What just happened: On September 30, 2015, Russia launched its first airstrikes against ISIS in Syria, but they actually mostly attacked CIA backed Syrian rebels fighting President Assad. Syria’s civil war has lasted four years, and Russia and the US have divergent views about its resolution. Russian President Vladimir Putin supports Syrian President Bashar al Assad while President Obama says Assad has to be deposed; but they both oppose ISIS.

Nostalgia: The Gen X’rs have brought back 80’s music and Obama & Putin have brought reactivated the Cold War. Remember in 2012 when Barack Obama mocked Mitt Romney’s concerns about Russian geopolitical ambitions with the snarky retort that “the 1980’s are calling to ask for their foreign policy back.” Well, Romney was right.

Recognition: Putin seeks to promote Russia as a recognized force on the world stage. Without incursions and wars, Russia would be a global political has-been; by reigniting the Cold War, Putin puts Russia back on par with the U.S.

Putin’s Power: Parallels between Russia and the old USSR are numerous. As a former KGB lieutenant, Putin has a shrewd grasp of Russia’s political and societal challenges, and how best to maintain his own policymaking power.

  • Crises, failures in Ukraine, loss of oil revenue, and Western sanctions have led to increased infighting among Russia’s political and economic elite
  • Putin’s leadership and ability to arbitrate among these dueling factions is a source of uncertainty
  • Wars and Cold Wars create a galvanizing force for Putin to maintain influence

Russia’s Loss of Power: Russia appeared strong after the 2008 Russo-Georgian War and Crimean annexation, but the fighting in Ukraine has sullied that image. Since then, the West has reduced capital investments in Russia and levied sanctions that are forcing the Kremlin to bail out large business and financial centers. Additionally, the drop in oil prices has severely hurt Kremlin pockets and helped send the Russian economy into a second recession.

Why now? Russia may feel its tether on Iran slipping as Tehran, Washington and Europe lift sanctions and reach their own nuclear detente. Therefore, enhancing support to Assad, one of Iran’s close allies, serves the dual purpose of cozying back with Iran and snubbing Obama. Besides, Syria has been armed by the Soviets since the mid-1960s, so there is history there.

No Peace: Attempts at negotiating power-sharing agreement and politically carving Syria into sectarian spheres have not worked. Similarly, reversion to the old status quo, with the Alawites regaining control of a majority Sunnis populous seems doubtful, but Putin’s overt help may turn the tide.

Oil Prices: The effect on oil prices remains to be seen.

  • Short-term, Russia’s airstrikes and snubbing will have little direct effect on oil prices.
  • Long-term, anything that brings oil producing nations (like Russia and Iran) closer can foster price and technology collusion which could lead to a cartel like lifting in oil prices, especially if they were both to threaten Europe with reduced energy flows in response to sanctions.

Michael Ashley Schulman, CFA
Managing Director
Hollencrest Capital Management
www.hollencrest.com