“Who rules East Europe commands the Heartland;
Who rules the Heartland commands the World-Island;
Who rules the World-Island commands the world.”
— Sir Halford John Mackinder
Yes, I buried the “geopolitics” lead – in a book about forecasting geopolitics – all the way in Chapter 6. Halfway through the book, you might be dismayed to still be wondering: what is “geopolitics” anyway? Even more bewildering: my choice puts it below politics, the economy, and finance in the constraints hierarchy.
Geopolitics is a nebulous discipline. Most use it as a catchall phrase for interstate relations in the international sphere. For investment professionals, geopolitics connotes the unknown, unstructured, uncomfortably qualitative variable that intrudes upon their numbers-obsessed profession.
Geopolitical analysts claim it is the ultimate arbiter of the future because it deals with immutable, universal variables (i.e., natural endowments, demographics, and geography). Analysts confidently forecast the future using the geopolitical crystal ball: a tactile relief map where the topography stands out in three dimensions. Their predictions rival the certainty and, in some cases, grimness, of the best psychics.
The future of Poland is dire, as it is destined to be filleted anew by its ravenous neighbors. Canada's grim weather report is to be torn asunder by its regionalism and high infrastructure costs. And the US will live happily ever after. It will remain an Empire forever, sheltered as it is between two oceans, blessed by navigable rivers, and endowed by a cornucopia of natural resources. Sounds familiar? This kind of determinism thrives among geopolitical thinkers.
My father introduced me to geopolitics through a mixture of politically incorrect Eastern European stereotyping – “Koreans go hard, Marko … hard” – and football (sports-related, but also politically incorrect stereotyping) – “Germans are disciplined, never tire, and press all night.” He boiled every country's foreign policy (or football tactics) down to a set of immutable characteristics.
Italians played defensively – catenaccio – because, well, they couldn't attack to save their lives. The English tried to lob the midfield with long balls and target mammoth strikers. Americans played with a naïve earnestness that was only possible for a New World power, unafraid and unaware of their certain defeat. The Dutch totaalvoetbal was as rehearsed and clinical as their integration into the global supply chain. And Yugoslavia … we played with the creativity and passion of Brazil coupled with the tragicomedy of Argentina. Any day, Plavi could beat (or lose to …) anyone.
My passion for football eventually waned, but a top-down, geopolitical mentality stayed with me. Football, especially international football, is all about the system. A team can have multiple superstars on its roster, but if they do not mesh quickly enough for a tournament like the World Cup, even the most loaded team will embarrass itself. To fast-track the meshing process, national teams adopted a particular style that was easy to slot players into.
As a young kid, I remember watching my dad sit at the edge of a small coffee table, puff his cigarettes like a skyscraper on fire, and decree (10 minutes in) which team would win, why, and by how much. I would protest, point out the quality of the players, the big names on the roster, and their stats in club football back in Spain, Italy, or England. None of it mattered to my dad. He had “read” the macro context and made his forecast. Much to my annoyance, he was correct on all counts more often than not.
My father's passion for top-down football handicapping got me hooked on the macro perspective, but working for George Friedman taught me how to apply it outside the football pitch. Friedman founded Stratfor, the geopolitical intelligence firm, in 1996.1 It was the absolute worst time to start a geopolitical analysis firm. American power was at its zenith, globalization was in full swing, and few people cared about geopolitical risk. Nonetheless, visionaries such as Friedman and Ian Bremmer, who founded Eurasia Group in 1998, saw an inefficiency in the market and sought to fill it with rigorous analysis.
At Stratfor, I learned how to read the news, ignore the “quality of the players,” and focus on the system. Working for George was even more annoying than watching football with my dad. He would stubbornly point out the systemic nature of a geopolitical relationship, ignore the messy details I had labored over for weeks, and conclude with a forecast. Again, more often than not, he proved to be correct.
Unlike my peers at the firm, I did not resist George's “breaking-in” process. Having completed my PhD coursework at the University of Texas in comparative politics, I was primed to accept a systemic worldview. And having grown up on football strategy, I was not afraid to ignore the individual playmakers and focus on the overarching strategy.2
Geopolitics is parsimonious and predictive because it posits that states are imprisoned, or blessed, by their geography. For academia, geopolitics is too parsimonious. And the professors are correct! Mountainous terrain combined with ethno-linguistic heterogeneity has consigned Afghanistan and Bosnia to centuries of conflict, but Switzerland, cursed with similar topography and heterogeneity, is doing just fine.
Geography is not destiny. And it is not immutable. La Manche was much harder to ford when the Spanish Armada sailed in 1588 than when the Luftwaffe flew over to drop bombs during the 1940–1941 Blitz. The US was not quite so navigable before the completion of the Erie canal in 1825. In the fourteenth century, Portugal was so impoverished by the black plague that its interior villages depopulated as the country desperately threw itself into the sea. Few would have predicted that in less than a century, the tiny Portugal – whose paltry agricultural output remained static and sparse – would launch the Age of Exploration and divide the planet with its much more fertile neighbor, Spain, in 1494.
So, as I advance through this chapter, remember that geopolitical analysis alone does not make an accurate forecast.
This book exists because I never grew out of being annoyed at the parsimony of my dad's and George's approaches to analysis. There are far more constraints to policymakers than just geography and Great Power geopolitics, a realization that dawned on me during the Euro Area crisis. To correctly forecast that crisis, I had to understand domestic politics, economics, and financial markets. The crisis saw a continent wreathed in geopolitical conflict for millennia brush it off, overcome it, and almost redraw the geography of Europe. With a tsunami of economic reform, it overcame its geography, demographics, and “navigable rivers” problem.3
Nonetheless, geopolitics is a crucial variable that investors sometimes ignore – and sometimes obsess over to the exclusivity of others. My goal in this chapter is to help investors locate that illusive, alpha-generating middle ground.
The theoretical foundations of geopolitics are thin. There are only two notable “fathers” of geopolitics: Alfred Thayer Mahan and Halford Mackinder. They both dedicated their lives to elucidating the “Grand Strategy” for great powers: the implicit but influential geopolitical imperatives, rooted in geography, from which a country derives its day-to-day foreign policy.
Mahan was a US Navy admiral and lecturer at the Naval War College. For him, the US imperative, or grand strategy, was to build a navy to dominate the oceans – the global “commons.” They are indispensable to modern trade and economy, and thus attainment of “hard power.”4 Hard power is the “power (of a nation state, alliance, etc.) characterized by a coercive approach to international relations, often involving military action [emphasis added].”5
A strong navy is the defining characteristic of a powerful state, as it gives military supremacy over vital trade routes and ensures that global commerce operates in its interest. If this sounds like the twenty-first-century US grand strategy, it is because Mahan influenced American policymakers in the early twentieth century. Theodore Roosevelt subscribed to Mahan's thinking, which included building the Panama Canal. Mahan's The Influence of Sea Power upon History and similar work by British strategists provided a historical and strategic framework for the UK–Germany naval race that helped cause World War I.6
Mackinder, a British geographer and academic, focused on the Eurasian landmass rather than the oceans.7 In his view, Eurasia had enough natural resources (Russia), population (China), wealth (Europe), and geographic buffer from naval powers (surrounding seas) to become self-sufficient. Hence, any great power that managed to dominate Eurasia, or the “World Island” as Mackinder coined it, would have no need for a navy. It would become a superpower by default.
The political consulting community tends to overstate geopolitics as a primary causal mechanism in global events. The subject – by definition always writ large – enables a generalist to advise clients on Canadian politics on Monday, global energy on Tuesday, and Middle East intrigue on Wednesday. In forecasting, the far-reaching quality of geopolitics provides the most value for the least work put in. It is the generalist's shortcut.
For the generalist, political analysis (Chapter 4) is too contextual and requires a lot of work and knowledge. Sure, it is the most powerful – and therefore predictive – constraint, but it requires the analyst to understand the differences between Italian and Brazilian electoral systems.
Economics and finance (Chapter 5) require specialized knowledge that most analysts in the political consulting industry lack or wield awkwardly. It also requires the same expert-level comprehension not just of different economies, but also of asset classes, monetary policy, and banking systems.
In contrast, geopolitics can be a one-stop shop for making forecasts. It is analytical fast food – an intelligence-by-assembly-line approach to forecasting. My favorite of these happy-meal forecasts include the following: Polish policymakers will always approximate paranoia, given that they are located on the North European Plain; the US will forever remain a safe haven, thanks to its two oceans;8 and China will never gain global influence because it is hemmed in by the Tibetan plateau on the west, the Gobi Desert in the north, and the “first island chain” in the east.
Relying on geopolitics in isolation is like driving a car with a rearview mirror, a GPS system, and a pitch-black windshield. The driver knows where he's been and the final destination, but he's completely blind to what is right in front of him.
Despite its limitations, geopolitics is a powerful constraint in the framework's structure and plays a role in most international events. The previous chapters' assessments of the Brexit imbroglio, Chinese domestic politics, the Euro Area crisis, and the US–China trade war would have been incomplete without an understanding of geopolitics. But it is not clear whether, as its adherents might claim, geopolitics was policymakers' fulcrum constraint for each issue.
I now turn to two scenarios where an understanding of geopolitics remains critical for making a forecast. They are the following: US grand strategy and Russian military intervention abroad.
Every US president, knowingly or not, has tried to construct a foreign policy “doctrine” during his presidency. There is rarely a single document that elucidates it. Scholars and journalists weave the ideas together from speeches, policy decisions, the administration's resource allocation, and rhetoric.
In 2017, Trump was in his presidential infancy. However, his actions and statements gave political commentators a rough idea of where his doctrine was headed. There were three main lines of thought in President Trump's doctrine:
Under the tenets of this inchoate “Trump Doctrine,” NATO and the EU are not just nuisances, but detrimental to US interests. If it became an active, consistent doctrine, its negative attitude toward Western nations and their global institutions would mark a profound shift in US foreign policy thinking. No wonder then that the Washington establishment revolted against the shift and launched a prolific op-ed writing campaign!9
Both NATO and the EU obstruct Trump's ideological tenet of nationalism. They are international organizations that pool sovereignty for some predetermined common goal. Because the common goal has nothing to do with the immediate, domestic, and economic goals of the US, the two organizations threaten US interests.
NATO demands a US overseas commitment with little material gain in return. This imbalance is not a new bone of contention. President Obama complained about the failure of NATO member states to pay their fair share (2% of GDP on defense) for collective self-defense. Obama's strategy was to cajole European allies to boost defense spending; NATO's existence was never in question. But Trump does not see any benefit in America paying for Germany's defense, especially when Germany has a sizeable trade surplus with the US.
The EU runs a large current account surplus in general and a trade surplus with the US in particular. To the Trump administration, the EU is a rival – perhaps even more than Russia, which, when viewed through a purely mercantilist lens, may not be a friend, but is not a foe either.
Trump's foreign policy is based on an understanding that the world is multipolar and that the US is in a geopolitical decline. Data supports this assertion, and Trump's doctrine aligns with that of the Obama presidency in that sense. Both recognize that the US can no longer act unilaterally and that it must retrench from its global responsibilities. But while Obama sought to enhance US power by relying on allies and supranational organizations, Trump seeks to geopolitically deleverage. Such a deleveraging, when combined with mercantilism, may cause America's traditional allies to try harder for its approval, like Trump assumes. Or it may push America's traditional allies away from Washington's orbit.
If the new doctrine forces allies out of the transatlantic orbit that Washington has maintained since 1945, these countries will pursue alternative economic and security relationships to hedge against America's lack of commitment. They may resort to outright hostility. Japan and South Korea, to offset potential tariffs and a drop in US military support, will become friendlier with China to fulfill both their security and economic needs. Absent US support, Japan and South Korea need better China relations to avoid conflict and to access new consumer markets. The same goes for Europe, with Germany and others eager to step in for the US by selling more to China amid US-China trade conflicts, as I discussed in Chapter 5.
The Trump Doctrine, taken to its conclusion, results in an American foreign policy that pushes Eurasia toward the kind of integration – if not exactly alliance – that Mackinder feared. Since greater Eurasian coordination could eventually develop into a dynamic of its own, this process directly contravenes the central tenet of American grand strategy: Prevent any one power from dominating Eurasia.
Trump, his supporters, and his advisors may believe that the twentieth century is over and post–World War II American alliances have atrophied. They have. Russia is not the Soviet Union. It is no surprise that NATO is having an identity crisis when it no longer has a peer enemy to defend against.
But geography has not changed. The US is still far from Eurasia, and Eurasia is still the “World Island.” The Trump Doctrine ignores the entire twentieth century, during which the US had to intervene in Europe twice and Asia three times – at a huge cost of blood and treasure – to prevent the continent from unifying under a single hegemon. The US set up international organizations after the Second World War to ensure that it would not have to intervene in Europe again to prevent World Island domination.10 The security and commercial system in Asia Pacific serve a similar purpose.
These transoceanic alliances and organizations are not vestiges of a past that has vanished, but ongoing attempts to manage a continental geography that is immutable. The Trump Doctrine threatens to undermine an imperative of American hegemony. If carried out to the letter, it will end American dominance on the world stage.
There is a significant probability that President Trump will pursue his doctrine to its ultimate conclusion, especially if he wins a second term and thus becomes free of re-election-imposed median voter constraints. However, it is unlikely because geopolitical constraints on the doctrine are too vast. The Trump Doctrine raised a specter, however faint, that has not existed seen since the Molotov–Ribbentrop Pact between Russia and Germany in 1939: a united Eurasian continent marshalling all its human, natural, and technological resources against the US. The last time that happened, around 400,000 Americans lost their lives to preserve US security. Loss of America's Eurasian anchor – NATO and European alliances – would prove too great a shock to American hegemony. It would also spell the end of Western dominance over the world that has been a fait accompli of geopolitics since 1492.
This potential World Island forms the Trump Doctrine's fulcrum constraint to action. It explains why, despite his stated preference, Trump said he supported NATO's mutual defense pact, Article V.11 The threat of a World Island drove the December 2017 National Security Strategy to take a more muted stance on the transatlantic rift than President Trump's original statements indicated. The strategy refers to the NATO alliance as “one of our great advantages over our competitors,” and maintains that “the United States remains committed to Article V of the Washington Treaty.”12 While the National Security Strategy's direction does not guarantee that geopolitical constraints permanently anchor Trump's foreign policy, it does indicate that the constraints influence policymaker decisions.
Three years later, most of the authors of the December 2017 National Security Strategy have been ignominiously removed from the White House. Nonetheless, the framework suggests that even if their replacements are ideologues, the power of the geopolitical constraint would again keep policymakers anchored to the main tenets of the transatlantic grand strategy. Material constraint – geopolitics – will ultimately win out over ideology – nationalism.
The Crimean Peninsula was annexed by Russia in February–March 2014. It was the first annexation of territory in Europe by force since the Second World War. The question on investors' minds was, “Where will Russia stop?”
A month after annexation, the Donbas War began. Donbas is a region of East Ukraine through which the Donets River flows. Ethnic Russians form a large minority in the two main oblasts (states) that make up the district: Luhansk and Donetsk. A majority of the people in the region, including many ethnic Ukrainians, are Russophone.
It seems hypocritical for Moscow to attack Ukraine and support an insurgency in Donbas. But the moves were not irrational or inexplicable. Russia's intervention in Crimea was part and parcel of the same geopolitical constraints that motivate other powers to pursue spheres of influence. Geopolitical constraints also dictated its actions in Donbas. Russia's Crimea military intervention was symptomatic of its fulcrum geopolitical constraint: Moscow has very little to offer to the members of its sphere.
Moscow's primary geopolitical focus is the post-Soviet space, the crown jewel of which is Ukraine. As Russian exports are uncompetitive outside of the post-Soviet arena, Moscow created a customs union to protect this economic sphere – and it eventually became the more comprehensive Eurasian Union. The union's aim was to cement and institutionalize Russian influence. Without Ukraine, the Eurasian Union would shrink to Russia and a collection of Lilliputian economies from Central Asia and the Caucasus. To achieve its goal, Moscow needed Ukraine.
Ukraine is the backbone of Russia's Eurasian Union project for a few reasons. In 2014, it was one of the top destinations of Russia's nonenergy exports, as well as Russia's key market for financial and nonfinancial corporations. Its demographic is ethnically and linguistically similar to Russia's, allowing the bigger country to easily supplement its flatlining population. Ukraine is a geographic buffer between Russia and NATO member states. Crimea houses the headquarters of Russia's Black Sea Fleet and provides Moscow with a strategic anchor in the Black Sea (although that anchor's critical nature is often overstated given that the port of Novorossiysk on the eastern shores of the Black Sea exists).
Considering Ukraine's importance to Russia, Moscow's military intervention seemed rational.
But it did raise an important question regarding Moscow's shift in strategy. When the 2005 Orange Revolution put a pro-West government in power in Kiev, Moscow did not react militarily. Instead, it played the long game, patiently undermining the pro-West government with political and economic pressure until the 2010 election: the nominally pro-Russian Viktor Yanukovych was victorious. Moscow had (successfully) meddled without military intervention. Why, then, did Moscow feel such an urgency to act militarily in 2014?
The answer to this question lies in the appeal – or lack thereof – of being inside Russia's sphere of influence. Russia offers the following three membership perks to states within its sphere:
While the Crimea military strategy did reassure other Russian dependents, it led some Ukrainians to reject membership in Russia's sphere. Although the media presented Ukraine as evenly split between the East and the West, the reality is more nuanced. The 2010 election results did not represent an East/West split in voter preference. There were other reasons – confounding variables – influencing citizens who voted for the “pro-Russian” candidate. As a result, there were far more pro-West citizens than a simplistic, single-dimension analysis of the polls would indicate.
Viktor Yanukovych did not win the 2010 elections because he was pro-Russian; he won because he campaigned on a pragmatic, pro-Ukrainian platform that prioritized EU integration and appealed to a broad coalition of voters.15 Certainly, he won more votes in the eastern part of Ukraine, but he would not have beaten the pro-West candidate without softening his stance on EU accession.
From the Russian perspective, a client state's pro-West preference is worrying because Moscow cannot offer the scale of economic and social development that comes with EU accession. Ukraine had flirted with EU and NATO accession for over a decade, although the odds of NATO accession were never high.16
For all of its faults, the EU has a proven track record in wealth generation and governance improvement. Joining the EU is a difficult process that requires implementing painful structural reforms, but it also provides access to the EU's enormous market and invites Western investors to search for opportunities in the candidate country. Membership – even just candidate status – provides an important good-housekeeping seal of approval.
Russia has no equivalent offer. Membership in the Russian sphere confers no comparable benefits, as becomes apparent through Ukraine's experience relative to the economic performance of its two former communist peers: Poland and Romania (Figure 6.1). For Ukraine, the post-Soviet era has been a tragedy of “You could've been a contender” proportions.
Russia resorted to a military intervention in Ukraine because membership in the Russian sphere was inferior to membership in Europe's. This “value-add” sphere imbalance – an immutable constraint for Russia – forced Moscow down the path of least resistance to its only remaining choice: military aggression. Compared to the EU's arsenal of benefits, it had few other options with which to appeal to the Ukrainians. These bargain-basement benefits weaken the Russian economy as well as the Russian value proposition to its client states. To co-opt a popular saying, Russia had no carrot, so it had to use the stick.
As Russian military involvement in Ukraine deepened, commentators wondered if Moscow would intervene directly to establish a land bridge to Crimea from the rebel-held areas of Donbas.17 Such a bridge would have required another military intervention to seize the large city of Mariupol.
Three main constraints prevented further Russian aggression:
The idea that the Russian populace gives its leaders a blank check to pursue aggressive foreign policy is not rooted in historical evidence. In fact, Russia has a spotty history regarding public support for failed military campaigns: the Crimean War in the mid-nineteenth century, the 1904–1905 Russo-Japanese War, World War I, Afghanistan in the 1980s, and the First Chechen War in the early 1990s.
As the “time-in-power” constraint might have predicted, each of these military losses and dragged-out campaigns eventually led to popular backlash. They caused domestic political crises (if not outright revolutions), especially when accompanied by economic pain.
Russia's poor showing was a function of East Ukraine demographics and geography. Russians and Russian speakers combined may be the majority, but they are concentrated in high-density urban population centers. Ukrainian speakers dominate the rural areas, thus making military operations beyond the cities a challenge for the pro-Russian rebels. Overall, the people and land constrained pro-Russian rebels to less than 5% of the total Ukrainian territory.
There are two possible reasons why Russia stopped at 5% and why it did not employ more aggression to build the land bridge to Crimea and push beyond to the rest of Ukraine (as pundits predicted). Either Russia was an incompetent, third-world power incapable of fostering a successful insurgency – even on its very own borders – or Moscow made the only decision its constraints allowed.
President Putin and his team understood the costs if they committed to a serious military confrontation inside a vast hostile territory. Both hostile forces and a hostile local population would threaten supply lines via insurgency.
Even if I accept the conventional view that Russia's military is highly capable, the corollary assessment that Russia could easily defeat Ukraine in a war purely due to the spread in capabilities betrays a lack of military strategy acumen. Geography and demographics matter in Ukraine. Securing supply lines inside recently conquered territory over vast distances would be a challenge for any military – particularly Russia's, which has experienced no similar warfare for over 50 years.
I estimate that to establish a land bridge to Crimea, the military operation would have required 60,000–100,000 Russian soldiers for the initial invasion, securing supply lines, and pacifying the local population. Invading all of Ukraine would have required over 200,000 Russian soldiers. This show of strength would have overcommitted the Russian military and economy, playing right into the hands of its adversaries in the West.
Two constraints held Russia back from more military action: the geography of its sphere of influence and its own hard power capabilities, which fell well short of the glory days of the Soviet Union.
Given the stalemate in Ukraine and the paltry territorial gains in Donbas, President Putin pivoted to countering Islamic terrorism. On September 30, 2015, Russian military intervention in Syria began. Russian state-controlled TV also got to elegantly pivot its coverage away from a theater of war where Moscow was geopolitically constrained and where its military prowess fell short to one where it was not and did not.
While I worked at Stratfor, my favorite analysis that George Friedman ever produced was a piece on the Obama presidency. It was late 2008, and Barack Obama had won the election. It came to George to pen an analysis of what kind of a foreign policy Barack Obama would pursue during his next four years in power. The main variables were what Obama would do with the troops in Iraq, whether he would establish a détente with Russia, and whether he would close the Guantanamo Bay prison.
George's missive to clients had a disappointing thesis: Obama would largely follow George W. Bush's prerogatives. Troops would not be withdrawn from Iraq as quickly as people hoped, the détente with Russia would not work, and Guantanamo Bay would remain open.
Oh, to see the hate mail pouring in. The conservative clients were incensed. The hippie-liberal Obama couldn't hold a candle to the hawkish conservative! Of course he would make America tuck its tail between its legs and abandon Iraq! Of course he would make peace with Russia!18 And of course he would liberate the terrorists from Guantanamo Bay! Meanwhile, the liberal clients thought George was trolling them. How could Obama follow in the footsteps of a failed presidency?
Geopolitics constrained Obama from delivering on his campaign promises just as it had forced George W. Bush onto the path of least resistance, which at his inauguration became Obama's burden to bear. The impassioned hate mail indicated that our readers could not get past their political and ideological frameworks. Geopolitical constraints do not discriminate between party labels.
While geopolitics is a powerful constraint, I never grew comfortable using it in isolation. In my experience as an investment strategist, geopolitical alpha is rarely a product of only the geopolitical constraint. Nonetheless, it is powerful in certain contexts and should be kept in store for careful use.
Oxford English Dictionary, s.v. “hard power,” accessed March 6, 2020, https://www-oed-com.ezproxy.lapl.org/view/Entry/84122?redirectedFrom=hard+power#eid69704699.