is where your cacao is all coming from. And that all goes back to those farmers. I saw an article in the Wall Street Journal, I didn't know this, but the, some kind of gum that. Is crucial in the production of product. I was going to mention Sim Tak: products. Gum, Arabic. Yeah. Jacob Shapiro: Sudan. I had no idea. So 80% of that comes from Sudan. So apparently, if you're drinking soda out there, maybe you want to, maybe you wanna stash exactly the cola products right now. It may feel like these conflicts are far away and who cares about a bunch of jihadi rebels in the middle of the desert. But actually you do. That's what it means to live in a globalized world. But yeah, as you said, sim let's not let's save that hour for the next time. We'll have you back on soon and let's, next time you come on, let's not even talk about Russia, Ukraine. We'll do a, we'll do a Sahel and a Yemen check-in and some other I don't wanna say fun things, cuz that's macabre even for me. But we'll have you back on and we'll talk about some other hotspots, Sim Tak: but I, I'd love to, yeah. Thanks. Sorry. Thanks. Jacob Shapiro: Thank you so much for listening to the Cognitive Dissidents Podcast, brought to you by Cognitive Investments. If you are interested in learning more about cognitive investments, you can check us out online@cognitive.investments. That's cognitive.investments. You can also write to me direct. If you want@jacobcognitive.investments, cheers and we'll see you out there. The views expressed in this commentary are subject to change based on market and other conditions. This podcast may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected any projections, market outlooks or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
Jacob Shapiro: Hello listeners, and welcome back to another episode of Cognitive Dissidents. As usual, I'm your host. I'm Jacob Shapiro. I'm a partner in the director of Geopolitical Analysis at Cognitive Investments. As promised, Emory Doru has come back on the podcast for a rapid reaction to Turkey's. Very surprising first round election results. Surprising That is if you trusted the polls, I warned you many times not to trust the polls here, that they weren't telling us anything really about what was actually going to happen, and that at least was true even though I couldn't give you any in. Side about which direction it was going. So Emory lays out what happened in the election, why we think what happened, and some thoughts about where it goes going forward. We'll have him back on after the second round for a deeper analysis, but we thank Emory for his time. I know he stayed up late watching the Turkish election results. And so thanks for making the time, Emory. We hope you enjoy. This Rapid Reaction podcast. Cheers. See you out there, Emery. I had a whole funny intro when we first started recording and then two minutes into the recording the internet craft dot. So I'm not gonna repeat the funny intro story, but the point of the funny intro story was to say, I. This election result here, the first round election result, it feels like as unexpected as Brexit was, and it feels as unex un as unexpected as Trump's victory was in 2016. Just because all of the polls were saying that the opposition looked good. And there was even after that opposition candidate whose name I can't pronounce him, that I'll trust you to educate me on. When he dropped out this week, maybe that was what was gonna push kh, Khali, Olu over the 50% margin. So I guess I want to, before we hit the election results itself I think I just want to ask you, how do you account for why the polls were so wrong here? The result that we've gotten doesn't look like Erdogan's gonna win outright with 50%, so we're probably gonna get a second round runoff. But the election we're, the election results we're getting with Erdogan at what, roughly 49%. Charlo around 44, 40 5%. That's not what polls were saying. So how do we account for the unexpected nature of these results? Emre Dogru: Yeah, it's quite interesting, Jacob. As you said based on the previous Perfors, we have been looking into the most reliable polls and they have been saying that, as you said the results would be other way off. Actually the opposition camp was expecting or and hoping for first round victory, whereas for adon, as you said, secured 49.5% of the votes in the first round. So it's clearly the pulse missed something and that something looks like the national sentiment of the TUR people. Cuz if you look at the results more in detail. Quite obvious that the, one of the main drivers that's resulted in this outcome is the national sentiment that church people wanted known. It seems like the opinion poll did miss that current, that deep wave as they, as it's called in three key, that sentiment, the feeling and how that's would change the vault behavior here. Jacob Shapiro: How would you respond to, because I know the c h P has already been saying that there was obstructions to voting and blaming it on that. How legitimate do you think the election result is? I'm not one to cast doubts on it, but this seems to me on the one hand you could say 49.5%. Oh, that looks suspicious. That's just enough to push it to a second round runoff. But enough also to show that er dewa. Erdowan is in the league. At the same time though, all this pushing about the polls and all the talk has been, one direction and it seems like sour grapes and sore losers to me to be like, oh, but really they obstructed everything at the ballot box. Do you feel like this was I don't know, as somebody living in Turkey, do you feel like there was any foul play here, or do you feel like this was a fair contest and the opposition just didn't sell their message to the Turkish people? Emre Dogru: Yeah, in terms of my data analysis and my observations and also the observations of people around me, we haven't seen any obstruction in the voting and counting process. So it was a fairly peaceful and quiet voting process. There were, of course, couple of incidents here and there, but for a close election like this one, it was a fairly quiet election. So that doesn't mean that the entire election period was fair. Of course, the government and President Erwin used to, most of the capacities of the of the states of the government, making investments and of course launching big projects as an election campaign. And opposition of course, did not have that kind of possibility. But still the electoral processes in Tygee is quite fair and it's usually reliable. One thing in addition to that is that almost 90% of the people run to the ballot box. So it's one of the record turnouts Turk history, and I believe, huh? One of the record turnouts are on the globe. A lot of people both from government side and opposition side they counted to loads. They waited until 6:00 AM 7:00 AM in the morning to make sure that all the votes are properly counted and submitted to the Supreme Election Board. So there is a lot of observation and a lot of monitoring in this process, and I don't agree with the allegations that the electoral process were obstructed. Jacob Shapiro: And I'm gonna ask you an impossible question here and let's see if you can dance around an answer, which is, Erdogan. Even though he has had a very impressive showing, he did have lower vote share in almost the in, in almost every single province in the country compared to where he had before. So there was some evidence that voters had sour on Erdowan a little bit, and we'll see if that shakes out in the second round. But I was actually more struck by the fact that the chp, they seemed to get 25, they got around 25% of the vote. They seem to always get around 25% of the vote if you go back to recent Turkish presidential elections. And I was just wondering, do you think that there. Do you think there was actually an opportunity for the opposition here and it was just that Kche dot oue was underwhelming or maybe some of the things that he said in the weeks leading up to the campaign really landed wrong and as you said, went against that national faction or do you feel like really the Turkish electorate. Had already made up its mind and there was nothing, it doesn't matter if it's K or anyone else what the C h P said, like by and large it was gonna be Erdogan or some flavor of nationalist party that was gonna be allied with him anyway, it was gonna go forward. Did, do you think CHP had a chance here, or do you think it was really, I. Actually they had a chance and they just, it was the wrong candidate or the wrong message or something like that. Emre Dogru: In terms of the decrease in the Justice and development party, you also known as the ATP's votes. We never expected those votes to be translated into the victor of c H P because these are two different chances of politic spectrum. And one the things that this election made very obvious is that it's identity politics, nationals feelings. Attachment to a certain identity and political party that determines voter behavior. So despite all the hardships that the Turk people experienced over the past few years, such as Covid 19 earthquake currents of fluctuation, the record inflation, the economic fluctuations, everything. Seems like most of the voters of the ruling camp stayed within the ruling camp. So that means there is some different transitions from the justice and development party to minor parties such as renewed welfare party, which is a minor party, but it's like a more religious fundamentalist party. So they gain 2.8% of the votes and they will be in the parliament with five cuns. Most of the people didn't expect that. So it seems like there is a Transition and the switch of votes within the opposition within the government camp, and also within the opposition camp, but not between the two. So I don't think that it's because of the leader, but it's because of ideologies and as I said, identity politics. Jacob Shapiro: Yeah. That's such an important point. When I look at other things around the world, like for a really good place where this happens is when you get into a debate about Scottish independence and people always trot out economically, it would be terrible for Scotland to try and vote for independence. Yeah. It was economically asinine for the UK to leave the European Union as well. There is something about when a politician or a political party can tap into that kind of feeling or sentiment that you're talking about. It overrides. Base economic interest. I feel and to your point in some ways that is the real story of Erdogan. He came to power amidst an economic crisis with high inflation and everything else. But somehow he has created that emotional pull between himself and what he represents. And enough of the Turkish electorate that, he can have infl. I don't know what else he could have done badly to lose his position. Inflation over 80%. The controversy around the earthquake, so many things have gone badly against him, but he still seems to have that emotional pull with a large, we can't call it a majority yet, but with a large bunch of the electorate. Now, Emre Dogru: regard the earthquake, by the way, the results are also very interesting. It seems like most of the provinces in the earthquake support presence are along for the presidential election. And also it's just some development party as well. Except for two provinces which are AANA and outside the other eight provinces really supported presence er, so it seems like his message that the earthquake was an act of God. And the government and President Aran himself is not responsible for it. And of course president Arran will give the effect of people new homes within one year resonated very well by the people who are very affected, who who lost their loved ones in that region. That's of course an emotional subject. And of course, it's for the people who live there, They also have this identical and theological attachments to the resident, everyone in his political party as well. And this promise that he's going to give back what they lost was a major promise by the ruling champ. The fact that opposition were not, was not able to convince the voters. There is something that I think they need to be thinking about. Jacob Shapiro: Yeah. As we look forward here, so the runoff will be in about a month time. Do you think the opposition has a chance? Or is this really just gonna be a coronation for another however many years of Erdogan's rule? It's going Emre Dogru: to be in two weeks, actually. On 29, on 28. So it's going to be in two weeks. So let, if you look at the pulse right now, so it's 49% five for presence, er on. And by the way, I think everyone gains a lot of legitimacy, in terms of international recognition and reputation as well by accepting 49.5% of the votes as running for the second round. So it's a, it's an important point for the Turkish democracy as well. KH position candidate got 44.8% and then the sonal, the third candidate, the nationals candidate got 5.1%. There will be elections in two weeks between just Argan and Kbu and whoever gets the majority of the votes will be the the president. So based on, of course, the current results, we can think that most of the voters, of the third candidates who now appears to be an emerges as a king maker for the second round it seems like his voters are mostly nationalist. And some secularist borders who could not vote for Adon for, for their second due to their secularist feelings, but who could not also vote for who? Allied with the Kurdish political party. So they were stuck in between and they voted for the third candidate si who actually was blamed for dividing the votes of the position. But it turned out that he is the only reason that Turkey is going to the second round of elections, that being said, there is one more thing, Jacob, that we need to keep in mind is the Parliament. There is still a parliament in Turkey and the parliament are distribution is also very interesting because again, based on all, failed opinion polls before the elections, we were expecting the ruling camp to get maximum 290 seats in the parliament out of 600. Nobody expected the ruling camp or the position camp to get majority of the votes. So the third airlines, which was mostly led by the Kurdish political party, was going to be the key in the parliamentary and legislative process. Now do that turned out to be wrong. So the ruling Alliance president, a Arizona's political party, his nationalist movement party ally and other minor political parties they received they got 320 seats in the parliament, which gives them a comfortable majority pass legislation except for the Constitution. Now that the ruling camp has an absolute majority in the parliament could also change Turkish pupil's vaulting behavior because we haven't experienced this before. Okay. So the, we don't know how the Turkish people will react when there is a clear majority of the parliament, so we dunno how to, if the church people will give their voice to opposition to balance the parliament's power. Or they're going to support the ruling Champ game, not to create a, imbalanced situation or more uncertain. My bet is that they're going to vote for the ruling champ and President Arora. So probably we are going to see a clear victory in the second round. But of course two weeks is a long time in Turkey and in politics in general. There is a lot of negotiation to be conducted among this party, so let's see what happens. Jacob Shapiro: No, that, that's a really important point as well. And we can get lost in the presidential election and miss that. There was a parliamentary election that was decisive for the A K P. Yeah. Does that sort of mean? Even if let's do a hypothetical here. Even if the opposition had won the presidency, but then AKP had this majority in Parliament, doesn't that effectively mean that the opposition wasn't gonna be able to do anything anyway? That basically the structure that Erdogan has set up is going to continue with the executive presidency, and the AKP sort of continuing on with its. Project for Turkey. In that sense, that was where the real election was, right? The president at this point is just the figurehead, if you have that majority in parliament. Emre Dogru: The president has a lot of executive powers and one of the things that he he or she can do is of course to appoint high level officials. And I think for investors and business people, this is quite important because the president can appoint the governor of Central Bank, the head of competition authority, head of Stock market, whatever. So it's he has vast powers in terms of appointments and changing the entire bronch addict system. Secondly, the president also has the power to prepare a budget and submit to the Parliament. Also has the power to issue presidential decrease and the sort of using legislative powers to legislate certain things on administrative methods. So if the Parliament is owned by. The ruling camp, the currents ruling camp, President Aredo political party and his allies, but the president is elected from the opposition camp. Of course, the system will be in deadlock. And probably we're going to see another early election in a couple of years. And by the way, talking about the election I think the next target of President Erwin is the local elections that will take place next year in 2024. Cause as you might remember, in 2019, the opposition camp won especially big cities, but also predominantly Istanbul and Ikara. It seems like the ruling camp will be breaking, non regaining the power, the municipality, local governments, and Istanbul, Ankara, and we'll probably aim for Isma as well, which is a strong halt of opposition party. Things are still moving in tur political field. Jacob Shapiro: I'm glad you mentioned the investors and the other foreign observers who have been watching this closely. You saw a bump in Turkish equity, really all Turkish assets yeah, in the last week or so, as people were expecting, maybe the opposition was gonna carry it out. Just looking right now we're recording here. It's Monday morning central time in the United States. It's afternoon, evening there in Istanbul. It looks like Turkish stocks down six or 7% on the day. The li is weakening on the dollar. It's not quite a 20, but it's flirting with 20 it's definitely not it's not been a good day for the lira. Exactly. But I guess my question there is, it feels like one of the reasons that Erdogan's economic and monetary policies have been so unorthodox was because he was headed towards this election. He knew that he really needed to win this election and control the system so that he could, have this fir this is his first time really being elected with a full term, with this executive. Presidency as well. Do you think that this opens the door to some normalization of Turkish monetary policy that Erdogan can declare a mission accomplished and not be worried about an election on his shoulders and he can pivot and be a little more welcoming to foreign investors? Or do you think that's a naive hope and that it was really with the opposition being so soundly defeated, not just for the presidency, but especially. In Parliament that foreign investors are still gonna look at Turkey with a very skeptical eye based on how Erdogan has done things over the past couple of years. Emre Dogru: A mean everyone and his government is welcoming of investors except for the fact that they need to accept turkeys turns and Aero's turns which means that. I see it's a bits quite unlikely that president Erdogan and Essential Bank will raise the interest rates anytime soon. So there is no going back to Orthodox policies because the Turk economy needs to grow for the fact that, the. There is a huge population and the, and his government needs to keep unemployment law. Keeping the interest rates, law is a key factor in that and he made a very political positioning out of that economic choice. So seems like there is no going back from that, but. There might be some signs of normalization like some banking rules or some other rules on capital. I don't think that pulse interest rates will increase, but as I said, there might be some other measures that will be put in place. Jacob Shapiro: Yeah. Last sort of question here. Erdogan had his health scare on the campaign trail. He is not a young man and he's had the stresses of office, and it's been a very difficult time to be a political leader in the world. And not least for a country like Turkey that is at the center of so many economic and political and military and security issues. My question is just eventually Erdogan will not be around. Is there an he apparent is the A K P grooming someone, do you think that Erdogan has a trusted lieutenant that he's going to start trying to groom as somebody who will take over eventually? Or do you think he's not even really thinking that way or that's not really how Turkish politics works? Because, I expect his healthcare side, I expect him to be around for many more years, but he is getting a little bit older. I wonder if there is any kind, anyone waiting in the wings or, I don't know, is 70 the new 50? Because in the United States we're about to have two octogenarians go at it against each other. So maybe it's a crazy question. I just wondered if there is some kind of he apparent or some kind of person who will eventually take the mantle. I Emre Dogru: mean, there are some names floating around. Some of them are, Being taken seriously more and more. The one that is more being discussed is his son-in-law such byar who is also their much involved in the fast industry and Turkish drones. The director John. His name is also around and the head of national defense, the Minister of National Defense, who is actually now the member of department is also of the persons that, people are looking at. But just coming back to your question, there is no your appearance for the moment. So it seems like the presence and his inner circle will continue to be governing Turkey for the next at least few years, maybe five years. So that's that's the situation Doug fair with right now. Jacob Shapiro: And I guess one, you mentioned this earlier and I guess I should have asked it when you mentioned it as well. What does this mean for the Kurds in general in Turkey? Is this, cuz it, it seemed I didn't it didn't register to me that the Turkish opposition was courting the support of the Kurds because I thought they would've known, they would've gotten the Kurds anyway. They were never gonna vote for Erdowan in general. But where do you see the participation of Kurds and Turkish democracy going forward based on these results? Is it just, they're just gonna be consigned to, to, voting but not being able to express anything? It seems like a difficult position for them. Emre Dogru: I'm in the Kurdish political party which entered the elections under another political party name because there were some legal questions about. There was a constitutional court process going on, says so. They got 8.8% of the votes and 62 seats in the Parliament this time. So it's quite a bit of game for them. And they supported kh, the Kurdish political party did not come up with its own candidate. So rather than that they support Kami, KK. As the candidates, and when we look at the mapped electoral map of Turkey, it seems like the Kurdish political party support Gemma was full, right? So all the people, all the voters of the Kurdish political party, HTP supported Gemma, especially in the areas were the Kurdish voters are concentrated. That being said, so they're going to be in Departent, but it's previous chairman set is still in jail and it seems like he's going to be in jail for because the government hasn't changed that as one of the promises of the main opposition for Kenai. But since the government is not changing, And, we see what happens in second round, but under current circumstances seems like Kurdish political movement is under a lot of stress. Jacob Shapiro: And to your point, it really underscores just how small a portion of the electorate the CHP has been able to attract. Because if they're getting that full bore support from Kurdish parties and Kurdish parts of Turkey, And everybody else is going for hedo. One. Even those Hedo ones had a difficult time. It just underscores that Emre Dogru: trade for the main position because once, I mean on the one hand KA was able to get the support of the Kurdish voters, but of course the chain, the price, which is the fact that some seculars and nationalists voters would normally vote for Kami said that no, if you're aligning with the Kur political party, which is usually as associated and affiliated, With the outlaw terrorist organization called pkk. The secularists the Nationalist Secularist, voters of opposition said that if they are. With you, we are not going to vote for you. So that was a hard trade off. Jacob Shapiro: Yeah. Emory, you've been very generous with your time. I know you were up all night. You probably want to go before I let you go. My father-in-law came over for breakfast this weekend and he was trying to have me teach him how to say Kalit org's name. And so I said my guy Emory tried to teach me how to do it, but I thought just before we could go, could you teach the listeners here of this podcast how what's happens with the letter g? In Turkish. So er, it's in your last name. Like how should they pronounce that and not look like, so if Emre Dogru: there is a sign or G that's a, so we don't really pronounce that. So Klu is like K so K is like someone like Swordman. And the kk is like the son of the Swordman. So it's it's that maybe can help our listeners to keep in mind. Kk, Jacob Shapiro: what is, what does Erdogan mean? Emre Dogru: It's it's not a noun that we use on a daily basis. AD is like someone who's who's brave and Is like someone who's born as brave. That's how can I translate? Yeah. Jacob Shapiro: Not a lot of not a lot of optimism here for the opposition, but hey, at least k who can say his name means son of as swordsman? He wins the dual of names. So Emory, thanks for taking the time. Thank you Jacob. We'll take some time. We might do some more analysis this week, but certainly after the second round we'll have you back and we'll dive a little bit deeper, so we appreciate you. Sure. Good pleasure. Thank you so much for listening to the Cognitive Dissidents Podcast, brought to you by Cognitive Investments. If you are interested in learning more about cognitive investments, you can check us out online at Cognitive Investments. That's cognitive investments. You can also write to me directly if you want. At Jacob cognitive.investments. Cheers and we'll see you out there. The views expressed in this commentary are subject to change based on market and other conditions. This podcast may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected any projections, market outlooks or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
Jacob welcomes Phillip Orchard onto the podcast to analyze the results of Thailand’s recent elections. They go over the results, Phillip offers some context on how to frame current developments, and they close with thoughts about the geopolitical consequences…with expertly executed basketball metaphors
It’s been a wild week in geopolitics and markets, but Jacob and Rob have got you covered. They discuss the slew of developments this week for the first part of the podcast, before diving deeper into the instability in Pakistan, global food prices, South America, and Germany’s commitment to Ukraine.
Jacob Shapiro: Hello listeners and welcome back to another episode of Cognitive Dissidents. As usual, I'm your host. I'm Jacob Shapiro. I'm a partner and the director of Geopolitical Analysis at Cognitive Investments. It is always a pleasure to welcome back Kamran Bokhari, who is the senior director of the Eurasian Security and Prosperity Portfolio at the New Lines Institute for Strategy and Policy Back to the Forecast. Kamran, as longtime listeners of this podcast, will know is a good friend, and he's come on several times and we're happy to have him on, um, this week to discuss the situation in Pakistan. Um, Kamran really also opened my eyes to some of the issues in the South caucuses. I had some awareness of what was going on there, but he really added some richness to it there too. Um, Kamran has really been focusing on Central Asia recently, uh, and we're gonna have him back on to do just an episode on Central Asia itself, not least because, um, you know, we're, we're recording here on May 18th. Um, China had a big summit in Central Asia this week and China's. Seems to be muzzling into the region as Russia is distracted with its ongoing war in Ukraine. But we will have Kamran back on in a couple weeks to talk Central Asia for now. Um, I'm pushing this episode out as quickly as we can. Um, it might mean that the cadence has bunched up a little bit here, so you're gonna get episodes from me almost daily here for the next, or you might have gotten episodes from me daily here for the past couple of days, but the world is just changing so fast right now. We can't sit on this episode because Pakistan, um, well, I'll let you listen to the podcast itself, but it's a very, very dire situation there. So, um, listeners, if you wanna know more about the knowledge platform, the CI knowledge platform that we wrote, that we rolled out a couple weeks ago, please check out our website, cognitive.investments, or email me directly@jacobcognitive.investments. We are offering access to our research and to also one-on-one consulting services for a small select group of clients. If that sounds like you, if you need help on managing geopolitics, uh, please reach out to us. If you wanna have more information about our wealth management services, please reach out to me@jacobatcognitive.investments. If you haven't left a review of the podcast or a rating of the podcast and you're a new listener, please consider taking 10 seconds out of your day to just put the five stars or two stars, whatever, however many stars you think we deserve, just put them in, it's immensely helpful for us. And last but not least, if you have suggestions for guests, good books that you read lately, a new rest. That you think I should try out Again, it's Jacob at Cognitive Investments. So without further ado, let's get onto it. Cheers and see you out there. Cognitive Investments LLC is a registered investment advisor. Advisory services are only offered to clients or prospective clients where cognitive and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website@www.cognitive.investments. The information provided is for educational and informational purposes only, and does not constitute investment advice, and it should not be relied on as such, it should not be considered a solicitation to buy or an offer to sell a security that does not take into account any investor's particular investment objectives, strategies, tax status or investment. Horizon. You should consult your attorney or tax advisor. Well, this is not, this is not meant to be a proper exercise come around. The podcast has always, uh, has always tried to be conversations with friends. Um, you know, imbibing some beverage with the microphones just so happened to be on and I wish we were doing it in person, but I appreciate you making the time to come back on. You've got, it sounds like you've got a very busy schedule, Kamran Bokhari: but yeah, just, uh, Too much happening. And then there's daddy duty. My daughter's in 10th grade and she is, uh, she takes up a lot of my bad. Jacob Shapiro: Um, well this is gonna be a terrible segue, but what's taking up a lot of global bandwidth in the world right now is your home country of Pakistan. Um, I didn't know who else I wanted to talk to about this because I really, I mean, I know some things about Pakistan and I've been trying to keep abreast of the situation there, but it's confusing even for somebody whose life is about geopolitics to figure out what's going on there. Um, just sort of the lay of the land and tell me, and like maybe I'll give the listeners a very brief lay of the land, come around and you can sort of help me as we go from there. Um, Imran Hahn was this cricketer populist guy who became Pakistan's Prime Minister. At first the military seemed to like him, then the military and Han soured on each other. He eventually gets the boot and. While he gets the boot. Also, Pakistan's dealing with an economic crisis with a balance of payment crisis and the flooding catastrophe and high prices of food and energy, all these other things. So the new government trying to get funds from the I M F Con is still out there, you know, politicking and trying to get his P T I party going on. But in the last couple weeks, things have really escalated so, Han gets arrested by Pakistani police forces, uh, for not, apparently not cooperating with an investigation into corruption allegations. Then, um, there are protests in which apparently Pakistani military installations get attacked by protestors. Then the Pakistani Supreme Court comes in and says, well, Han's arrest was illegal. You need to release him. He is subsequently arrested, and as we're recording here on Thursday, May 18th, according to Han. Pakistani security forces are outside his home. We're waiting to arrest him again. Um, this will publish on Monday probably, so we'll have a couple days between now and then. For all I know he'll get arrested again and released again between then. Um, but maybe just help us sort through the lay of the land. I think it's probably too simplistic to just say this is about the military versus Khan. It's, I mean, there's the current government, there's the judiciary, there's the political parties themselves. There's just a lot of noise here. So help us, maybe just help us at the broad outsets was anything I said wrong just now and sort of where do you think we need to watch going forward to understand what's happening in Pakistan? Kamran Bokhari: No, I think you summed it up pretty well, Jacob. Um, look, uh, I think that the old ways of looking at Pakistan or sort of the old net assessment to use an old terminology is perhaps no longer valid, uh, because we're in, you know, undiscovered country, uncharted territory here. Um, look, the, the military has always produced proxies, both political and militant. And the, the experiment didn't go well then, you know, they know how to deal with it Yes. With difficulty. But in the end they do. Uh, you know, the, the military as an institution, uh, remains insular to the experiment, if you will. Mm-hmm. Uh, and so what's happening now? So, you know, before I jump into what's happening now, just take for example, uh, the, the Pakistan Muslim League of former Prime Minister Nawa Shri, uh, he was a proxy of the military not too long ago, you know, 25, 30 years ago. Uh, and he was brought to power to counter, uh, former Prime Minister, uh, the late Benze Pakistan people's party. So the result of that was, yes, you counter, you know, the Pakistan people's party by creating a new party and backing it, but then that party goes rogue. So then what do you do? Hence the mahar coup of 1999. Uh, and, and during the Mahar era, you will recall both political parties were out in the, in the wilderness and once Mahar, uh, once after Mahar was gone, or actually even before he was formally gone, both parties made their way back in. Mm-hmm. Uh, if you look at the militant proxies that the Pakistani military has cultivated over the decades, uh, they have, you know, there's been blowback on that 80,000 to a hundred thousand people have lost their lives in insurgency that ran somewhere between 2006, seven, all the way to 20, the 15, 16 and after a lot of blood and treasure being, uh, spent. Uh, They got a handle on it or you know, they were able to contain it. The problem still there, but you know, it's, it's more manageable right now. Uh, and this is all pre Taliban coming to power, the Taliban in power in Afghanistan. That whole calculus is also, uh, you know, needs to be revisited and we need to reassess what's going on there. But Iran HA was brought in, Iran HA has been a political force for, you know, 25, 27 years. And it wasn't until the 2011 or roundabout there that the military took interest in him as a third force to break the duopoly. So first they created a duopoly, then they're gonna break the duo. That experiment didn't really took me a few years to, you know, put the party together, build it, cultivate it. And in 2018 through very clever electoral engineering, they brought Honda Power. Now, guess what? That r we rogue as well. It, look it. There, there, there, there's a, a certain logic here. If you are a political party that is allied, that has managed to come to power, uh, with the help of the establishment, the military led establishment, you will not always be, you know, on the proverbial same page with your patron. Mm-hmm. Uh, your calculus is different, their calculus is different. Uh, and at some point the honeymoon period is over and you find yourself at odds over, you know, things that seemingly look like tactical issues. But beneath those, tho those tactical issues is, is a broader problem, which is that a divergence of interest and therefore it's only inevitable, uh, that you run afoul of your former benefactor. Now the, the uniqueness of Han is that Han actually and his P t I, uh, it wasn't just an one of those run of the mill. Political proxies. Uh, it was a proxy that had deep relations with the ecosystem of the military, with, you know, the broader social fabric of the military, the retirees, their families, and so on and so forth, which makes up a good chunk of the middle class. And so, uh, for the longest time they were, these were allies. It's, it's, there's a, there's sort of a, for those who sort of, uh, among your listeners who understand what's happening in Turkey, it's kind of like what happened between the Golan and the A K P. They came together to defeat the Kalis. Once that was over, it was between them. And I think that that's what has happened. Their ecosystems overlap. Uh, and what Han has achieved, uh, you know, is that he basically penetrated through what was largely insular military institution and its broader ecosystem. And there was lots of support and there still is, uh, han from within. You know, the serving officers at junior ranks, mid ranks, high ranks. It's an opaque institution. There's the fog of war. We cannot tell for sure, you know, uh, what is the scale of that precise scale of that support. But he didn't come this far. By attacking Headon and calling out by name officers, the Army chiefs, the head of the ISI and his associates so publicly, something no other politician has ever done before. And until now he was getting away with it. And I think that is the major shift that has happened in, in sort of the, the Pakistani political system that for the first time, the military's own ecosystem, its own body politic has been contaminated by a proxy, uh, in such a significant way. Now, this doesn't mean that Hanah has overwhelmed the military, but it poses a significant problem. Wouldn't you explain, uh, to a large extent why it took them a year, actually 13 months to actually crack down on the guy, uh, because they were, you know, uh, basically link him, you know, giving him a wide birth to vent his anger and whatnot, let him talk and, you know, eventually the, the temperature became too high. And you know, they put the incident of the attack on military facilities on May 9th after the arrest of Hahn was just sort of the trigger for this thing to come to blows. Jacob Shapiro: Well, where, where does, where does Khan go from here? Because it seems like picking a battle with the Pakistani military for as popular or for as much as he's, as he's been able to convert some of the body politic to his point of view. I mean, the Pakistani military is stronger and they haven't just surrounded his house with police. They're arresting supporters. They're probably suppressing dissent. I mean, if the Pakistani military, uh, feels like it is threatened, like the proxy has gotten beyond itself, won't the Pakistani military sort of cut off its own arm to, to cure the patient? I mean, I, I feel like this is not gonna end well for him. But he doesn't, he's not acting like a man who thinks that he's in danger. He's acting like a man who se he seems to think he's holding the cards, or at least he's acting that way. Maybe it's an act. Kamran Bokhari: So yes and no. Um, he does think that he holds the cards, um, He doubles down. I mean, he's not a quitter. He's not one to throw in the towel. He's very competitive. People who have followed his career, particularly his cricket career, know that very well. Uh, you know, he, uh, many people may not recall or even know about this, but he actually mounted a coup against his old captain, uh, when, you know, during his cricket years and became captain. So that's, uh, for those who have lived long enough and remember those days, or at least pay attention to cricket, are well aware of that. But there is that side to him and he's, he's not gonna throw in the towel. Uh, he firmly believes that, uh, he is, you know, he's the one righteous in this battle. He sees himself as fighting the good cause. Uh, in other words, he's actually drunk his own koolaid. Uh, and, but uh, more importantly, he thinks that, uh, if he keeps at it, he will eventually win. Uh, you know, he, he, he, he has, he sees himself having come to a point where, yes, there'll be setbacks like the one that's happening right now with lots of defections from his party, uh, happening as we speak. Uh, lots of party members, associates condemning the violence by the party. Uh, and they're, you know, this isn't happening organically. This is. Being, you know, this is something that, uh, you know, prompted by the military because they have influence and they're mm-hmm. Basically going to these people and say, you know, your man is out of control and you gotta decide which side you're on cuz this has gone too far. Uh, so despite that, I think he, he thinks from his point of view that, uh, you know, right now there's a setback, but eventually I'm gonna come out looking good. And he's, he's just not one of those people who is going to throw in the towel. So, so in other words, the military did business with an actor, um, That was very atypical from the type of people they're used to. The typical politicians, those who are futile in nature, come from, you know, large agrarian holdings to, you know, major businesses and whatnot. I'm talking about, you know, the, the old pop, uh, the usual suspects or the old class of politicians. Uh, this guy's very different and he's given, he's given them a tough time. But at the end of the day, you're right. Look, you can't come to power on the back of the military and then within, say, what has it been four years, uh, gain enough power to turn against them and hope to succeed. No, uh, obviously you're gonna be cut down to size. I think he, uh, he's, he's seen a, a setback. We we're not sure what's going to happen to him. Uh, what he has writing for himself, and something I should have mentioned earlier is that he's the most popular politician in the country. Yep. Uh, and it wouldn't be an exaggeration that if elections were held today that he would, I'm not willing to say that he may get a two third majority, but that is the fear of the establishment, that if he gets that, then they're, you know, it'll be much more difficult for them to handle the per, uh, Han. But he will, uh, you know, win a large, a comfortable majority. Uh, and that's the problem. And that he think, he thinks that that is his winning card and he's gonna leverage and milk that for all it's worth. He's not going to give up. He may be forced, uh, into a position that is uncomfortable, but eventually he, he, I mean, he, see, look, he's 70 years old and probably, well a little bit over 70. Uh, He, I mean, he sees himself. He's building a legacy for himself. He wants to be remembered as a great leader of the country. So this is an man you can't wheel and deal with. In the normal way of that, the Pakistani military has gotten used to wheeling and dealing with the usual politicians. Jacob Shapiro: I have to confess that when I'm 70 years old, um, I hope that I'm on a beach somewhere, drinking little drinks with little umbrellas in them. I, I have a hard time with all these politicians, you know, Erdowan and Biden and Trump running around. They're old and they're, I, I wouldn't want to do it if I was as successful as these guys, I'd be somewhere else, but maybe that's not why I'm a politician. Kamran, if I could, if I could zero in a little bit more on what you just said, cuz I don't have a good sense of this. Why is Han so popular? Because it's not like he's presided over a period of. Particularly good economic policy for Pakistan. If anything, I mean the Pakistan economy, which should be actually really well suited for this multipolar world that we're, you know, emer entering into Pakistan, has great strategic location. Hundreds of millions of people, well educated, lots of natural resources, and yet, Pakistan's running out of money. They can't afford energy. All these things are happening to them, and they can't take advantage. They look across the border at India and the distance between India and even Bangladesh, Pakistan continues to expand. Those two countries have a lot of economic dynamism that Pakistan just doesn't have. And it's not like Han changed anything there. So what, what is the source of his popularity? And maybe you'll go back to the Turkey comparison, which, you know, Erdogan at first gave good economic policy, but then he's developed this emotional bond with a large part of the Turkish electorate that votes for him in spite of their own economic interests. Is is that what Han has? He has this emotional bond with the people. I, I have trouble sort of parsing through why people are so enamored with him or have such feelings of loyalty towards Kamran Bokhari: him. So that's a great question. Um, and the answer is that, um, people don't necessarily love him or, uh, support him for who he is. But he is perceived by a vast majority of people. Uh, and keep in mind that, you know, the, the bulge is growing in Pakistan. Mm-hmm. Uh, and new. There are at least, uh, um, um, from what I've seen as many as 18 million new voters who are going to be participating in the next election. That entire, uh, strata of society, uh, is sick of the usual politicians is sick of the military's intervention in politics. Uh, and they see in hon, hope so. Yes, he hasn't delivered. But then the question is, look, he wasn't allowed to deliver. Uh, even when he was in power. Uh, you know, people can point to him being encumbered by the army, by the intelligence services. Um, you know, he kept saying, look, I'm going to put away and lock up all these people, the crooks and the thieves. Uh, basically his political audience, but yet he couldn't. And so they, they, they, people have sympathy for him, that he's fighting their good, their fight. Uh, they really believe in what he says. Uh, and he's been really, really savvy in terms of being able to build a narrative. Um, you know, he is, uh, he's, you know, Pakistan's Trump. I mean, he can, he has his loyal following. And then there are a large number of people who may not love him and, but they hate the other side. And they say, Hey, we game chance to be up everybody else at more than once. So let this guy come in. And then there are those who say, you know, if he wins, he wins because we want democracy in this country. So let it be, this is everything, you know, all of this benefits him. So he's riding this wave, so he's not, uh, he hasn't delivered anything, in fact, on delivery. You know, one of the arguments that is made is that if he wasn't thrown out of office with the void of no confidence in April of 2022, uh, he would not be so popular today. Um, plus there's the political machine that he put together. Um, he has appropriated the narratives that historically were developed by the military in the intelligence services. And he is, well, you know, a, you know, his machine is probably the most efficient when it comes to the use of social media, uh, and narrative building. They're, you know, great info operators, if you will. And so it's, it's, it's a latent sentiment. But it's also the leveraging of that sentiment through skillful is, is, and his team is, uh, you know, a large number of young people who, uh, are ambitious, energetic, tech savvy. Uh, whereas the old political parties, they're like, you know, dinosaurs and they don't have comparable machines to, to go out. They're still doing politics the old way. So all of this explains his, his popularity just not so much love for him. There are, there is that core cult-like, if you will, following, but on top of that, it is the hatred of everybody else that lets people gravitate towards him. Yeah. Or directs bef Jacob Shapiro: Well, where does Pakistan go from here? Kamran. I mean, there really hasn't been substantive change in this country for. Decades, half a century. I mean, it's basically just been the same story repeated over and over and over again with different characters. Is, is Pakistan just sort of condemned to this eternal return of the same bullshit forever? Or is, is there some kind of change that could happen with Pakistan in, in the context of this conflict? Or could this get worse? Could we get, are we looking at a real civil conflict within the country? Um, what, what are our signposts for going forward? Kamran Bokhari: I think that it's gonna get worse than before it gets better, uh, and a lot worse because, you know, let's just look at the financial leagues of the country. You know, e everybody has a different number, uh, but, you know, let's, it's safe to say that Pakistan needs at least 20 to 30 billion, uh, of assistance to get back on its feet. Two's just not, the money is not there. There is, nobody is willing to cuff up that amount of money, even collected. There is no incentive. Look, United States, there are reasons why the United States historically, uh, aided Pakistan to the tune of tens of billions of dollars because there was a, an interest. So in the ni, the first trench of money, or the first period of close US Pakistani relations is the sixties, the height of the Cold War. Pakistan is a frontline state. So therefore Pakistan becomes the beneficiary of alon of US financial assistance. Mm-hmm. And military assistance. Uh, you fast forward another couple of decades. In the 1980s, you have the Soviet invasion of Afghanistan that becomes the driver for yet another long period, 10 years of a large infusion of financial assistance. Uh, you can fast forward further to the Mahar era between, you know, 2001 and 2007 eight. You have the post nine 11 and it's aftermath. That becomes the basis for which, uh, the United States again, pumps money. There are, there is no basis for which there is no appetite in the United States to help out Afghanistan. There's no reason the world has changed. The United States has cut its losses, Afghanistan and has moved on. There is the Russian and Bo in Ukraine. There is climate change. There is China. There are a host of other issues that just we're sucking up the bandwidth. That's the United States, uh, China. I mean, China has already poured, you know, tens of billions of dollars in its signature b r I initiative called the China Pakistan economic corridor. And they're not seeing any return on their investment. In fact, they're looking at losses, you know, and so if you're the Chinese and you're looking at this situation, would you want to invest more money here? No. Nope. Then if you go to the Arab states, the Saudis and the Ammas are probably the most closest of allies of the Pakistanis, and they have a lot more influence in Pakistan. Then do the Chinese and the Americans, uh, they're looking at this and saying, oh my God, you know, what are we dealing with over here? I mean, recently the Saudi finance minister, and it was a hint to both Pakistan and Egypt, indirect statement that we are no longer in the business of cutting checks. You know, we will invest, but we wanna see reforms. Who are they saying that to? They're saying that to the Pakistanis because that's where, you know, they just, you know, I don't wanna say a blank check, but something close to it and say, okay, here brother, you got problems again. Here goes solve your problems. Uh, that's over. So, so Pakistan's problems are not improving. Uh, uh, uh, you know, are, are growing larger, they're not being addressed. Uh, so that's a huge, huge, uh, dilemma for Pakistan. Then you've got, you know, a Taliban one Afghanistan, but you don't have relations with India in, if you had some trade relations, you could say, okay, maybe, you know, we can work something out here that's not happening. Uh, so where is this country going? I, I, I think, you know, and I hate to say this, but I think that. If the Pakistanis cannot get their act together and soon, uh, it's not beyond the pale to say that we're looking at a failed state situation. Jacob Shapiro: A failed state with nuclear weapons no less, no Kamran Bokhari: had nuclear weapons. 240 plus million people ordering nuclear, bordering two other nuclear weapon states and Afghanistan and Iran. Well, Jacob Shapiro: ironically, I mean, that might be the interest that actually does get the foreign or the international community involved here because if suddenly, you know, the Pakistani government is not there to take care of, of Pakistani nukes, I mean that does have major, major global issues. Kamran Bokhari: Yes. I mean, you know, one of this is kind of like the Chinese strategy. Uh, you need, if you want to go do business anywhere you in your China, you want to be able to go into a state that's mal. A Malibu state, by definition is one that isn't very strong. Mm-hmm. The problem is the Chinese put in money and it becomes even more weaker and they lose, you know, in other words, the Chinese are hoping that, you know, citrus parus, nothing will change. All things being equal, everything will go on the same and we're, we're gonna be able to make money that doesn't happen. Be, and we've seen this, and even today, there's an article, uh, in, in the press about how, uh, Chinese debt has led to, you know, has had devastating effects on many countries. Pakistan included, Sri Lanka included. Uh, you know, there's, there's a mention of Mongolia, although I'm, I, I know very little about what, what that relationships looked like. But the point is that if you, if you're the United States and you're worried about nukes, You, what can you do? You need a partner in country. If the partner is at war with itself and there is no coherent partner to work with, then how are you? Who are you going to give money to? How are you going to do that? And let's say you are able to find the partner and that, but past experience tells you that it's not worked, then you know, you don't really have a solution. So, and then we've never had in the history of the species, the situation where a, you know, a nuclear weapon state fail. The closest thing that comes to mind is the implosion of the Soviet Union, but, Soviet, the union included, it was replaced by the Russian Federation. Now that reality is also changing and we have to worry about, you know, if a defeat in Ukraine needs to Russia be destabilizing, what does that mean? And in the case of Pakistan, uh, you know, at least Russia, there is some institution. There's, even if it is autocratic and not, and there are resources that if, you know, you can sort of still stand the degradation. Here there are no resources and degradation is picking up pace. Jacob Shapiro: Yeah. Last question on Pakistan before we sort of turn to some other parts of, of the Muslim world. Um, obviously there is so much water under the bridge between Indian Pakistan, you know, not least of which is, you know, Muslim versus Hindu. And I mean, we could go on forever about why, um, the division ha why partition happened. And I don't wanna go there per se, but the only thing I wanna ask is, isn't this India's problem ultimately, if India's going to be this great geopolitical power and be self-reliant and do all these things that it's talking about, um, doesn't India sort of have to solve this problem? Because India's really the only, I mean, no other great power in the world or aspiring great power in the world, whether you're Brazil or Turkey or China, like nobody else has. A country with 200 million people with nuclear weapons. That is your sworn enemy on the border that you don't talk to, you don't really have relations with. So isn't it India's problem is, and is there really anything India can do here? It Kamran Bokhari: is India's problem. If you look at it, empathetically, put yourself in the shoes of the Indians. Uh, this is a nightmare scenario. Here you are trying to be, you know, the fifth largest economy of the world emerging as a geo-economic power. Uh, and you, you know, have problems with the Chinese. You're trying to maintain, uh, you know, an independent foreign policy while you are aligning more and more with the United States, and you've got your own problems. I mean, the world is a complicated place in which you are emergent. And next door you have this state that is committing geopolitical suicide. Uh, and, and, and, and you are. Looking at this and saying, oh my God, what are we gonna do about this? Uh, the the reality is there's not much the Indians can do about it. What are they? I mean, they can hope for the best. Uh, then there's the, you know, the, the other complication, which is that right now, uh, Pakistan is, is in, you know, is tanking. But, but India also is turning into, or as turned into, you know, what many would call a majoritarian democracy and anibal democracy, uh, where you have the rise right wing, Hindu nationalism. That, and between Pakistan's problems and then beyond Pakistan lies the, you know, the. The, you know, the scary emirate of the Taliban. So this, this is a, a contiguous land mass that has problems in the entire sort of western slang of India, uh, is mired into uncertainty to a least, if not outright crisis and conflict. Uh, so it, it's, it's how do the Indians deal with this, uh, will depend a lot upon how the Pakistanis deal with their own situation. Because at the end of the day, uh, India has to deal with whoever is in power in Pakistan, uh, uh, can the military. And that is one of the problems. I mean, the end of the sheriff era proved one thing that the military, uh, you know, his ability to hit reset, uh, and, you know, peop its dominant position in the political economy. I is waning. And, and this experiment, you know, that, uh, has exploded in their face, in the face of the military experiment called Iran. Hah. Uh, is, is is further, you know, uh, if you will, uh, highlighting that dilemma that you, you don't have a political system, uh, that can function, uh, with and, and you can't have the military come in and, and hit the reset button cuz it doesn't have the reset button anymore. This, this situation can't be reset and you just, there's just so many stakeholders. Now, you know, one of the reasons why Imran Han was arrested by paramilitary forces. Uh, is, you know, because, you know, the courts were giving him a pass. It's not that they gave him a pass after he was arrested, but they were giving him a pass because that's just the way the legal system works. Just because there's a politician that you don't like and is not doing the kind of things that you want him to do, uh, or, or is threatening your interest, uh, you just can't lock him up. So, you know, there's, there's a, a, a, there is democracy in Pakistan. There's a democratic side to Pakistan, but then there is also this autocratic side to Pakistan and the, the, those two universes aren't able to coexist in. Uh, and, and, and the coexistence was there because the military kind of maneuvered an engineer. Because the civilian space was wheat. Pakistan was a much different country in decades past, there weren't a whole lot of people to begin with. Hmm. The the dollar was not at 300 rupe. Uh, you know, the Pakistani currency hadn't devalued. The economic situation was far back. We did not have social media and just, you know, that the level of public frustration wasn't there. Now, all of this is happening. What are Thes supposed to do? I mean, they just have to hope. They, they, they, they, they're, they can hope that, hey, in the end, uh, this doesn't completely. Go out of hand and you know, there's some method to the mathes. Jacob Shapiro: Well, on that uplifting note, um, why don't we turn to the South caucuses. Um, you were the one who said, as we were talking before we got on the podcast that you wanted to talk about the South caucuses. There's a lot going on there. There's, you know, Armenia, Aja Neg Karaba. This is one of the areas where Russia's, um, lack of success in Ukraine creates a power vacuum because Russia used to be the dominant power here. Now Turkey and Iran and other powers are, are seeking to, um, to push their influence into this area. So what, what is happening in the South caucuses that catches your eye that we should, uh, be telling the listeners about? Kamran Bokhari: I think that, uh, we're not paying enough attention to, uh, the South caucuses because of, uh, not just the Russian weakness, uh, but also because. Served by John. Uh, and, and this is before the Ukraine, December of 2020, was able to alter, radically alter the balance of power in Nagorno Karaba and the broader and by extension of the broader south caucuses by taking large chunks of Al Karaba from the Army helped by the Turks. Uh, and so that was a game changer. A, it signified that Russian influence isn't what it used to be. Uh, and the Turks saw the opportunity that they helped them with military and intelligence through military and intelligence means, and they enabled, uh, the victory that the others by Johnnys, uh, got over their historic rivals. The arm mediums one that does is not only does it show that Russia's not an influence there, and then you have the, the, the, uh, the added effect of Russia's dismal performance in Ukraine. So you have that dynamic happening, uh, Armenia and, you know, can no longer rely on Russia. Uh, because although if you read today's papers, apparently Tremlin has invited both the others by Johnny President, uh, Mr. Ali and Mr. Russian. Uh, they are median prime Minister to come and for negotiations. Uh, but the reality is that the Russians can't shape the outcome of that region. Turkey is, as you said, you know, uh, has punched into what was a, clearly a Russian sphere of influence. But then there's also the Southern Board, which makes it, which is in my opinion, are more interesting. I think that the Russians will realize that they need to focus on Ukraine and if they can, if they need to fix the situation for themselves in Ukraine, and if they can't do that, then. You know, the south caucuses is, is also going to become a problem for them. So the, the order of priority over there is Ukraine first, then South caucuses, in fact, south caucuses and the north caucuses depends on the outcome of the Ukraine caucus. Mm-hmm. So Russia is not paying attention beyond saying, Hey, come, you know, we'll mediate and you're gonna have, you know, we'll have dinner together and tea and whatnot and drinks. We'll talk about this. That's the extent. But what's really happening now because of the weakening of Russian influence is that Usai John now has a much longer border with Iran. Those territories that were under the control of, uh, the Armenians. Uh, they're, they have been taken over by the US Baja, and this is a problem for the Iranians. Uh, and at, at a time when Iran is going through its own, uh, you know, historic evolution and, and the state is weakened. Uh, we, you know, the protests seem to have, uh, died down for now. Uh, but you know, the sentiment isn't going away. Uh, we've talked about you and I in, in previous podcasts about how, uh, the, the internal regime evolution, uh, is, is, is an inflection point. So it comes as a, this, all of this in the south caucuses on Iran's Northern Flank comes at a very bad time for the Iranians. Now the key here is to realize that ethnic azeris who lived. And straddle that border with others by John and the South caucuses form Iran's largest minority, 25 to 30% ethnic azeris. This terrifies the I R G C and the, and the regime as a whole, uh, because, you know, they're weak right now. And if somehow, uh, you know, looking at their, uh, co-ethnic brothers north of the, uh, border succeeding and then seeing the regime weaken, will there be a rising amongst ethnic azeris? Were Iranian citizens. And what does that do to the regime? Uh, the other thing here is that until now, uh, the legitimacy or sort of the glue with which the Islamic Republic held all of its. Minorities, uh, you know, perhaps no more than 55% of all Iranians can claim, uh, Persian heritage, uh, ethnic heritage mm-hmm. Near Persian, Nate by culture and language was, there are large minorities, uh, we just mentioned the Azeris. There is the balochi in the southeast. You have in the southwest, the Avazi Arabs, you have Kurds are, you know, straddled between the Azeri population and the Iraqi border. Uh, and these are arrested populations until, for the longest time you held all of this together, lieu of Islam, because this is an Islamic Republicans bureaucracy, a theocratic, parliamentary republic hybrid. Weird hybrid. But you got along, you, you were getting by. Now that the people are completely done with the theocracy, there's no patience for it, and they're, we're seeing the rise of the I R G C trying to hold things together and have, or at least affect the soft landing for the regime. Once es no more, uh, the question of the minorities comes up. I mean, are we, so if Islam is going to be somehow replaced with Iranian nationalism, then what about these sub nationalisms. And what is their, they'll demand their share of power if this is going to be, you know, uh, if, if Islam is no longer the thing and which is no longer because people do not subscribe. Uh, and, and one has to wonder, you know, to what extent, uh, even in the best days of the Islamic Republic, uh, were, uh, you know, the, all these minorities subscribing to the national narrative, which was so heavily, uh, you know, rooted in theocracy, shi, Islamist theocracy. If that's no longer the case that these people wanna share their power, how will the regime deal with that? So I think we're looking at a north south, uh, you know, reality dynamic emerging in the south caucuses. It's not just, I mean, we're, we're looking. At, uh, the south caucuses, the trucks are looking at south caucuses. The hazard by Johnnys are looking at the south caucuses as sort of this, uh, corridor by which she can have this, you know, east west trade, the trans Caspian corridor, or otherwise known as the middle corridor. That's the frame that they're looking at. They're looking at bypassing, uh, you know, Russia and, and, and asserting their, their sovereignty even more with Russia weakening. But what about the Southern flank where you have a major, uh, state like Iran, uh, in evolution? How does that, this is a transnational problem, mind you, that it was as recent as the 18, the, the, the mid 18 hundreds that the Russians took the south caucuses from the Persians. So it, it, what I'm saying is that we're at a historic moment here that that is unfolding, you know, which way the ships fall, uh, is anybody's guess, but I'm trying to highlight something that I see as, as really, really, uh, dramatic and potentially game changing for the region. Jacob Shapiro: Come on. There are many reasons I love you and, uh, chief among them is the fact that for you, the mid 18 hundreds is extremely recent. Um, but I have, I have a bunch of different thoughts that I, I wanna throw in there. The first is that, um, You know, I don't think Nagorno, Kaba and all these, you know, azaris and all these terms that are probably confusing to a lot of listeners who haven't spent time thinking about this. Um, you might think this is just sort of, you know, two nerds geeking out about geopolitics, but this is actually very significant to global supply chains and even to global markets. Um, on the CI knowledge platform, we actually, uh, put out a report a couple months ago about how, because of the Rush Ukraine war, if you look at air freight roots in the world, they actually have to go on a pretty narrow route that goes through Ezra Baja. So if you had a kinetic conflict in this part of the world, you would see air freight roots, um, really start to shut down and you would have a lot of bottlenecks that would come up that you wouldn't really be able to solve because with Russia, Ukraine, if something happens here, it's actually a choke point that you should be thinking about in those terms. So this has broader import in general. Um, The notion of Iranian nationalism, I mean, that almost sounds almost like an oxymoron to me, Kamran, because the, the great history of Iran and of Persia is that the way it gets all of these populations around it to quote unquote submit, is that it lets them do their own thing. That that's sort of what made, you know, the great Persian empires of the past. They would, they would, you know, give a certain amount of independence and autonomy to local populations, understanding that Iran, the center, was where economic prosperity was located. And I get the sense Iran can't really make that argument today because there is no economic prosperity in Iran. It's a pariah state. They've isolated themselves. There's no nuclear deal if you're an azari living in Iran. O Baja probably looks like a much more modern, much more advanced, much, a much greater financial economic opportunity there in general. And it also struck me the way you talked about this, um, you know, looking East, west and trans Caspian. Just today we're recording on Thursday, May 18th, there's this report about the Russians and the Iranians agreeing to build a rail link as the Russians try and establish this north south corridor through Iran to the Persian Gulf and get access to, um, you know, the world's oceans. Uh, that, that seems asinine to me. The idea that Russia's suddenly gonna let bygones be bygones with this historical rival in Iran, and it's gonna be able to project power not just in the South caucuses, but through Iran on a rail link that's gonna get all the way to the Persian Gulf. I, I just don't know what the decision makers in the Kremlin are smoking right now, but I mean, those are just some thoughts based on what you said, but I thought I would ask, um, And you can tie this back to sort of the broader points. Um, there was that very strange report or that very strange development in January where the Azerbaijani embassy in Iran was attacked and people died in that attack in general. And it seemed to really cause a diplomatic problem between Iran and Azerbaijan. And it hasn't really gone anywhere since then. I was actually sort of expecting things to get worse and it's just gotten very quiet. Do you have any insight about what that particular thing was about and then sort of zooming out from that, you know, what is, you talked about Iran and maybe Iran coming apart at the seams, but let's say the Supreme leader, you know, passes away in the next couple of years and the I R G C takes control. Are you also raising the possibility of a conflict between Ezra Bejan in Iran where Iran might actually want to get involved here and or reassert itself in the south caucuses? Because that sounds awfully dire to me. Kamran Bokhari: So the, a great question. So. Uh, that was a weird incident where this person came in and shot up, uh, you know, people at the, uh, Azer by Johnny Embassy in Tehran. It really, really not. Look, you know, Baku and Tehran relations were never good, you know, and so the, the Iranians, you know, for both for offensive and defensive purposes, for the longest time for decades, tried to export, uh, you know, their revolutionary ideas. Uh, trying to leverage the fact that 65% of all, uh, others by Johnny Nationals are of Shia persuasion. Sec, from a sectarian point of view, trying to push those theocratic radical Islamists Shia views. Uh, in a society that was otherwise secular. Uh, and that really created problems. And th this was done right after the implosion of the Soviet Union. Uh, and it was an opportunity. The Iranians saw, they were successful, there was pushback. Uh, and, but part of it has to do with the fact that. An independent other by John and Europe on your northern slang, when it was a Soviet Union, was the Russian empire. It didn't really matter. Uh, they handed over, you know, in the Stan and Mank in the 18 hundreds, the Persians handed this territory, you know, uh, over to the Russians. It said, Hey, we're done after having controlled for, for centuries. Uh, but now that Azerbaijan becomes independent and you have an ethnic azeri population that is, you know, not exactly well knit into the theocracy that is the Islamic Republic, then therefore, if it's also a defensive measure to go and promote your own, you're trying to insulate yourself. Say, okay, if OER by Johnnys are experimenting or dabbling in our ideology, then that ins insulates our population from the reverse effect of secular ethnonationalism being, you know, uh, cultivated or promoted. Uh, so this is something that's been happening for a long time After that embassy incident, the, you know, suspicions and that acrimonious relationship just spiked, uh, both sides have expelled diplomats in recent months. Uh, first it was the, uh, the Ozo by Johnnys and followed by the Iranians. And there's been an incident in which an MP in Ozo by John, uh, was, uh, there was an assassination attempt on him, which the Oza by Johns have, you know, indirectly accused the Iranians of trying to engineer. Uh, so relations are bad. The I R G C and the, the regular armed forces are both have done exercises, uh, on that border ever since. The turn of events in Nag Karaba of, uh, in late 2020. So yes, I am saying that there, the, the, the likelihood of consulate between us by John and Iran is growing. What? I'm not ready to predict that it will happen, but the probability is rising. Given everything that's happening both north of that frontier and south of that frontier. The conditions are, are conducive unless there's some form of an arrangement that assumes that both sides can reach an understanding. Uh, and therefore, you know, we're, we're looking at a potential conflict here, hopefully proven wrong. Jacob Shapiro: I can't imagine that Azer Baja would be willing to go this route unless it either had ironclad promises of support from Turkey or ironclad promises of support from the United States. So is is, is Azerbaijan drinking its own Kool-Aid or does it feel like it has a security patron that is gonna have its back if it wants to take on an actor like Iran in the region? Kamran Bokhari: So, um, I don't think the Azerbaijan is looking for a fight. I don't think that they're, you know, gonna go in and, and initiate one. I think they're going to be defensive. If you have, if you are OER by John, it's like Turkey and Syria. You know, if you're OER by John and south of your border, there's commotion and the regime is in flux. What does that mean for your side of the border? Our ethnic, A area is going come in as refugees. I'm just throwing out a hypothetical scenario here. Mm-hmm. That they will have to react to that. There's also the fear that then, this is what the Ajas feel and my conversations were. They're senior officials. They, they say that, you know, Maybe in an, uh, the Iranians become so threatened by what has happened that they initiate a conflict. So then what do we do? Plus you have to understand that there is an Israeli factor in all of this. Yeah. Other by John just opened up its embassy after having decades of diplomatic relations. But no actual embassy in Tel Aviv. They opened their embassy a few months ago, and that's not the only place where the Israelis have opened an embassy, uh, sorry, where there's growing diplomatic relations between, uh, Israel and an, uh, the northern neighbor of Iran. The Israelis have opened an embassy in Tur Stan in recent weeks as well. Jacob Shapiro: So have they, I I missed the, is are, did they have a, a party DJ'ed by Gur Gooley himself, or, uh, or did they let the Israelis, uh, DJ the Kamran Bokhari: party? I think that, uh, foreign minister, Mr. Cohen was there for that. If I, okay. If I remember the reports, uh, accurate. Jacob Shapiro: So, but you just made my day. L l listeners, if you're not aware, Turkmenistan is really the weirdest country in the entire world. Go, go onto YouTube and just search Gur Goi, new Year's Eve. Dj, you'll thank me later, but, sorry, come on. Go on. Kamran Bokhari: No worries. Um, so, uh, so you have a situation where the, there's enough there to frighten the Iranians. Uh, you have pressure from the Israelis. The Israelis are now typing relations on your northern flank, your old ally Russia that you've been relying on to the so in, so as to, uh, as a tool to which you could manage relations with the US is itself mired in, in a major problem. This is a new world for the Iranians. They're suddenly feeling very lonely. Uh, and China isn't ready to jump in. They don't, why would they? Uh, and so you have to fend for yourself and in times like these, uh, there are miscalculations bad decisions. So what I'm trying to say here is that we're the conditions again, you know, inside a rod. On its Northern Flank, globally speaking, or as such that it increases the likelihood of a conflict between Baku and Tehran. Jacob Shapiro: Um, Kamran, I, I could talk to you forever and, and I wanted to talk about Central Asia, but honestly I don't want to do it. I don't wanna shortchange it because it's such a big issue. So my instinct is maybe we'll have you back on and we will just do a Central Asia episode, but before I let you go, um, just your quick take on, on Turkey's elections and what the result means for the future of, of the Turkish Republic. Take that question in any direction that you want. Kamran Bokhari: So I think, look, um, clearly ados day, day, best days are behind him. I think I said this in one of your shows earlier as well. I, I still hold to that opinion because. If Adovan has to go into round two to win an election, that's not very, as you know, that's, that shows that he's not as popular as he used to be. It was easy for him to breeze through and get the 50% and, you know, it was like a, a given that hey, who, who can defeat ado? And despite the fact that he actually had his main rival, the, the mayor of, uh, Istanbul, Mr. Iam Olu disqualified. Yes. And Mr. Hilu is not exactly a very, very charismatic po uh, politician is more of a compromised figure for the combined opposition. And yet he polled 45% of the vote. And we need to go into a second round shows that Mr. Ados. Uh, isn't his influence and his popularity isn't what it used to be. Now, does that mean he's Jacob Shapiro: gonna, well, come on, it was now 45. It was 49.5. So Kamran Bokhari: he almost got to 50. Yes. But, but he, he, he, he had 45. I'm talking about Mr. Klu who got Jacob Shapiro: Yeah. Closer. I'm sorry. Yeah. I thought, I thought meant near to Kamran Bokhari: one. Yeah, yeah, yeah. And so, but I'm not saying Avalon can't win. He, he will likely win again because in the second round, but that doesn't change the fact that his problems are still there. His best days are behind him. He's somehow not going to win again and turn Turkey around. Uh, and so I, I think that this doesn't change much for the trajectory, the overall trajectory of Mr. Adon and his popularity. Uh, and if he wins again, then that's going to create more public iron. Uh, and people are gonna get more frustrated. And if half the country is frustrated with you, it's not a really good situation to be in. Yes, you can, you know, the, you can go to, uh, Mr in and got 5.3 or something percent of the vote and say, Hey, I'll offer you a cabinet position. Why don't you, you know, uh, step down in my favor and have all your voters vote for me so I can get passed in the second round on May 28th. That is very likely. That doesn't solve the problem, nor does it solve, but nor does it change the fact that you are still a weak president, even if you somehow managed to get reelected. Jacob Shapiro: Yeah. All right. Well come Ron, we'll call it there and we'll have you back on hopefully in the next couple of weeks. And we will do an entire episode just on Central Asia because I know it's a topic that's dear to your heart. It's dear to mine. We just did a long sort of deep dive on Uzbekistan here on the podcast series two, so, and I know that you're, you're bound for Tosh Cant soon. So thank you for making the time and we'll have you back on very soon to pick up where we left off to talk about Central Asia. My pleasure, Kamran Bokhari: always pleasure to be on your show. Jacob Shapiro: Thank you so much for listening to the Cognitive Dissidents Podcast, brought to you by Cognitive Investments. If you are interested in learning more about cognitive investments, you can check us out online@cognitive.investments. That's cognitive.investments. Uh, you can also write to me directly if you want, at Jacob Cognitive Investments. Cheers, and we'll see you out there. The views expressed in this commentary are subject to change based on market and other conditions. This podcast may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected any projections, market outlooks or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
Jacob Shapiro: Hello listeners and welcome back to another episode of Cognitive Dissidents. As usual, I'm your host. I'm Jacob Shapiro. I'm a partner and the director of Geopolitical Analysis at Cognitive Investments. Before we get to my weekly chat with Rob about geopolitics and markets, I just wanna take a minute or two to talk to you about some exciting news that's happening at CI. As you probably know, I promise there are never gonna be ads on this podcast as long as I'm the one who's hosting the podcast. That's not really what I'm interested in. But one of the things the podcast does allow me to do is share exciting things that we're doing at CI. You might know that CI is primarily a wealth manager, so we interact with individual clients and help them manage their portfolios, but we've also had a lot of interest from people who didn't necessarily want access to those wealth management services, but wanted to know how do you do all this research? How do you generate all these insights? How can I get access to some of the things that you are seeing in real time? And we took that feedback seriously and what we've done. As we've made our quote unquote knowledge platform, which is the internal name we use for our geopolitical research and our disruptive innovation technology research, we've made that available to potential subscribers who want access to that information, but who don't necessarily, or are not necessarily interested in our wealth management services. There's a link in the description to this podcast where you can find out more information about those research services. I expect that many of you will not be interested in them. You may just want this free podcast to, know things about the world a little bit better. You'll continue to read the Global Situation Report, which will continue to come out each week, but we know that there's a significant subset of you who are either in the context of your work or if you're super, super interested and nerdy about these types of things or building your own portfolios. They want access to that research. And so we've enabled that access. And you can either, you can pick geopolitics, you can pick innovation, whatever you want. There's also options. A select number of clients can also interact directly with me if they have concerns about supply chains or want some more hands on things. But all the information is on the website. It, if any of that sounds interesting to you, please go to that link where you can write to me@jacobcognitive.investments directly. Rob and I spend the first 15 or 20 minutes or so on the podcast talking about the knowledge platform, but also just talking about why geopolitics and why disruptive innovation are the things that we're focused on, and giving you that sort of macro perspective on those frameworks. So I hope you enjoy that. I hope if you're interested in that, you'll reach out or you'll check it out online. Otherwise, thank you again for bearing with me over the past couple weeks. It's been honestly, a difficult couple of weeks for me personally, but I'm back in action. I'm back at my desk. I'm not traveling anywhere for seven weeks. And we'll get back on the podcast cadence. I already have some of your favorite guests lined up for the next couple of weeks and some, also some new interesting guests who are slated to come on. Without further ado, cheers, see you out there. Cognitive Investments LLC is a registered investment advisor. Advisory services are only offered to clients or prospective clients where cognitive and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website@www.cognitive.investments. The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on. As such, it should not be considered a solicitation to buy or an offer to sell a security that does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor. Rob, we're back at it. I've been some listeners to the podcast might know that a couple months, I guess it was a year ago now, I discovered some documents in my in my dad's basement that, pertained to my grandparents and their flight from the Nazis. And anyway, they, it might mean citizenship for me in a European country. I'm like I was looking through some of those documents over the past couple days and realizing what a weenie I am and like how good we all have life right now. I was in Atlanta, or I was in Georgia last week. I brought the eight month old to see my dad and I'm like freaking out and stressed about, oh, I gotta get the eight month old on the plane and we gotta get from one, gotta get her in the stroller and get the car seat. Point A to point B. I'm looking at my grandfather's documents. He was like putting a three month old on a ship to cross the Atlantic with no state papers, like a stateless human who had no idea what he was doing, writing to different consulates and all sorts of different languages. And here I am, like worried about the car seat. That's my way of saying life's pretty good right now, y'all, I know it might not feel that way if you look at the headlines, but compared to where we've been, things are going well and that's how I at least wanted to start out. How are you doing? Rob Larity: We always do make the optimistic case on this podcast, so that's good. Jacob Shapiro: Do we, I feel sometimes, sometimes the content itself is too doom and gloom, but I guess we're at least a little more sober than the rest of the people, at least when we're recording. Before we dive into what's been going on over the past couple weeks, you and I missed last week cause I had some things pop up. But it's an, it's been an exciting week for us at ci and while I always say that we're not gonna put any ads in the podcast, we're now gonna do a little bit of talking about ourselves and what we've been doing on the off chance that you might want access to some of our research. So this past week we we've been testing this for a while. We've been talking about it for a while. We talk about it on the podcast all the time. We rolled out access to some of our research because some people out there. For whatever reason, you trust your financial advisor already. You don't have, your account is too small to warrant, some of the services that we provide, some people wanted access to our research without actually wanting to become clients of the money management side of the business. And there was enough interest there that we had to say, okay, how do we do that? And we've spent the last couple of months very intentionally thinking about how to structure that, how to put it behind a paywall, how to figure out all those, brass tax out. And this week we finally rolled it out. So Rob, I think I might just turn it over to you there. What do you want the listeners to know about the knowledge platform? Rob Larity: There's a lot there. I guess to start with our wealth management clients have gotten access to knowledge platform from day one, even when it was a very nascent thing. And this new development is essentially a way to bring the knowledge platform to corporate or in, investment manager clients or individuals who really have a strong need for research and information. But essentially what is the knowledge platform? It is our our database and our dashboard of everything that we're analyzing and seeing. It's a guide to what's going on in the world that we use internally and really in two different silos. The first is geopolitics, which we talk about all the time, obviously on the podcast. And the second is disruptive innovation, which is a new area. We've hinted at this a little bit. But this is a major area where we've been focusing and just now we're starting to reveal some of that work that we've done to the world. Disruption, disruptive innovation and geopolitics are the two sides, but they also connect to each other in a very important way. And maybe do you want to explain what that way is? Like why geopolitics and adjust disruptive innovation? This isn't just a random pairing of things, right? Jacob Shapiro: Yeah. The example I always use when I'm speaking to audiences is the US semiconductor industry, but we can talk about a few others. But if you go back to the 1950s and 1960s, this is the height of the Cold War. It's the height of the red scare in the United States. It's the white Knight of capitalism versus the evil communist ogre and things like that. But the US government basically stands up the US semiconductor industry by becoming the largest client of these various different semiconductor companies. It's not very capitalistic the way that the United States government went about doing that. And the reason the United States government did that was not so that you and I could re could record these podcasts or so that It was not so that you and I could record these podcasts or so that listeners could send TikTok videos to each other that make them laugh. It was so that us missiles that were gonna strike targets in the Soviet Union could be more accurate. And everything that comes afterwards with semiconductors happens because the United States government basically funded the startup of that industry for that very explicitly geopolitical need. That might feel dirty to listeners a little bit, especially because technology and tech entrepreneurs have cloaked themselves in this garb of. I don't know, moral purity. Like they're gonna be the future of the world and everybody's gonna be connected and geography's not gonna matter anymore. And we're all gonna overcome all these things that have defined human civilization for centuries, not really. And when you actually look at the core of disruptive technologies like this, the countries that are able to have that first position in them do well geopolitically. And then the companies and investors that can identify those places where you're going to have disruptive technology, that's where you can get the largest returns. So trying to find those concentric circles between, okay what's important geopolitically and what is important from a tech basis that is changing every day. Is why those two things line up. And I know that it can sound amorphous, like the knowledge platform and a database and things like that. But what I want listeners to have in their minds is, imagine you can open up a stream of everything that's going on in the world geopolitically I'm on there every day and some of our other analysts are on there every day sifting through all of the different things that are happening in the world, and we're picking the 20 or 30 things you need to know and telling you, Hey, This is what we think about this. Or sometimes we're telling you, Hey, this was completely unexpected. We have to drop everything we're doing right now and look at this. And we're also doing that from the tech perspective. And in some ways it's more important to do that from the tech perspective. I think like electric vehicles is a really good example of this. Everybody's talking about electric vehicles today. Everybody says that electric vehicles are gonna be the new thing. We have no idea if electric vehicles are gonna be the new thing. We don't even know what kinds of batteries are gonna go into different types of vehicles or other products around the world because research on battery technology is changing every single day. So if you think you know something that makes you think that lithium is gonna go to the moon in the next five years, Maybe that's possible. But on our innovation dashboard, what we're going through is finding, all the reports and the obscure journals around the world, not just in the United States that say, Hey, there's a new potential technology in this country that could completely obviate the need for lithium. Maybe you need to look at something else. So it's a feed of those types of items with those initial analysis. And obviously it's the building blocks of everything that we do here. It's the building blocks of my analysis, both with clients and with research. It's the building blocks of many of our investment theses. We want all of the companies we're investing in, or, for buying bonds from a country or from a co all that stuff goes into it. It's the building blocks of it. And we're not telling you like what we're doing with the information. We're giving you access to that information feed if you want it. But that's the idea behind it. We're trying to show you. In some ways, I guess we're trying to show you our work, if you will, we're allowing you access to the things that we use to build our strategies, our consulting, all of these different things, Rob Larity: and then the deep dives. Do you want to talk about that? Because that's an important Jacob Shapiro: part. Sure. The deep dives are just when we take a step back from something and say, you know what, like this deserves 800 words or a thousand words. Cause a lot of what's going on in the world, you don't have time to sit back and write long things and people don't have time to read long things. Time is really precious. It's at a premium. And, readers of the global situation report and the global situation report is just the little tip of the iceberg. It's me collecting some of the most important things on the geopolitics knowledge platform. From that week, we used to include, longer form in focus pieces. In the sit rep every single week. We stopped doing that in part because it made it like 10,000 words long. And most people weren't interested in that. They just wanted the download of what was going on in the world. But those in focus pieces now live exclusively in the knowledge platform. So if you sign up for this research service, you are gonna get not just that stream and the immediate analysis of what's going on when we take a step back and say, Hey, we wanna look at how the geopolitics of, for as an example of what we did just a couple weeks ago. Or I guess I should say last week, we wanna show you, hey, the geopolitics of Ireland is changing for the first time in literally a millennium. Irish geopolitics has never been this good before. Here's why, and here's why. Irish Home Builders might be an interesting opportunity might be in a place to have an interesting opportunity in the context of those geopolitical developments. So those types of reports are being generated there. I think we're gonna average roughly one a week probably. We're not sitting here saying, oh, we must put out one a week. But anytime something comes across our desk that says, Hey, this needs to be focused on a little bit more, it's gonna be in there. A good example is I can tell you right now, my next in focus piece is gonna be about wheat. And we might talk about wheat a little bit in the context of the rest of this podcast because you've got terrible weather conditions in the United States. You've got wildfires in parts of Russia and in parts of Siberia. You've also got Sudan's emerging Civil war and lots of internal refugees, all these different problems around the world. That could mean that we're finally putting in a bottom on wheat prices. I'm not quite sure yet, but if you're on the knowledge platform, in about a week or two, you will see that I've sat down and sorted through all the intelligence and given you a thesis and a framework for thinking about that. So it includes all of those individual items, that stream of information, but every once in a while you will get a longer form focus on something that is particular interest and. It's the effect of the knowledge platform is also cumulative. It builds over time. So the more that we add to the database, the more valuable the database is, the more you can search backwards through time. That's one of the real features of thinking about the world through an intelligence lens. It's not thinking of it as, James Bond going to the party with the martini and, oh, I now have the information that I need to figure out what's going on in the world. Real intelligence methodology is really just cataloging a bunch of information, sifting through it for accuracy, sifting through it for legitimacy, and then trying to put together frameworks that make sense. It's a lot of reading and the, conclusions you can reach are very interesting, but the actual hard work, it's really hard work and some of that works really boring cuz you're reading 10 different things. Maybe only one of them is gonna be important. So all of that is embedded within this approach. Rob Larity: And just to word on the connection again, between geopolitics and innovation, because really we think of this in two ways. You mentioned the early stage innovation. And this is a concept that a lot of people understand that early stage, really new disruptive innovations, they take too long for venture capital to care about. It's just not in their time horizon. So it's inevitably a non-economic actor, it's a government, it's a, usually the defense department of whichever country to finance and develop these. So looking at early stage technologies through a geopolitical lens is a big part of what we do. But also once the technologies have been developed and they're being rolled out, which countries adopt and develop these technologies and build the supply chains around them is also inherently geopolitical. So to continue with the semiconductor example, Like, why is Taiwan the biggest semiconductor maker in the world? Like, why the hell is this stupid little island off the side of China dominating the whole world in semiconductors? For a very specific reason that during the 1960s when the semiconductor industry was just getting off the ground, Taiwan was worried that the US was going to abandon them. And they realized, they started forming deals with Texas Instruments, which at the time was this very nascent company. And they got Texas instruments to come build plants in Taiwan because they thought, they figured the US military wouldn't allow China to come in and march into Taiwan if Texas Instruments plants were there. And that was the genesis. And OB obviously there's a longer story beyond that about Morris Chang and, their deliberate attempts to really provide the subsidies and the resources that they needed to build, this champion in T S M C. But that's all geopolitical. We wrote a piece last year for clients talking about the semiconductor materials and how Japanese companies and Korean companies were at loggerheads because of all these issues that you talk about. And that was a huge issue if you were an investor in technology stocks and in, in semiconductors specifically. That was something that you needed to know, and that was inherently and purely geopolitical. This is something that you cannot avoid anymore. And we're really, we formulated this idea and we've really been rolling this out because we just kept bumping into this over and over again. Hey, Geopolitics and technology are always on the same page of what we're thinking about whenever we're doing anything for clients or, making a certain investment or analyzing something. So this is the heart of that. There's a few different ways that we approach that. One of which, again, getting to the geopolitical side, is this notion of bottlenecks. So you have disruptive technologies, you have technologies that are growing in an exponential fashion. Where are the bottlenecks? Where do the inefficiencies show up? Where are the pinch points in the global system when things change really fast? So on our website we just put our first a report that you can download for free if you wanna read. And it's about the subject of Iridium and iridium. I'm, to give this case study cuz it's a good example of the sort of work that we do. Iridium is needed to do hydrogen production using p e m Electrolyzers. So the vast majority of companies that are starting to build hydrogen capacity, they need iridium to make that process work. And we won't get into all the details why, but Iridium is very problematic substance. Not too many people are talking about this, but 85% of it comes from one mine in South Africa, it's a platinum or, grade metal. When the mine went down for a few months in 2021, the price of rium went up like 150%. That is an awfully shaky hinge on which to rest the hydrogen economy that everyone has such high expectations for. And this is a subject that people are ignoring. So this is an area where we really dug in. And when I say dig in, it's not us per se, we are generalists. But we have, we've referred to this in the past, our innovation advisory board at Cognitive. This is people in industry scientists, PhDs, who work specifically in these areas, who we consult with, who we work with directly to understand these issues and to dig into them. With people who know them backwards and forwards and can speak to the science. So that's an example of the sort of stuff that we're doing Jacob Shapiro: well, and it's amazing. And this is a reflection of globalization and how successful globalization was in the unipolar world that most of us have lived in for the past. I don't know, two, three generations, how many you want to count it. Iridium is not special from that point of view. Even things like, tungston or tin or rare earths, you start to go down the list of where you get raw materials from cobalt, it's usually from one place in the world. And we optimize things so that you could get it cheaply from that one place and then move it out to the rest of the world. And I feel, I don't know if you've noticed. This like in the last couple of weeks, I feel like everybody and their mom is talking about the US dollar and the dollar is a global reserve currency and will the dollar fall or reserve currency or not, like these types of arguments that are these red herrings that don't actually matter about anything. That's the nonsense, that's the noise. There's not one item in the knowledge platform about the US dollar going back two or three weeks. But what there is, hey if we are de-globalization, if we're looking at multipolarity in some of these really intense supply chains that everybody's dependent on right now, what does that look like? The United States and China might want to have a trade war or they might wanna fight about Taiwan, but China needs things from the United States. It can't get anywhere else. And the United States needs things from China that it can't get any get anywhere else. So what does that look like and what are the alternatives and what other countries are they going to? And I think it's also Yeah, we talk a lot about multipolarity and de-globalization here, and that's one of the big macro themes for me over the course of the next decade. The other big macro theme that really intersects with, and we're not even really talking now about the knowledge platform, but we're talking about sort of our framework for things is the fact that we're going through an energy revolution in a tech revolution right now at the same time that we're going through multipolarity. So you made that point about, the relationship between geopolitics and disruptive technology. It also doesn't have to be something shiny like semiconductors. Think about the rise of the British Empire. One of the reasons, and there were many reasons, I'm painting with a broad brush here, but one of the reasons the United Kingdom became a global empire was because they had a lot of coal and because they had a lot of coal that was very cheap and easy for the United Kingdom to access. They were able to take advantage of the first industrial revolution in ways that other parts of the world were not. The shift from coal to oil begins to happen because the British Navy with Winston Churchill leading the charge says, you know what? We need to move our ships from coal to oil because we think oil is gonna be the future. The problem was the UK didn't have a lot of oil. So the oil economy creates all sorts of geopolitical issues. It creates these king makers in the Middle East who have oil in the desert. If you look at a map of World War ii both European and Pacific developments it's all about who's getting access to what raw materials and what energy as they fight those different wars. And what's happening right now is we are at the very beginning stages of moving away from hydrocarbons. So all of these different countries around the world are thinking about what's the next energy source? Where am I gonna get cheap energy from? And we could sit here and argue until we're blue in the face, is it gonna be hydrogen? There are countries like Chile and Japan that think yes and that are betting heavily on that. Could it be nuclear? What we might talk about this a little bit later, Italy, which has been. Famously reticent to embrace nuclear. Their chamber of deputies announced a motion this week to say, we want nuclear. All of a sudden, Germany, we're now looking at you to take up the bandwagon there. The United States, we've got plenty of shales. So the United States is still thinking about the hydrocarbon economy and there's a, Miles has been here. He's on our on our innovation advisory board. He's talked about nuclear fusion. The point being it's not just multipolarity and de-globalization. You're also getting this major energy tech revolution that's happening at the same time. And that's some of those concentric circles that we're talking about. So when we're thinking about all these different things on a macro level, those are things that are gonna play out over a span of decades. Like I think we'll be having conversations about these issues for the next 5, 10, 15 years. But the other part of this is you have to see the forest. You also have to see the trees. And so every single day there are little tiny incremental changes that you might not even notice that will get us to a place where in the future, you'll say, oh, of course we were gonna embrace nuclear. Of course we were gonna embrace hydrogen, and I think oil is the real lesson here. Nobody knew in the 1880s or 1890s that oil was gonna assume the position it was in the global economy, oil was mostly used as a light source, not as something that was gonna power warships or define the destiny of nations. But if you could go back in time and say of course oil is gonna be the thing that is gonna do that. I'm gonna buy shares of standard oil in 1900 in one of the NA years. That's good. You could have made an entire like fortune just on that one sort of decision. So the point there is that's a really good example of figuring out that calibration between geopolitics and between tech disruption and then getting your hands dirty and figuring out on a daily basis, okay, how do I cap, how do I ride these ways as they come up over years? Because it's easy to see the macro, it's easy to follow the things in real time. The hard part is making those things talk to each other and that's what analysis is. That's in some ways what this entire podcast conversation is about. So I'll leave it there about the knowledge platform. If that interests you, and I'm expecting a lot of listeners, you just want the free sit rep or you just want the free podcast, it's not going anywhere, don't worry. But if all of that sounds interesting to you, if you work at a company or at an institution or at a university where access to that kind of information or to this deeper analysis is useful to you, it's jacob@cognitive.investments. I've said it in the intro as well, we'd love to talk to you. But otherwise, if you're just here along with the ride for us. Now you know a little bit about what we do behind the scenes and maybe we'll turn to the world in general. Rob you joked about how we're usually the optimists. But you made some changes in the macro strategy this week that we're not so optimistic, looking short at Germany and looking short at the United States. So tell the listeners why you're suddenly a Grinch over here. Cuz it, you didn't sound so optimistic to me in our team Slack when you were putting in the trading orders earlier this week. Rob Larity: That's why it's funny because I am optimistic and that's why we're short equities. Which sounds weird. And let me explain. Everyone is used to stepping back for a moment, People get used to the sort of environment that dictates, how you spend most of your career. And in most of our career, we've been in a deflationary environment. So going back to the eighties when inflation started to come out of the system in the early eighties, and you entered the nineties and the great moderation, you had financial markets and you had the economy behaving in a de a deflationary or a disinflationary way, first disinflationary, and then it went into deflationary after you got past 2002 really. And that in, in those in circumstances, financial markets behave very differently. Bonds go down when stocks go up and vice versa. So for instance, 10, 15 years ago, if the economy was slowing, if interest rates were going down, then stock prices would go down and bond prices would go up because the assumption was, hey, we're going into deflation again. Or like serious disinflation. That's good for bonds and it's bad for stocks because in that environment, companies don't have enough demand, they've got too much supply, they're gonna have to cut prices whenever demand slows down. So fast forward to today, and I think one of the biggest things that we disagree with, the consensus, one of the biggest things we would say that we think is, fundamental to investing now and for the next probably 15 to 20 years at least, is that you have to take that whole disinflationary deflationary mindset and just throw it out the window. And it's been shown that it, things are not moving that way. In 2022, stocks went down and bonds went down, and inflation went up. That's what it was like in the 1970s. And this is a really important thing because I think our sort of base case assumption is that the next 10 years is gonna be characterized by very choppy, very brief cycles in which inflation is very volatile and averages much higher than it did in the past. And that's a really shitty environment for stocks. If you're gonna go out and just buy the s and p 500 and expect that you're gonna make 8% a year or 12% a year just sitting on your butt, it, that ain't gonna happen. I'm like, I'm sorry. And it has not been happening for the last year and a half as some of these problems began to. Began to show their face. So that's a long-winded introduction to saying that part of the reason why we are short equities is because we're pretty optimistic about the economy relative to other people, which means that we think inflation is gonna be higher than people expect. We think demand is gonna be better than people expect. And if inflation, reac accelerates or is higher, then interest rates are going to remain higher businesses are going to experience more of a margin compression. A lot of this is not good for stocks, even if it's good for employment and, the money in individual people's pockets and things like that. So being short, the market does not necessarily mean doom and gloom in the way that it once did. And I think that's a really important distinction to make. Jacob Shapiro: Why did you pick cuz when you said short the market, you picked the US and Germany as your whipping boy. So why did you pick the US and Germany? Is the two, two like areas that you wanted to be sure to reflect this. Rob Larity: The US is really the big one, and that's about three quarters or 80% of our shore position. And the reason it's pretty straightforward, US margins are way too high. If you look at what businesses had been doing, and we've talked about this is in like some new development but US corporates have seen their margins expand for the last 30 years really. And that started to roll over starting around 2014, 2015. And then margins were in a downtrend that was interrupted when covid hit and when the government started giving out money to everyone. And when you had this inflationary surge that a lot of businesses got ahead of by raising prices ahead of their own costs, then their margins exploded again to all time highs. And now you're seeing that start to bleed off. And part of this is just greater conviction that we have. I've had, I, I mentioned to you before the podcast, I was like, Jacob, I don't know what's going on in the world because I've had my head so far into all these individual companies earnings in the last week, cuz it's the meat up season. Oh, you can see that happening. Margins are getting worse. Companies are not able to get ahead of price increases, or they're doing so in a lesser way and the costs are rising to, to catch up. So we're not optimistic that corporate profits are gonna be really strong in the way that they have been in the last two years. And that's starting to play out and the market looks very shaky, just technically you can see this, A lot of stocks have already been underperforming. The market's been, the leadership of the market has been very narrow, which means only a few big stocks have really been outperforming. Put that together and I think that's a good risk reward. We're not a, not making some huge statement here, but that's our tactical view at the moment. Jacob Shapiro: Okay. I think from there we can turn to look at what's going on in the rest of the world. And it's been a pretty it's been a pretty eventful couple of weeks and it's, it hasn't been one of those weeks where there's one thing that's captivating. There's just a lot of different stuff happening around the world and, we could all, we could spend every single podcast talking about Russia, Ukraine and about China and all these other things. And if you wanna know about the updates on that, look at the global sit rep, obviously, or if you're on the know knowledge platform, you can look there. But there, there are a number of other things that I think it's important to look at that are going on in the world. The first, and I'm not by any means an expert on this, and I've already asked Kamran to come onto the podcast and he should be with us either next week or the week after. But Pakistan is a country with over 200 million people, which is circling down an economic catastrophe here. It's been reaching out to the IMF and a technocratic government has been trying to cut spending and do all these tough things. we talked about Pakistan earlier this year because their government came out and said, we can't afford any of this LNG that's on the market, so we're just gonna forget about L N G and go back to coal and other things like that. But it's been a particularly spicy week for Pakistan. Former Prime Minister Imran Hanah was. Arrested by Pakistani Security Forces, his supporters hit the streets and even apparently started attacking Army property and in and installations. And at that point, the Pakistani army joined the security forces and hit the streets as well. And you've got reports of deaths and fighting and clashes between protestors and between Pakistani security forces. We're recording here on Thursday. This will come out tomorrow. Today, the Pakistani Supreme Court came out and said, actually, Imran Han's arrest was illegal. And the security forces should release him as well. And if you read Pakistani papers like Dawn and some of the other mainline papers, they don't necessarily support Khan and some of his more populous measures, but at the same time, they don't like the look of the military sort of going into the streets. And I say all that to say, this is a country of 200 million plus people. They have nuclear weapons, they're right on the border with India. This is the connective tissue between the Middle East and Asia. Probably nothing is gonna happen here, but Pakistan has been simmering for over a year now. It started with those terrible floods that they experienced last year. The economy's been doing really badly. You put all of those things together, it's just not a very pretty picture. And I'm using Pakistan there as a stand-in because they're not the only ones without that pretty picture. So I'll the other part of the world that I want to talk about here. Is East Africa. and let me get this right, it's the I D M C put out a report that showed that the number of, people who were internally displaced in countries around the world increased from something like 38 million last year. or excuse me, in, yeah. In 2021 to last year, it increased to over 60 million. And some of that was the Russia Ukraine War, but some of that was Somalia. Some of that was Ethiopia's civil war. Some of that was the Rohingya crisis in Myanmar and the coup there and everything that's been going on there, that's part of it. Some of it is the floods in Pakistan, and we can now add this Civil War in Sudan as well. that's a massive increase in internally displaced people. And you've got, some of those PE that's just internal displacement that doesn't even talk about refugees who are streaming out of their countries trying to get from point A to point B. The un warned in a report this week that as a result of fighting in Sudan, which doesn't look like it's any closer, to being over, in fact it looks worse. It looks like the military, which has, which is stronger than the militia, is basically pounding Sudanese cities with artillery and air forces, and their Air Force. But the militias are doing. Classic counterinsurgency, and that's a recipe for really, for destruction and for high death counts and all sorts of other things that are terrible. But anyway, the UN report was expect another two to 3 million people at least experiencing foods in insecurity in Sudan, in a region where you've already got the Ethiopian Civil War that just ended, you've already got a famine in Somalia that has maybe the worst in decades. You put all that together. there's, refugees, there's internal displacement, there's food security issues. You start to put all those things together and it, I don't know, it, looks. It looks like these little nerve centers and emerging markets are really not doing very well, and I think that's gonna affect everything from commodity prices. for instance, I was just mentioning wheat. We talked about how, wheat prices have had a terrible year so far. if Sudan fighting is gonna keep going, you put together some of these other crises and we're gonna have that kind of demand out there for, wheat and other grains. Let's say the Black Sea Grain Initiative goes away too because of Turkish elections. Oh, suddenly things could get a lot worse there. a lot of these places too, they're not important from the perspective of global markets, but going to your point in Mount bottlenecks like Pakistan's in the Indo-Pacific, like that's a bottleneck. The Horn of Africa, the only reason anybody gives a crow about the Horn of Africa is because it's on some of the most important key maritime choke points in the world. So you start to put together these things. I think if something happens there and disruption in global shipping and markets change, people will come out and say, oh, it's a black swan. It's not a black swan. A lot of these indicators that I look for in emerging markets to find signs of trouble, they've been flashing, yellow maybe for. Six to eight months, but now we're getting some red. I really don't like the situation in Pakistan. I don't like what I'm reading out of Sudan. so not very optimistic for me either right now. Rob Larity: Yeah, I hate to say that, we predicted this when I think a year or two ago we're talking about kind of big themes for a multipolar world and a world where, globalization and supply chains are fragmenting and all this because in places where there are problems, it does invite the problems. But other than being, I mean leaving the humanitarian side over here, just thinking about how do you act in the world if you have capital to allocate and take care of or wealth to preserve. I think making sure that you're identifying which countries you want to be exposed to and which you don't, is a really important part of that because these issues, they crop up very fast. As we can see, so Pakistan has been on our do not go list. As far as our country specific allocations go for for exactly this reason that, there was the possibility of. True disruption like this, and unfortunately that is seeming to to play out well. Jacob Shapiro: And I think one, one tangible way, whether you're just thinking about the world from your own perspective, whether you're a supply chain executive, whether you're an investor this is one of the reasons that you should place such a high premium on institutions and you can't. It's, hard to get a, an indicator that says, how good are institutions in a given country? But a good example of what, I'm talking about here is the example of Chile. so going back to really 2020, even 2019 when, you had anti-government protests in Chile and the, they're gonna rewrite the Constitution, and then you had Gabriel Borge gets elected and everybody's talking about, oh my God, the left is rising in Chile and this is gonna destroy everything. The reason that Chile is what it is, because, it actually has surprisingly robust and legitimate. State institutions, which is actually relatively rare in South America and relatively rare in emerging markets. And that's one of the reasons that you think about Chile being able to moderate the prevailing wins of domestic unrest That popped up because of, in, in, the case of Chile, it was, I think it was, people were upset that the government increased, the price of public transportation and that was the straw that broke the camel's back. Suddenly everybody was in the street and complaining about all the things that were wrong with Chilean society. But look at what Chile has done over the past couple of years. So this week we've got news, that chi, so they tried to. To get one Constitution, constitution through. Didn't work. It was a shit show with all these different people. they had all these different, resolutions that they wanted in. Everybody was covering the crazy resolutions. The ones that actually made it to the new Constitution weren't so crazy, but it was the super. Anyway, they had a referendum and the population said, nah, that constitution sucks. So now they're going back to square one. They're rewriting the constitution. They had an election for who was gonna rewrite the Constitution, and who wins more than three fifths of the seats on this council center, right? Candidates. So you've got, the center left, Gabriel Borch is, the president, and they had their year in the sun. They couldn't deliver the goods. Now you've got this ping pong back and forth to the center, right? The reason I say that is because when you look at media coverage of Chile, it's all about, oh, Gabriel Borch is a leftist, or, oh, he wants to nationalize lithium, or, oh, copper is at risk in Chile, and things like that. Yes, and those are all concerns and they're all risks and you have to take them seriously. But Chile's the example of a country that has the sorts of institutions that can weather the types of issues that we're talking about, that Pakistan and Sudan cannot. This is one of the reasons that Turkey's elections, which are coming up this weekend, we're gonna do a rapid response, on Monday with Emory to the results. We talked about it a lot this week with Ryan Bole on the podcast as well. One of the reasons this election in Turkey is so interesting and important is we're about to really stress test Turkish institutions. So is Turkish democracy going to stand with all the pressure that's being put on it? My bullish take is, yes, I think it will. Even if Turkish democracy isn't perfect, I think it's a democracy. I don't think that Erdogan's gonna be able to just ride roughshod over Turkey if things don't go the way that he wants. The flip side of that though is, oh, if he does, then suddenly we have to question Turkish institutions. But that's why so much when you're thinking about geopolitics, one of the most important things you can really focus on is the health and legitimacy and status of state institutions and countries like Sudan, like Pakistan. The reason they're risky, the reason that wonks like me will describe them as risky places is because you can't trust anything out of them. There is no rule of law. There is no stability. Institutions are extremely fragile, and in a world that is going to be more competitive, you're gonna pay a premium for markets where you do have strong institutions or where you have governments. That can make strategic decisions and pivot from one strategy to another. Rob Larity: I have a high level question, which is, do you think that there is a process whereby if institutions are pretty good for, a certain amount of time that tends to self reinforce? So I'm just thinking about Brazil for example. You mentioned Sheila, how, you know Durably, they've been able to get through their protests and in Brazil we had a January 6th moment, which we talked about and you, I think you did a special emergency podcast even to say yeah, this isn't not gonna be a big deal. Yes, we, and that turned out to be totally correct. Jacob Shapiro: We had a few listeners point out that I always seem to do emergency podcast when I don't think it's an emergency, which I guess I need to do one when there's an actual emergency, but yes. Rob Larity: But Brazil is an interesting example because, that's a country that's had multiple coups, hyperinflation within living memory. And yet there seems to be, because there's been a sort of institutional durability of some kind for 20 plus years, that seems to have solidified a little bit. And you can point to similar examples, like that where countries have weathered the storm a little bit more than you would expect. Do you think that's how it works? Where if you get things right for a while, that has this sort of dividend that it pays and people get used to stability, people get used to behaving in a way that promotes civil society instead of undermines it? Or is that being way too optimistic about how quickly these things change? Jacob Shapiro: You hit the nail on the head there at the end yes, the longer an institution is in place, the more durability it has and the more that people come to expect that institution to be that way and that inertia comes with its own strength. But that doesn't mean just because there's been an institution that it will be there forever and institutions can change very quickly. I mentioned earlier when we were talking about the knowledge platform, this this idea that we've been developing about Ireland's geopolitics changing for the first time in a millennium. One of the reasons is because Great Britain, which is the king of institutions, it's got the Magna Carta and institutions going all the way back. British institutions are starting to look a little bit brittle. They're making decisions like Brexit and they're actually fumbling some of their advantages as the English speaking gateway to the European world. And suddenly Ireland's political institutions, which have historically never looked that stable, look more stable than British institutions in the uk. We've had. Rishi Sunk and Liz Truss and the head of Lettuce and Boris Johnson compare that to recent Irish governments over the past 20 years, which have been mostly moderate, where you haven't had these extremes and had these major policy snafus and things like that, and that could open up opportunities for Ireland. So all of that is to say institutions can be attacked even if they've been around for hundreds of years. But it is really hard to kill off an institution if it's durable and if it's been there for a long time. The flip side, and this is where it's really hard to benchmark opportunities, is where are you gonna see places where institutions are beginning to strengthen? So this is your point about Brazil. Up until the 1990s, Brazil really didn't have stable political institutions. All it really had was the army that came in and did whatever it wanted when it needed to. Now the Army seems to be safeguarding democracy. Now when Lulu or Bolsonaro goes and runs their mouths about monetary policy the Central Bank of Brazil, I loved their minutes this week, came out and said, no, we must approach inflation with serenity and calm. Like they're not scared of Lula and Bolsonaro and all these other things because you've got this kind of support. Mexico's another really good test case. Mexico doesn't have very good political institutions to the extent it has institutions. It's been the Mexican military and armed forces is relatively respected. And that election, overseeing group that AMLO has gone after here in the last couple of months, that was another good political institution that's now under attack. And we're about to see just how stable Mexico's political institutions, which it's built up over the past 20, 25 years are actually gonna be. So that's my way of saying like the, that's a very long-winded, circuitous answer to your point, which is yes, institutions have durability the longer that they've been there, but that doesn't mean that things can't change very quickly. And it doesn't mean that you can't build institutions very quickly. But yes, in general, time and durability is something that is good when it comes to thinking about political institutions. Speaking of institutions. Let's close with a couple thoughts on something that if if the, if our podcast producer wasn't literally pinging me every day that we needed to address this topic, I probably wouldn't even bring it up. I think we should talk a little bit about the US debt ceiling. Cause it looks like, the house and Kevin House, speaker Kevin McCarthy is going after the White House. And they're talking about actually enforcing this debt ceiling and it's out there as a big fear I think in markets. And I just wonder, Rob, if from your perspective, is this something that you're worried about? I've said here in the past that it doesn't make sense for the United States to have an issue like this because it's all downside, but just because it's not in US interest doesn't mean it's not gonna happen. We just saw from Russia how much countries will do things that are not in their interest because a leader thinks something is wrong or because of internal political dynamics. But I just wonder if you think the debt ceiling issue, or maybe we could even tie this to the US immigration issue and Title 42 and all these other things. If that is something that is concerning you about the state of US institutions and if you think the market should be worried about the death ceiling debate that's out there. Rob Larity: I think there's two ways you could tackle that. The first is from a financial markets perspective as an investor. And the second one is longer term because, just this morning an email from a client saying, Hey, I'm really worried about the dollar. Can we have a discussion to talk about what's going on? And that seems to be the zeitgeist as you pointed out, everyone's concern about this. So let's take each of those in turn first on the investment side, which is more tactical. So we've had multiple meetings specifically to talk about this internally and just make sure that we understand what's going on. And essentially the way that we're positioned right now when full disclosure is we have a big position in short term US treasuries, T-bills. The yields on T-bills is really good right now. It's over 5%, 5.2% in that area. And the concern. Is if you do have a debt ceiling breach and you have a technical default, then you will, you, the duration that you'll get on those T-bills, you'll have to wait a little bit longer to get them paid. But for most people it doesn't really matter, like even if it's delayed a month or two. For all intents and purposes, it's the same thing. If they do have a dead ceiling breach and they, this, they have a technical default, you probably will see at least a modest selloff and stocks and risk assets and credit spreads and stuff like that. It's a little bit hard to dictate or to predict because the notion of the risk-free asset is so ingrained in all finance theory that if the risk free asset, even if it's just a technical one, has a default. It's a little unpredictable. It's Building all your institutions on the understanding that there's gravity and then gravity turns upside down and everyone's flying up to the ceiling. So there's a bit of, a little bit of the unknown unknowns, but I think for the most part it's fairly mild. Any actual ramifications in the short term? So th that's how we're positioned and that's our take. In short, not a huge deal. The bigger question that I think more people are interested in is is the dollar losing its reserve currency status? Is the dollar becoming weak? And this is, I think, an area just that's so ripe with misunderstanding misinformation because it's not, It's so unintuitive some of the key aspects that drive the dollar strength. So let's just break out some of those and talk about them. So first of all, I'm gonna bring up the name Michael Pettus. So we're gonna have an argument right now, Jacob Shapiro: but no, I like Michael Pettus. That's Rob Larity: good. Just for we're background. Jacob and I have been having a lot of discussions about Michael Pettus recently. But I think he's right in pointing out and I really like Michael Pettus too. He's right in pointing out that the dollar strength is not necessarily a good thing. It's not necessarily a sign of, oh, the US is so healthy and that's why the dollar is strong. And therefore, if the US is not healthy, if you have people storming the Capitol building, if you have a technical default that the dollar is going to be necessarily weak the dollar is strong. Because we are the only country that's big enough and liberal enough and accepting capital from abroad that you can put your funds here. So for example, right now, people with money in all of these countries that we spoke about, Sudan, Pakistan, they're desperate to have dollars. They're desperate to get their money out of those countries. And if you put that together, where are you going to go? What are you going to buy? In aggregate, the US is the only capital market that has the depth to accommodate the flows of people who want to have a reserve asset. The bigger thing is not individuals like that. It's states. So states like China and Japan that run chronic current accounts. Surpluses. So trade surpluses. They run those trade surpluses because of policy levers that they've pulled in their own economy. And as a result of that, they need, we always think of the current accounts in terms of the trade side. Yes, they export more than the import, but the corollary of that by necessity is they have flows of capital that they need to shoot outwards like a fire hose. So who's going to accept that flow? The United States is the only country that can and will, were the only country that's big enough. Were the only one with liquid financial markets. Even Europe. Europe, arguably from a GDP basis, is about the same size as the US if you take Europe as a whole. But the way their financial markets are structured yeah, you have German boons and then, very quickly you run out of safe stuff to own or liquid stuff to own, because Europe has a lot of debt. A lot of it is owned by the ecb, or it's in countries that are you're like that's a little weird. I don't know if I want to own so much Italian debt, for instance. So the whole point is the US dollar strength is a, is the outcome of this, of the global system that we've lived in for several decades now. And those countries are not going to turn around. Like everyone always assumes, it's like a moral story. Oh, are they gonna punish us by not buying dollars anymore if we're too stupid or we shoot each other too much or we burn down the White House. No, they're not going to because there's no alternative. And I think that's really so hard to wrap your head around. It's not a moral story, it's not a judgment call about the us it's a, it's an equation, a mathematical equation. And the only potential outcome after the equal sign is buy US dollars. And until something fundamentally changes, and it probably won't be on the US side, it'll probably be on the other side. Some fundamental shift in the Chinese economy where they're no longer running structural current accounts surpluses, where they change policies to durably consume more, which. Isn't on the horizon, but at some point they probably will have to because it's not sustainable otherwise. That's when the dollar will fundamentally change. But in the meantime, all of this stuff we can do lots of crazy things and the dollar is not going to suffer as a result of it. Jacob Shapiro: And you were talking about the 1970s at the beginning of the podcast, one of my favorite charts to show people when I'm on the road is, look at dollar strength over the past 10 years. Looks like it's been going up quite a bit, but then look at the dollar strength going back to the 1970s and we're relatively low compared to, we were in the 1970s. So like when you think about there being room to run, there was an interesting article, I don't know if you got a chance to see it, a knowledge platform yet. Cause I just put it there this morning in Nika this morning, which had two Japanese. Life insurers, two major Japanese life insurers were talking about getting, cutting some of their actually US treasuries and buying Japanese government bonds instead. And that was interesting for a couple different reasons. It was interesting because that was actually, two top executives at major life insurers in Japan saying maybe the Bank of Japan is going to change monetary policy over the next 12 months. I think people have been anticipating that change a little bit prematurely, but now you're getting to see, oh, little voices within Japan itself saying, oh, maybe we're gonna get some kind of change in monetary policy. And even thinking about strengthening of the yen in general, that one stuck out to me because that, to your point, there are not like large enough liquid markets out there that can handle all this other thing. But Japan is, this is one of these states that has a lot of interest in US treasuries and just, an article about maybe life insurers thinking about, no, we're gonna go US corporate debt, or we're gonna go Japanese government bonds rather than US treasuries. I don't know that stopped me and I just thought about it for a minute. D does that relate to what we're talking about here or am I making a mountain out of a mole hill? Rob Larity: It does relate. It's a tricky thing because in the case of the Japanese insurance companies, so much depends on the costs of hedging out their currency exposure. Yeah. That depends on what are people's expectations for what the currencies are gonna do. Cause that determines what your cost to hedge is. So it's, I wouldn't read that as, oh, we fundamentally are scared of the US and we think the Japanese, bonds are suddenly much more attractive. Cuz they're not. And you can see that in what they're saying. If you thought that the BOJ was gonna normalize policy, why the hell would you go out and buy. Japanese long-term bonds trading at 50 basis points. If you think, in six months you can go out and buy, buy them for much less than that, or, for much less in price, much higher in yield. So I think Japan is always a weird case because they have such a huge position and a lot of the actors that they have are economic actors. Taiwan is similar. So Taiwan has a huge surplus position, most of which is intermediate intermediated through insurance companies as well. Whereas, China for instance, has much more in the arms of, state controlled bodies which give, less consideration to, the economic return on their holdings. So yeah, it is relevant. On the Japan thing, not to get off the dollar, but just on Japan specifically, cuz I think it's an important thing to note. I would imagine that these guys are saying that and they don't really believe it if they really are, shifting into Japanese bonds and you can see just this week. So we've talked about this in the last few months. How so much is depends on these Japanese wage negotiations in the spring. Are you starting to see this self-reinforcing inflationary spiral, which would be good that, that's what they want. That's what they've been trying to engineer for so long. And actually this week you had a pretty disappointing data point on the actual wage increases coming out of Japan. They were only 0.8% in in, I forget if that was real or nominal but it was meaningfully less than the government and some of the more bullish. Observers we're hoping for. So that makes it less likely that they're going to normalize monetary policy anytime soon. As far as the yen goes, and yen strength, this is a very interesting one, and I don't have a strong view either way, but here's the setup. The yen has been strengthening for 30 years, 35 years. Which is the natural state of a country that runs current accounts surpluses all the time, which Japan does. If you go back to, David Hume, countries that run current accounts, surpluses, they're supposed to heal themselves naturally because the currency appreciates and that causes exports to become less competitive. And, because if someone is buying your stuff they're getting your currency. And that's what you've seen in Japan. Except if you take, there's been periods of where the dollar has been really strong against the yen and the yen has weakened again. But if you look at the chart of the Japanese yen going back 30, 40 years, that down trends that we've been in, where the yen has gotten stronger and stronger, and squeezing higher against. Against the dollar that's broken. And that's a really interesting development. So the yen today is, around 135 to the dollar. That's, that represents a break of this big trend that we've seen. And if you just look technically like it looks like the dollar could really go much higher against the yen. In the seventies the yen was three 50 to the dollar. I don't know if it would go back there, but it just doesn't look like we're gonna have some period of, extended yen strength. It looks like something is broken. Jacob Shapiro: On that note, I think we've been going for a while, so we'll come back at you next week listeners, and thank you for your patience. And until next time, thank you so much for listening to the Cognitive Dissidents Podcast, brought to you by Cognitive Investments. If you are interested in learning more about cognitive investments, you can check us out online@cognitive.investments. That's cognitive investments. You can also write to me directly if you want, at jacob@cognitive.investments. Cheers, and we'll see you out there. The views expressed in this commentary are subject to change based on market and other conditions. This podcast may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected any projections, market outlooks or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
Jacob welcomes Ryan Bohl onto the Cognitive Dissidents podcast to discuss the least volatile region in the world – the Middle East. They talk through potential scenarios on Turkey’s upcoming election before exploring multipolar developments in the Gulf and in Iran, then closing with thoughts on the future of Israel and Syria's direction moving forward.
Jacob and Rob discuss why they continue to be more optimistic about U.S. macro than consensus – and the important geopolitical implications. From there they touch on Turkey’s upcoming elections and why fundamentals are more important than headlines, before closing with thoughts the differences between Chile and Colombia and the recent spate of news around lithium nationalizations.
Jacob and Bethany talk about Bethany's latest book, Saudi America The Truth About Fracking and How It's Changing the World.
Jacob Shapiro: Before we get there though, I was here speaking at a Raymond James fixed income conference, which is an interesting place to be at this time in the economic cycle. I feel like there was a lot of doom and gloom in the room. And if you were at the conference and you're just discovering the podcast now, nice to have you. Hope you enjoy listening along with us. But I was struck by how much doom and gloom there was in the room. Lacy Hunt was on the stage before me and talked about how he was expecting recession by q4, q1 and about the role that debt was playing and constraining US growth. When you talk to people or rub shoulders with people were oh, it's been a really difficult, it's it's been a really great two years, and now we're getting into a difficult 12 month period. Things aren't doing well, very gloomy. Whereas from my geopolitical perspective, I'm going up there and saying, Hey, it's label ppac 2.0. We're gonna have an energy transition and we're gonna have all these interesting areas where the governments are gonna go through money. There's all these growth opportunities, reorganization of supply chains. I felt positively giddy compared to them, but that's the geopolitics I wanted to throw back at you, especially since Chase filled in for you last time we were supposed to gather for our weekly podcast and he was also very gloomy. Are you feeling gloomy? Have you have the storm clouds risen for you or arrived for you in the last couple of weeks or do you think we need a little bit of a healing salve of optimism to combat all the gloominess that seems to be out there? Rob Larity: I am definitely on the more optimistic side and it's not a healing solve, it's just looking at the data and trying to focus on the actual information and not. What the media says about the information. So everyone seems to be convinced that we're heading into a meaningful recession at some point. Even the Fed has started to project that we're gonna enter a recession toward the end of the year. And that's a very common view. And as a result, a lot of people want to buy bonds. So one of the most popular trades right now is people want to buy long-term bonds because they think that the Fed is making a policy mistake. They think that the Fed always makes policy mistakes and inevitably, like Wiley Coyote, the Fed punches over the cliff and looks down and realizes, oh my. The economy is slowing down much more than we thought. We better turn around and cut rates and that's what people expect today. And I think I personally and the team at ci, the investment team, We're pretty skeptical of that. I think we're much more optimistic a as around us growth and global growth, and the durability of everything that we're seeing. Jacob Shapiro: What are you seeing in credit markets that kind of backs up that point of view? Because that's when I hear I feel like the doom and gloom narrative is really about, and we were talking about this before we hit the record button about, everybody's searching for the next crisis, but I hear so much about debt, I hear so much about credit markets. I can't tell you how many times the dollar came up in the context of conversations here in the last day. And people are using that too, as an indicator. So what data would you point people to look at that goes against the data that most media sources are cherry picking. Rob Larity: As you said, everyone is looking for a crisis, and it's really hard to know what that even means sometimes. But if you read the mass media views, whether it's on in Bloomberg or Financial Times, orCNBC, whatever it is, the drumbeat is about banking crisis. Where's the next problem gonna emerge? Silicon Valley Bank was the start of, this domino effect of problems. And we just don't see that. And I know it's not good. It's not good podcasting technique to say, "Hey there's nothing to see here." But that's the reality. And we were here a few weeks ago saying, forget about Silicon Valley. It's really, it's not that important. It's not a systemic crisis. We don't see any evidence of that. And tell me what has happened in the month since we had that conversation. Credit spreads have tightened. The nominal rate expectations for the US have started to creep back up again. Because bond markets are not pricing in some j\Jurassic rate cuts in response to a crisis. There's been little evidence of significant stress in the financial. If you look at, not to get too wonky, but if you look at the implied volatility of the US Treasury bonds, which is basically like the fear gauge for treasuries, if you think of the Vics and how people talk about Vicks as the fear gauge for the stock market. There's a fear gauge for treasuries that's called the move index. And after spiking in the wake of S V B that's completely roundtrip and gone back to normal levels the primary window for new credit issuance has opened up again. So you're seeing even companies like, CarMax just this morning priced an asset. A loan deal backed by car loans, which is one of the areas where people are, most concerned about credit, stress, low income consumers struggling to pay. And and they increase the size of the package that they sold. Greece, just to give another example, Greece just issued 10 year bonds, no problem. 4.22%. So to put that into context, the US government borrows at 10 years at 3.6%. So Greece is just borrowing at 4.22%, so not exactly a crisis. When you put all these things together, there's not much evidence. Jacob Shapiro: Does the commercial. I feel like commercial real estate is now the other big buzzword is does commercial real estate, the guys over, like Ian, I think Roger Hurst over there who I do stuff with sometimes. They, I think they were pointing out commercial real estate and I think what it was, the California Pension Group was talking about writing down some large portion of investments that they made in office spaces like that. Is there any, anything to look at there or also more smoke than fire? Rob Larity: Again, I think it depends on being precise about what is a crisis, right? Of banking or financial crisis is when something happens. That's really surprising and a lot of kind of previous assumptions need to get revised in a hurry. Commercial real estate, we're really talking about the office sector, right? So first of all, let's put this into context because people often don't cite the numbers and like what they actually mean and how big they are. Commercial real estate in total is 25% of all bank loan portfolios and debt portfolios. So of all, if you took all the debt in the private sector in the US commercial real estate is 25%. So mortgages, residential mortgages are by far the largest. Just to put that into context. So total commercial real estate, which includes not just offices, it includes retail strip centers, like everything. So of that 25% only something like 20 to 30% is really office, and office is where you have a problem. Rob Larity: So we're talking about something that's 20 to 30% of 25%. So like 7% of the overall banking system, which has meaningful credit issues because of work from home mostly. But again, what is a crisis? A crisis of something unexpected and sudden. The issue here is that everyone has known this for two plus years now, and commercial leases. Are fairly long-term. You generally have, about seven to 10% of Lisas rolling over in any given year. So yeah, there's credit problems, but as far as something that's, we should be talking about on C N B C is this is it's not very interesting. It's sort of small potatoes. It's not very big. It's slow motion. Everyone has plenty of time to figure it out and work out with who's, who can ultimately pay and who can't, and how do you restructure and cases where you need it. This is not Lehman Brothers. Fifth. Fifth, full stop. Jacob Shapiro: Yeah. It's funny, I was a podcast listener, was was emailing me yesterday and he said, Jacob, I really appreciated that quote unquote emergency episode you did, where you came on and talked for 20 minutes about how something that everybody thought was an emergency was not actually an emergency. I feel like we're in danger of going down that rabbit hole again. So why don't we pick something? We'll move away from the market update and let's go to things that are more interesting. I thought the first sort of big geopolitical thing to talk about, and we might pair the Mexico US relationship here, but president Lula from Brazil was in China and ran his mouth again about. The complicity of the US and the West, and even Ukraine in the Russia, Ukraine war. And it set off a lot of anger. The United States government reportedly, like communicated to the Brazilian government how mad it was about the, about Lula's comments and how it was just parroting Russian propaganda. European capitals were not happy about it at all. I think one of the things that went underreported is people freaked out about Lulu's comments were that he signed ostensibly 10 billion worth of deals in China with Xi Jinping for more cooperation between Brazilian and Chinese businesses. Now, you can sign deals all you want. We'll see if it comes through, that's an impressive number and it's an impressive number of deals that they. Lula apparently felt so much pressure in the end that he he went from China, I think, to Europe. He went directly to Europe, and after a lunch with the Romanian president, he came and said, oh, no, Brazil just really wants to be part of a neutral group of countries that brings peace to the war. We condemn the Russian violation of Ukrainian sovereignty. But I think that I said this yesterday and what I said to the. And this is a great example of what you choose to pay attention to. I feel like English language media basically only pay attention to Brazil when its president says something crazy or stupid or that is interpreted as crazy or stupid and nobody else covers anything else that's going on with Brazil, for instance. There's no deep dive on Brazil, China relations and Brazil Argentina relations and how all those relationships are changing and how Lula can actually control anything. And the very interesting things that are happening in Brazil, the back end there. We have a long position that we recently put on with Brazil though too. So I wanted to go back over to you and I mean that position knows Dived yesterday. I think there's this feeling in the market that, oh, maybe Lula isn't this trusted actor. So put all that together. Where do you see this, how did you react to what? To Lula running his mouth off in China about about the Russia. Rob Larity: Sentiment toward Brazil right now remains very negative by the people who are not us. There was a piece that I read this morning where it was a a journalist based in Sao Paulo, like a market commentator, and he was saying like, Brazil is at the mercy of foreign capital. And until they show that they can be serious and you know that they're not going to trash the currency and continue with these profligate ways and, the, and the currency is in such danger and they need to be responsible because the American capital won't come into the country and you'll never see stocks go up if it doesn't, blah, blah, blah, blah, blah. And the thing that I was thinking while reading this was, it's pretty striking because the Brazilian reality has been one of the best performing currencies in the last few years. Yeah. Don't give this guy the memo about the Mexican peso. His head would probably explode. But I do think there is this big disconnect between the financial community and what seems to be happening. As an investor. My sense of lula's actions is generally positive. I think the more that he tries to do things abroad, it shows that he's shimmied at home. First of all, and second of all, I think even in a silly over the top way to signal that we're not just going to be the US' lap dog and we want to strike out an independent position in the world is a really positive development for Brazil, like we've talked about a lot here. And it's gonna put them in a position of greater strength and allow them to play both sides. And just to root this in actual data and information, the foreign direct investment numbers of outside capital coming into Brazil to build factories and. Have been accelerating in a huge way. They look very positive. Just today, just to put something concrete around that, just today Toyota announced they're gonna spend another 370 million to start building hybrid vehicles in Sao Paulo. This, that's today's east of news. So that data looks very good. And if you look at some of the internal service sector and consumer confidence measures in Brazil, they're all turning upward and they all look really positive. So this seems like a bit of a sideshow. Jacob Shapiro: Yeah. Although it's interesting you say that because it seems like overall Brazil's FDI figures are doing well, but actually US companies have been more skeptical about engaging B Brazil. And I think I, I can't put my finger on the article that I read this morning on it, so I can't give you the exact figures, but it was talking about how you've actually seen some US companies pull back from investing in Brazil because they're worried about the environment. But I think you're exactly right, and I think people aren't understanding that most countries in the world don't have the benefit of acting out their foreign policy in completely ideological ways. Now, that doesn't mean that they don't dress up the foreign policy in ideological ways. Lulu's obviously a very ideological man and an ideological president, but Brazil doesn't have the luxury of ideology. One of the reasons that Brazil can't be so tough on Russia is because Brazil's agricultural sector, a major portion of the economy. It's growing. It's actually starting to displace the US exports to lots of different places. As Peter's Han likes to say, this is what Peter's Han uses as proof that Brazil's not gonna amount to. Brazilian land not as fertile, not as great as some other land that you might want. So they need a lot of fertilizer to reach their goals. And if they have fertilizer, they do very well. And if they don't have fertilizer, things would go very badly. Who are some of the top fertilizer exporters in the world? Talking Russia, Belarus, China. So if you have, legions of farmers who you're supposed to respond to, you can't really go and pick a fight with China and Russia if you need access to those fertilizer supplies. It's why Bolsonaro, who was nominally very pro us, very anti-China in a lot of his rhetoric and his ideology, he was hanging out with Putin just a couple of weeks before the war. And when the war started, he wasn't saying the things that Lula was. Instead, he was concentrating on whatever stupid stuff he had to say about what animal Covid 19 vaccines are gonna turn you. But he was still making sure that the U, that the Brazil Russia relationship was intact because he knew that if fertilizers dropped off the wall there, that things that, that things would be bad. And I think it's not just the financial community, it's the foreign policy community. It's the media community. The United States is having a really tough time. Thinking about the fact that other countries have other interests and that they deal with things pragmatically on their own, and that not everybody's just gonna do what the United States says. And that's exactly what Brazil's signaling here. If you actually look at the substance of what Lula said, rather than the crazy flowery stuff that came around it, all he's really saying is, Hey, this war sucks. We think it's everybody's fault. We want everybody to come to the table and talk about it. Let's try and fix these problems. Which is honestly a little bit of the Chinese narrative too. Now I admit personally, that doesn't feel good, cuz I think Russia's the aggressor and I would much rather everybody take Russia to task. But, that's the fanciful world of adolescent political opinions. If you're actually in the world, then you have to guarantee fertilizer supplies to your country. Things have to be a little bit more complicated. Rob Larity: I know when you give your talks about geopolitics and multipolarity and how we should think about investing in the next 20 years, that one of the things you always point out is. In a unipolar world, the countries that benefit the equity markets that benefit are the ones that can benefit from, or can plug into the unipolar power. So you're either investing in the hegemon, which was United States. Is the United States still just to be clear or, a Hong Kong or a Germany or some, country like that where they can slot in, benefit from globalization. Brazil was never, the kind of two early, two thousands commodity boom, notwithstanding Brazil never really fit that mold so much. They were always known for having barriers and being quite separate and trying to, build an independent capability to do things even when the zeitgeist was against them. I would posit that Brazil is one of the best place countries, when we think about a multipolar world to pursue some of those strategies and have them be a little more successful than they might have been previously. Jacob Shapiro: What do you say to that? It's a menu of countries. It's Brazil, it's Indonesia, it's Turkey. It's to a lesser extent India. They have execution risks, but they have the same sort of profile. A country that is very jealous of its non-alignment and doesn't wanna be in one camp or another and has that kind of requisite economic scale. So I don't want listeners to think that, we're not saying that there aren't risks here. It's still an emerging market. There's still a lot of, especially in Brazil, socioeconomic and cultural change that has to happen if they're gonna take advantage of some of the opportunities that are in front of them. But, if we're right about this broader thesis about a multipolar world, like they're sitting in a very good position. But I wanted to pair our conversation with Brazil with a conversation about Mexico, because Mexico would love to be on the list of countries that I just talked about, but they can't really be because of how close they are to the United States. It was Porphyria Diaz who said poor Mexico so far from God, so close to the United States. That really still applies, but when you look at Mexico, US relations things are not looking good at just about any level. So AMLO just this week, came out and was very angry about apparently some of the leaks and those Pentagon papers that came out. He was very upset about some of the stuff that was in there and is now talking. Classifying information related to the Mexican army and the Mexican Navy so that the US can't get access to some of that information. The US and Mexico are in a dispute about corn right now. Mexico says that it wants to ban imports of gene, genetically modified corn. That's a way of saying, Hey, we don't want to import corn from the United States. We want to import it from Brazil because we don't want to be so dependent on the United States going forward. There's a lot of issues over energy in Mexico right now where AMLO is trying to increase nuts trying. He is, he's increasing the role of the state in both oil production and electricity and utility in power production, everything. He's really returning Mexico to a previous time where the state was directing some of these sorts of things. And then there are other security issues there too. And one of the things I think people aren't realizing, this is a, another great place where the media is really failing us. Remember the last time you probably read about Mexico in a US newspaper, it was probably because it was either Cinco de Mayo or because the cartels did something really bad. Those seem to be the only types of stories that make it into English language press about what's going on in Mexico. But the bigger story here, the US Mexico is arguably the US' most important trading partner. More important than China for sure. There are states whose top export destination and top trading partner general is Mexico, not China, and the overall Mexico US trade relationship, especially on an export basis, much more important than the US China trade relationship there too. So if you're gonna get real problems, At the political level between the US and Mexico, we should be talking about that as least as much as the US China trade war, especially in terms of how it's gonna impact the US economy and people aren't talking about it. Throw on top of all of that, the things that AMLO is doing to try and mess with democratic institutions in Mexico and what's gonna happen in the next election. And this is a place where you should probably be following things very close geopolitically. Now we're, I should say, I'm pretty bullish on the long term here, but man, these next 12 to 18 months in Mexico, I think they're gonna determine a lot and it's gonna be very volatile and I just don't think anybody's talking about it. And the reason I wanted to juxtapose it with Brazil here to finish the, or to close the loop and finish the thought is that Mexico can't do what Brazil is trying to do because Mexico's too close to the United States. AMLO can say all the things he want, he can be as ideological as he wants. I think it's something like 75% of Mexican trade is tied to the United States. You can't be a Mexican president and just give up on the US relationship there, you're gonna have to find a way to work with them. But even Mexico, with that dependence on the United States is pushing back against the United States on a trade level, on a security level, on a political level. And if that's not multipolarity, I don't know what is... Rob Larity: How much leverage do you think Mexico has to screw the United States a little bit and get away with it? Because there's such an enormous commercial interest in northern Mexico and its manufacturing base and so many US companies are there, whether they want to be or not, they're gonna be there for a long time, and, That border to be functioning. They need, Mexican policies to be functioning. Are we attached to the hip by the hip to, to Mexico? And how does that improve Mexico's or AMLO's bargaining power against us if he wants to banish US corn exports or other things that are inflammatory? Jacob Shapiro: Yeah, so there's a couple aspects of that. I don't think that in the grand scheme of things, Mexico has that much leverage. I also think AMLO is a very unique political figure. And even if somebody from his marina party takes over in 2020, I think that person will be far more pragmatic in dealing with the United States. They won't have a lot of AMLO's idiosyncrasies. So I think once you get through this kind of next 12 months, things should be a little bit better. I will say though, I think am, AMLO's political instincts are right, this is the moment of maximum leverage, such as it is that Mexico has, because if the United States is going to have this big trade war with China is gonna keep throwing Chinese companies on the entity list and try and decouple and really, encourage us companies to move out of China, all those other things. Mexico really is, the United States is ace in the hole. We can talk about interesting markets and Southeast Asian, south America, things like that. But Mexico is the real opportunity here and the real resource for the United States in terms of reshoring and nearshoring and, fixing globalization and all these other. And AMLO is basically raising his hand at the moment in which the US is really escalating the trade war against China and saying, Hey, I'm not particularly happy. So maybe you need to do some things that are more in line with Mexican interests if you want to continue to have this Mexico US relationship going forward. He probably also sees the writing on the wall. Excuse me. He probably also sees the writing on the wall, which is US Mexico relations are going to get tighter, especially at an economic trade perspective, no matter what he says. So as much as he can politically is probably the time to try and put at least some guardrails in there so that Mexico doesn't just become, the 52nd state of the United States going forward. So I, I think actually ironic. Am LO's political instincts for which I don't think he gets enough credit because people look at all the crazy stuff that he does and the crazy stuff that he tweets and he does. I think his political instincts are right, like this is a moment for Mexico to maybe ask for some concessions from the United States because at least on paper, the United States should not engage in a trade war with China and have problems with Mexico at the same time. No, I should probably banish the word should from my vocabulary because that word doesn't work in foreign policy and in geopolitics. But that's I, that's where I think the lay of the land is an answer to your question. Let's move on from there to some news in the European Union and news that I'm frankly, pretty disappointed about. We've been bullish long term, the European Union for quite some time now. Of course, That ebbs and flows like we were very bullish over the past six to eight months. We've been warning for the past, what, two or three months? Hey, things are starting to look a little bit negative. We've even been toying around with short euro positions here and there. But the big news of the last week or two is, so the Black Sea Grain Initiative is back in the headlines. Russia's raising doubts that it's gonna renew the deal. They're blocking some Ukrainian ships from transiting the Black Sea. And then in the meantime, you had unilateral moves from countries like Poland, Hungary Slovakia, I'm not sure if Romania eventually went along. Bulgaria was also talking about it basically banning imports of Ukrainian grains to their local markets. And the reason they say is that Ukrainian farmers can't get their grains out through the Black Sea or through the sort of other corridors that were promised to them, that they'd be able to get their grains out. And so Ukraine is dumping cheap grain into those local domestic markets, and it's hurting the farmers there. And those governments wanted to protect their farmers. The European Commission came out very angry at first and said, Hey, you're not allowed to do unilateral things like that. This is the European Union. This is not, Poland doesn't just to get, doesn't just get to ban grain from Ukraine just because it feels like it, or because you have an election in a couple months and you're worried that the farmers aren't gonna support the government, which is exactly why Poland did this. Rob Larity: But the depressing part of this, I shouldn't say depressing, the disappointing part of this from our thesis point of. Is that the European Commission? We're recording here, Thursday, April 20th. Happy 420, is the European Commission has basically wilted, they're basically saying they're basically gonna make some rules, post fact to make it not unilateral what those Eastern Europeans dates did. And they're still gonna give them some packages in terms of support and specifically agricultural support that we're already coming down. Which, the NBA is being tougher on Draymond Green than the European Union is being on Poland and Hungary in these other countries for literally defying the entire purpose of the block. Which, we, when I put out my forecast at the beginning of the year, this was exactly the sort of thing I said we needed not to see out of the European Union if it was gonna take advantage of this opportunity and become a more serious geopolitical player in the world. Maybe they'll get resolved. Maybe it's just local domestic politics. But I don't know that Europe has time for local domestic politics if they want to compete in a world that is rapidly TA changing and is as competitive as it is right now, especially from a European perspective. Why do you think the European Commission folded like that? Jacob Shapiro: I think it's a, that's a good question. I wonder if they just don't have the chutzpah to do it. It also goes to show you that when Eastern European countries and central European countries join forces, they're a major force. It's one thing for Hungary to be off in a corner doing silly things, but if Poland and Hungary and Romania are all now saying some of the same things, or expressing some of the same interests, that's not something Brussels can really go after in an easy way. They can't threaten a block of countries like that as easily as they can. Threaten the smaller country. I also think that, look, Brussels and the European Union they're really interesting to think about from a geopolitical perspective because the European Union it's not a nation state. There is no European national identity. European Union officials are bureaucrats. It's a bureaucracy that was created to manage a union that was imperfect when it was first founded. So in some ways, you don't really need geopolitics to understand the European Union. You need to go read Max VA's thoughts about, the evolution of bureaucracy and how bureaucrats deal with things. And it's a classic bureaucratic sort of move like, oh, we have this major problem, rather than address the root of the problem. Let's make it not a problem by shuffling some paper around and, oh, it's no longer illegal. It no longer challenges sort of the things like you can it's a very elegant, bureaucratic solution. So I think that's part of it. The EU itself can't do anything. People like Ursula Lavon land and these EU officials sorry if they're listening and this offends them, they're not, they're stewards. They're not actually politicians or they're not making decisions like that. And people get in European capitals, get angry at them when they start overstepping their bounds. So to really change the European Union, you need, the leaders of Germany and France and Poland and all of these big countries and Italy to come together and say, Hey, these are the changes that we're gonna have. We're gonna go get, solidarity in the solidarity and the block around the changes. And then we're gonna tell the bureaucrats to enforce these rules to the utmost that everybody's agreed on. And that's the real problem here. Something Macron has been saying for a long. Macron has been saying we have to change the structure of the European Union because otherwise it's not gonna work going forward. This is a great example. If you don't change the structure to expect bureaucrats to do anything different than just try and, make sure they can kick cans down the road and not have big problems among them. I think that's where the locus of the problem is. So in, in some ways, I shouldn't say it's disappointing, like you shouldn't expect anything different from the European Commission. The disappointing thing here is that, France and Germany and Italy and some of these other Western European countries weren't anticipating the Eastern European countries objections. Instead of those countries working together to figure out a resolution or some kind of solution to the problem, those countries decided to go at it unilaterally and give a middle finger to the bureaucracy. Like those are dynamics that you don't want to see. And it also goes to show you that, it's kind of Europe. I think the crisis is over, like Covid is over and the war has become normalized. So it's just business as usual and. Europe's not gonna do well if they just keep treating things as business as usual. At least that's the way I see it. Rob Larity: And in the same week you had Macron going to China and making statements about foreign policy and, relations with China and how they're not going to just tow the US line. How is this connected with all this? Is this a sign of national leaders trying to forge a European identity? Is this just Mac trying to grandstand and show how cool and he is, which is usually what he's doing. Jacob Shapiro: It's absolutely Macron like doing his best Charles Dugal impersonation and trying to chart an independent path for French foreign policy. People make a lot of fun of Macron. And you do too, and you're entitled to it. You're in Paris. His instincts are not wrong. If you could get China to flip on the war, you could get to an end of the war and get back to business as usual, which I think is what Macron is trying to do. The problem with Macron is that he overestimates the influence of his office and the influence of France because France has nothing to give China to change China's point of view. So it's the right instinct. You want to go to Beijing and try and get Beijing on your side, or at least reach some kind of accommodation with Beijing in order to get them off of this kind of weird tacit support that they have for Russia and the Russia, Ukraine war. But like what? The Chinese are gonna import Morere from the French, like they don't give a shit what Macron has to say and he doesn't have any of the leverage. Now, if Macron was able to convince Biden to come with him and maybe a couple other European leaders and they all go to China and say, Don't, we don't want you to support the Russia, Ukraine War. We know there's a trade war. We can't give you Taiwan. What can we give you? What incentive can the west give you to stop the support of Russia in a way that would make you feel secure, would help you economically and would take away from kinda your support of Russia? China still might tell a coalition like that to go stuff it, but that's the level of kind of leverage or political power you would need to deal with Beijing to make the move off of a foreign policy position like that. Macron going over there and doing his sort of song and dance. Is not gonna work. I dunno if you also saw he committed like a diplomatic faux pa while he was over there, which is in the press conference after he met with Xi Jinping. He spoke for longer than Xi Jinping by a significant amount of time. And you're not supposed to do that like it's supposed to be equal time, especially when you're in China. The Chinese are very fastidious about those sort of diplomatic protocols. The French generally are too. So I don't know what the heck he was thinking. He has the good instinct, but then he goes and he blows it up because I don't know he has a, an inflated sense of self-worth. But no I wouldn't pay too much attention to Francis move there because France can't do anything. Even if at a base level, I think the idea is the correct one. Rob Larity: So just going back to the EU for a moment, then, how do you see this playing out? Because so you have this sort of bureaucratic structure. Overlaying all these national interests. And our friend Sik has come on the podcast and described his theory of the inter marium, where Poland and the Eastern European core, their interests are going to diverge significantly from those of the West. They're, likely to try to forge a, something of a more unified body over time. H is this a sign that's, that those kind of ruptures between east and west in Europe are becoming more important or intract. Like how does the EU or the European Commission, how do they actually get to where they need to be? Jacob Shapiro: Yeah, the European Commission can't do it. They don't have the tools. All they can do is try and withhold EU budget fund. Like they have a very limited set of tools that they can use to actually pressure other European states. It ha it has to be that all the member states look at each other and say, Hey, we made the European Union in the early nineties. It was good for the time, but the world has changed. And if this block is gonna survive, if we're gonna be competitive and relevant on the world stage as a, as an entity, like we're gonna have to change some things and give some new directives to the bureau guests that we hire. I don't think that this is any sign that the problems have become more intractable. The problems have always been there. It's the original sin of the European Union. What it raises doubt about is whether those problems can be overcome. And that I'm not sure about. So I don't think that the problems that, like the inter maam is no more real today than it was when Sik was last on here, fantasizing about it. And that's what it is right now. It is just a fantasy. But if you get to a position where in a couple years from now the European Union has not made changes, or I should say the member states have not agreed to reform the European Union, and it's still the same kind of push and pull, yeah, you absolutely could get blocks within the European Union looking for other places or looking for other alliances or trade networks and things like that. It might look something like Meser where the block might remain functioning and it might even, put out statements, but the countries will start pursuing their own interests. But, there's a lot there that also has to be adjudicated in the next couple years. What if Turkey's opposition gets more than 50% in the presidential election coming back and they. Follow their words and say, Hey, we're gonna try and rejoin the EU again and get closer to NATO, and we don't wanna be part of Russia. All these other things. If you can add Turkey to the inter maram, suddenly now we're talking a very interesting group of countries with maybe some real economic legs to stand on. Yatsik himself when he was on the podcast. Admitted. Yeah. Economically it doesn't work because the whole thing's based on Germany. If you could have another sort of central export powerhouse that could help those countries get a little bit away from Germany and do something else, that can be an interesting block as well. So it'll be interesting to see how things evolve in the region. I think that the most likely scenario is that Eastern Europe, like the Mexico example, I'm sure they would love to be completely separate of German supply chains and be doing stuff with India and Bangladesh and China and everything else. But it's Eastern Europe. You're in mc kinder's heartland, like you're stuck between Russia and Germany, and you're gonna have to. Work on that. And turkey's the interesting one, but you're ba basically stuck. I wouldn't say that, this shows that the inter myam is rising or that Eastern Europe is gonna break off from the European Union. But it is a reminder that there are very deep intractable intractable problems within the European Union. And I thought this year I said this year was a litmus test because there are not that many cri you're not gonna get that many moments like the Russia, Ukraine war, or like Covid because the types of fundamental changes that have to happen to the European Union, they're probably gonna happen in times of crises. Cause that's the only time that people are gonna put aside their petty issues and say, Hey, we really have to do stuff. We really need to think more seriously about the future of this block. If the crisis is over and this is the best the European union's been able to go with it's not gonna fall apart. I'm not saying the European I think that's a ridiculous forecast, but. Is it gonna be relevant? Is everybody gonna just start ignoring the European Union and doing their own thing and negotiating their own free trade deals? And Brussels will continue to issue circulars that people throw into the trash can as soon as they get it, if they don't like it. That's the scenario that makes Europe rather than one of the rising or established powers in a multipolar world, a battleground for some of the other powers around them. And that, I think is the thing that the European leaders really should be sitting with right now. Because if they don't make the changes now, that's what their future. Anything else on Europe, Rob, or do you wanna turn somewhere else? Rob Larity: No, I was hoping that we could turn a little bit south and talk about North Africa, Egypt, Sudan, even Tunisia. I know that's a small one, but there's some interesting stuff going on there. And I'll let you give us the download on your current thoughts, but dad, it seems like just a giant mess, whether it's the Sahel, whether it's, Northern Africa. Ethiopia now Sudan is this really a sign that stability in the broader region is increasingly breaking down or am I reading too much into it? Jacob Shapiro: Yeah, what stability is the first question I would get back to you. It's it's never stable here at all. I think this is a good last topic to hit on the podcast. And it also I think oil prices also when their way in the back end of this conversation, so maybe we can get to them as well. Look, the download on Sudan, I don't have a great download on Sudan because I don't follow Sudan particularly closely. Not because Sudan is an interesting, it's a fascinating country, but it's generally not that geopolitically important. We were looking at it a little bit more closely when the Grand Ethiopian Renaissance Dam issues seemed a little more apparent. But in general, you don't think of Sudan as a real important country. It's isolated in general. But to your point, what's scary about what's going on in Sudan right now, and it looks like a civil war, it's basically the military and a militia are going at it. They're, you've had popular uprisings and unrest in Sudan for years now where the military dictator, or I shouldn't say that the dictator was overthrown. The military came in, they were trying to transition. It's a whole sort of long, we could spend hours just talking about the back end of that. But the upshot is that you're basically now entering a period of civil war in Sudan, where the military is on one side, this militias on the other. There's reports of, tanks and war planes in cartoon and all these other Sudanese cities. So we're talking about real warfare here. We're not just talking about people in the streets, clubbing each other. It's, real military assets and real fighting and hundreds of people are already dead. And the reason it starts to get geopolitical is because there are different countries on different sides of the conflict. So Egypt is supporting one side and Saudi Arabia and the Emiratis have interests of their own. Libyan militia is taking the side opposite of what the Egyptians are. I'm sure Turkey is looking at this very closely. I'm sure Ethiopia is looking at this very closely. Ethiopia's been trying to convince Sudan to come onto its side with the Grand Ethiopian Renaissance Dam for a while. My sort of spidey sense about what role Ethiopia is playing on this is extremely high. So I think that's the real concern because we already saw that sort of play out in Libya. Libya went from being, an authoritarian state led by a pretty unsavory character in Kadafi. To basically a never-ending cycle of civil war where Okay, and when things are going well, they export oil and when things are going bad, they stop exporting oil and it's just death and destruction and arms deals and smuggling and radicalization and opportunities for jihadists all over the place. Is that what we're getting in Sudan in general? At the broader level I do think we don't wanna be guilty of lopping in all these regions in Africa with each other. The Sahel has very particular problems because of its geography. It's always been the sort of weird transnational space where smugglers and weapons deals and all that stuff is happening through it. That's basically the same. What's different now is that Islamists and Jihadists, because they've been kicked out of their home in the Middle East, like they, they're looking for places where they can have bases. They can't go to Afghanistan anymore. I guess I can go back to Afghanistan if the Taliban wants to play a little bit of poker. But anyway, you've seen this rise of sort of jihadist forces within the Sahel and that's why the fighting there has gotten worse. It's also, once you put the moniker jihadist on something, everybody pays more attention because, that's the inheritance of the war on terror. So you know, that's there as well. East Africa, the picture looks a little bit better to me. I put on the knowledge platform just yesterday, something a story about Tanzania and trying to build rail connections with other countries in the region because they wanna supplant some of the other countries in the region in terms of regional trade connections. We'll see if they actually build it, but that's the sort of stuff that Africa really needs. Ethiopia, the Civil War there seems to be over. Yes, there are problems and yes, it's gonna take a lot of time to reconstruct and get the politics back together, but Ethiopia, before the Civil War was mul, was on my, Indonesia, Turkey, Brazil list. They have all the things you would want in a sort of power that's gonna take advantage of a multipolar world. I r I routinely, I criticized Nigeria for being an absolute dumpster fire of a country and I'd shorted every opportunity that I could get. I dunno if you saw this though, but both Ghana and Nigeria this week before final trials for this vaccine have gone through, approved a malaria vaccine to get rolled out to their populations. I can't understate or I can't overstate the impact that a malaria vaccine in sub-Saharan Africa would have. The billions of dollars in percentages of GDP that are lost to malaria right now, if we're suddenly gonna flip a switch and have a malaria vaccine. Wow. Just on that, we're gonna have huge, like much better GDP growth figures in demographics in the region in general, and that's before we even get to South Africa and mineral commodities and all these other sorts of things. I wouldn't say the picture's great. I still think Africa until it can prove otherwise is going to be. It's gonna be a renewed version of the scramble in the 18 hundreds. And you've got the Europeans and the Americans and the Chinese and everybody else treating them. They can't call them colonies because that's politically incorrect these days, but there's a new age colonialism that's already beginning to happen where these outside powers are trying to take advantage of African powers. But when you look underneath the hood, some African powers are trying to push back and trying to create integration between them. So look I'm not an optimist on this sort of, in the general scheme of things, but I also don't think that there are, that it's not completely zero. It's not like some of the instability and violence that we're seeing is out of the ordinary. What was it that Leonardo DiCaprio said in Blood Diamond? It's, this is Africa, man, like this is how it works. And my personal hope for Africa is that it can overcome this. And we can lay out a blueprint for them to do but it's gonna be very difficult. Rob Larity: You put something on the knowledge platform that I thought was interesting this week where you were discussing food prices or prices for wheat in particular in Africa, and how they might be impacting Russia's desire or not to, inhibit Ukrainian exports. Could you maybe talk through that logic? Jacob Shapiro: Yeah. This sort of gets to the Russia, Ukraine deal and back to the conversation we were having about the e. Which is, we're trying to figure out what is Russia doing with the Black Sea Grain Initiative? Is it really gonna leave? Is that threat for real or is it just gonna be what happened the last two times? Now, the first time that Russia raised the idea that they weren't gonna renew the Grain initiative, I believe it was October or November last year, I can't remember which month. They did, they left the deal for a couple of days and everybody from Brazil to South Africa, all these countries that have been nominally supportive or at least have not criticized Russia as much as the United States would want came out and said, no, this is bad. You're gonna raise food prices in the rest of the world. Go back to the Grain initiative. We all want the grain initiative. And the thing about Russia is that it has basically turned, its back on Europe and turned its back on the United States. It's gone full in, in the multipolar world. And if you've gone in full in on the multipolar world, you can't afford to lose support from some of these other countries that you've been banking on as pushing back against the US-led order. The point that I would make there is that, if the Black Sea Grain Initiative ended tomorrow if you were long wheat, you'll be very happy. If you are in Paris and you wanna buy a baguette at the bakery, oh, maybe it's gonna, how much is a baguette in a per, in a Parisian bakery right now, by the way, Rob? Rob Larity: Shockingly cheap. Like one year, 50? Jacob Shapiro: Yeah. Okay. So like you might go from one Euro 50 to two euro fifties oh my God I'm sure the French will complain. We'll probably see yellow vest protests over the two 50 baguettes in the streets. We'll be storm the barricade sort of things. But in countries in Sub-Saharan Africa, they're literally gonna star. Go look at the UN World Food programs weekly updates or their press releases if you really want to depress yourself right now. We've got famine lurking in Somalia and in parts of East Africa. We've got famine lurking in the Sahel and in places like Molly and Burkina Fasu. I think the latest number from the UN was that something like 48 million. Are in danger of not having enough access to food and hundreds of thousands, in danger of direct famine. So if Russia's gonna screw with the Black Sea Grain Initiative, wealthy countries are gonna buy up whatever grains they have for whatever price they need. Because if you can't feed the masses, they're gonna overthrow you. And the countries that are gonna starve are the ones that are in Sub-Saharan Africa or in Southeast Asia or in the Middle East, that are dependent on imports and suddenly can't get them. So you would think that is a constraint on Russia leaving the Black Sea Grain Initiative, because then Russia will become the global pariah that the United States and everybody else has been trying to make them. But at every step of the way, Russia has done things against their interest. And maybe Russia can figure out some other way to export to these countries that is not through the Black Sea Grain Initiative. Maybe I'm, maybe they've, they can use their icebreakers to get through the Arctic or something like that. I don't know. But I think Russia really has to tread carefully here because if they are seen as wrecking the Black Sea Grain Initiative based on the way. Especially grain pressures are in some of these countries that we're talking about, it would be very negative for them. And you could really, last year I think we were thinking about the potential for an Arab Spring type situation, except on a global level. That crisis was averted in large part due to the Black Sea Grain Initiative. And because farmers around the world did what they do best, they produced more than anybody thought that they could. It's a lot to ask them to continue to do that, especially if you take the Black Sea Grain Initiative out and when you get that kind of political volatility, maybe that scenario is still there in the cards. Rob Larity: That's a downer note end the podcast on, did you want to finish with something more uplifting? Something? Yeah, let's talk about that. Jacob Shapiro: We should be happy about. Yeah. Let's pat ourselves on the back about two things we've been right about. The first is oil prices. Here, hold on, let me get the exact thing. Cuz they dropped below 80 yesterday. Crude oil as we are recording right here. Down 1.83% to $77 and 71 cents. I feel like I went out a little bit on a limb there when the Saudis announced that surprise cut, and I said, eh, that doesn't look good to me. Because like right before they announced the cut, I put an in focus piece on the knowledge platform saying the risks look really skewed to the downside here. To me I'd be thinking more short than I would long, if anything, and it's probably a stay away. I think it's to go against some of your optimism at the beginning of the podcast. I, and I think the oil price cap has something to do with this, but the fact that oil is now sub 80 for a couple days now despite the Saudi surprise cut. That's telling you like, either China's not consuming at the levels that people thought, or there's more oil on the market than people thought. Like I think that's really interesting. And something really to watch. So now that we can, we had a week of headlines of oils going back to 140 a barrel. Now the serious people can get back to talking about what's actually gonna happen with oil. It's a lot more uncertain. So I'd say let's pat ourselves on the back about that and to hell with the Oracle of Omaha who was in Japan this week talking up, what a great investment opportunity that Japan is. Let's talk about the Oracle of Paris over here, Rob, who's been talking about Japan as an investment opportunity for years. I hate that Warren Buffet's getting all this cred for suddenly thinking about Japan when, we've been talking about Japan and had long positions with Japan for years. He, he, part of the move to Japan for Warren Buffet is that I think is what, in the last six to 12 months, they closed a position on T S M C, which, the off, he wrote a, basically a sort of short report on T S M C because of the geopolitical tensions. I don't know, does that qualify as optimistic that we were right about oil prices going down and that Warren Buffet seems to be on our corner in Japan. Those things made me happy, but I might be a little demented at this point. Rob Larity: I think it shows that Warren must listen to the podcasts. There's no other way about it. He's just, he's following Jacob Shapiro: our book. It's funny, I know that's a joke, but I actually was wondering who's advising him on geopolitics or whether it's just. Because the decision to reduce an investment in TSMC and then the next step to be, to go to Chi to go to Japan and say, Hey, there're undervalued companies here. We wanna invest in a big way. That's if some not to step on my own like services, but if somebody wanted to hire me for a consultation, like those are some of the first recommendations that I would make. So I wonder if he came to that on his own. I wonder if he has people doing geopolitics in his ear and that is now making his way up there. It's I don't think we'll find an answer, but from that point of view, it was interesting. So even Warren Buffett is thinking about geopolitics right now, and I'm sure he is not listening to this podcast, but he must be listening to something or tracking something to make those sorts of decisions because that's the only explan. For making the kind of moves that he's been talking about and what he's being saluted for in the media again. Rob Larity: I think it just goes to show that Warren Buffet, who famously says, oh, I don't care about macro, I don't care about politics, I don't care about what's going on in the world. I just sit and read 10 k filings and read about companies and just do bottom up work all day long. That's bullshit. Even Warren Buffet, he has to take this stuff into account. He owns the biggest railroad in the Western United States. If you think that their business is not completely dependent on what's going on in, Asian geopolitics and Chinese exports and US trade wars then you're wrong. Jacob Shapiro: Yeah, I mean that, that's a perfect. Point to end the podcast on and it calls back something that we said earlier, which is in a unipolar world doing nothing but bottoms up analysis and reading the 10 Ks of US companies, that's actually probably a pretty good use of your time. You're probably gonna do really well there because you're focused on the place that's gonna have the most growth and the most opportunity. But as I said to this audience yesterday, as I keep saying to audiences in general, like we're in a multi-polar world, and I would say it's not just audiences. I would say, for listeners who were thinking about their own investments, like whatever advisors you're working with in general, we obviously manage money too. Are your advisors prepared for a multi-polar world? Are they thinking about what's happening if the United States is not the hegemon or the sort of secondary consensus, if it's not just a bipolar Cold War conflict between the US and China, are you hedged for that? Are your investments prepared for a world in which Multipolarity is the driving macro force in the world? Warren and Buffet just telegraphed to you that he is. And that he's finally thinking about that too. And I think it's one of the big things that we say here it's all about I say all the time, I could be wrong about Multipolarity, but I don't think I am. I think we've laid out a really good case. And if we're right about Multipolarity, if you try and invest the way that people have been taught to invest for the past 30 or 40 years, you're not gonna do well. It's not just up until the right, it's a much more volatile and much more fractious world. If we're right about all the things that we talk about here on this podcast all the time, Rob Larity: Amen brother. Amen, brother So whether it's us or somebody else, make sure that you're covered for the multipolar world and otherwise we will see you next week. So cheers.
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