How we misunderstood Russia

good morning. Many people were wrong about the risk of a large -scale Russian invasion. We were also to blame - if not explicitly. There are some considerations about why this error occurred so often. Also how the war increases the use in the crypto debate. Send us an email: robert.armstrong@ft.com and ethan.wu@ft.com.

In Russia there were no bargains

at the end of January I wrote an article entitled "Bargain hunt in Russia", a sentence that I don't like to stop a month later. The article pointed out that a combination of high energy prices and tensions on the border with Ukraine made Russian stocks appear very cheap. The piece ended as follows:

Unheded is not dealing with the assessment of geopolitical risks. But if the situation cools down at the border, someone will earn a lot of money in Russia.

This statement is secured twice, firstly by saying that at the most relevant risk I had no idea what I talk about, and secondly, by using the journalist's loyal friend, a condition. But still the piece looks terrible afterwards. Apart from the conditions, the piece did not remove the risk of the Ledger seriously enough.

How much I am an idiot is not an interesting topic in itself. It is interesting whether the widespread gullibleness about a certain report on what happened on the border with Ukraine can be teached and whether these teachings may be used broader. After all, many global investors had Russian stocks and bonds last week. The country's budget and current account surpluses made the bonds attractive, and the commitment in raw materials for inflation protection did the same for the shares.

My article characterized the arguments for Russian stocks as follows:

The. . . The argument of the Russian bulls consists of two parts. . . First, Moscow is seriously concerned with his own security and has neither domestic support nor geostrategic interests in an annexation of Ukrainian territory. If the USA and NATO cool it by offering assurances in relation to rockets and a break in NATO's expansion efforts, a de -escalation would follow.

Secondly: Even if it gets worse, financial sanctions against Russia are probably too weak to threaten its economy unless the country prevent the country from selling its oil and gas abroad - which would harm Europe as well or maybe more harm than Russia.

argument one overestimated Vladimir Putin's concern about domestic support and geostrategic interests that are traditionally defined. The failure of argument two followed directly. When Putin chose the open war, skepticism about the power of sanctions was falsified. Russia's foreign exchange reserves were effectively destroyed by sanctions against the central bank, and its wider banking system is already on his knees.

The first point that must be noted here - to clarify, not for mitigation - is that very surprising things happen. If someone says: "I am 95 percent sure that X" and then does not occur, the probability estimate may have been correct. As the psychologist Philip Tetlock emphasizes, this can only be assessed by checking whether the probability estimates of a specific person are roughly correct over time-that is, the things they say, for example, have a 75 percent probability that they occur, about 75 percent of the time.

But that does not let me or anyone else from doubt that a real invasion would take place. I think was part of my problem and many other people, which experts we spoke to. All people I talked to were strategists and portfolio managers who have been pursuing Russia and Russian stocks for a long time. But if you think about risks, it is dangerous to rely on this kind of insiders. The following told me an investor who lives in Russia:

A [Worst-Case Scenario] is an invasion of Ukraine, in which Russian tanks cross the border and take a large territory. This is very, very unlikely: there is no support in the Russian people. There was support for the annexation of the Crimea. Of my friends in Russia, maybe 10-15 percent of Ukrainian passports-there are many friendly relationships, with the family at one or the other place. It's like in Norway and Sweden. So I would copy this scenario.

Tetlock is happy to remember that experienced CIA experts for Germany had no idea that the Berlin wall would soon fall. It was only the new analysts who noticed that something was wrong. Lesson: In the case of a strict risk assessment, obtain both experienced professionals and people who bring in new perspectives and do not meet the standard assumptions.

In the past few days, many foreign politicians have spoken about how Putin has changed and has become more irrational - that he "is not the Putin we knew". It may be that Putin is more risky now. But this is also a way for surprised people to reduce their own cognitive dissonance to mental illnesses, covid isolation or age. As Tetlock informed me of in an email, this line allows me to say surprised experts: "Well, he would have done what I expected if he hadn't suffered from XX".

In my opinion there is another problem. As soon as we assign a little probability to a result, we often stop thinking intensively about the consequences of this result. In this case, one of the strategists I spoke to said that "it can hardly happen that something worse happens than what has already been praised" - a familiar chorus if burried assets are offered. Well, from the point of view of foreign investors, it is slowly looking that many Russian assets are little or nothing worth if bonds fail and dividends are blocked. Even if you have "stoked" with high returns with a tiny percentage of your portfolio on high -risk Russian assets, a wipeout hurts. Did I think enough about it?

One last thought. What happened this week made me think about the not investable risk again. Are there risks that are simply too complex to analyze them with precision that require investments? Should we have known beforehand that the military conflict in Eastern Europe was one of them? Are there any other, analogous, non -investable risks in the world? Warren Buffett has a "too hard" tray on his desk, in addition to the usual "pure" and "out" baskets, where these risks are. I would be interested in what the readers are currently in this category.

Freedom money flees from Russia

The price of Bitcoin rose on Monday and rose by $ 3,000 within a few hours. But ignore that. The more interesting news was an increase in the Bitcoin buyer, which continued to crash the currency. Long -time bitcoiners triumphed. Here is a :

We could not choose the time or the way in which our small industry became geopolitically critical overnight, but it is up to us.

The NATSEC and NEOCON types will not like the fact that sanctions are bluntly and will soon be overhauled as an instrument, but if the choice between monetary sovereignty exists on a state and individual level and "everyone uses a monetary database controlled by a single government", I would know where I stand.

western sanctions lead to a devastating crash of the ruble and new capital controls, so that Bitcoin uses more than usual as an escape route. As in Türkiye at the beginning of this year, the volatility of crypto is less scary if the official currency has lost half of its value. This seems as if Bitcoin is working as intended.

As we found last week, a "Freedom Money" vision of Bitcoin gains strength that promises to avoid state control. The Ukraine collects millions of crowdfunding bitcoins (including). The Canadian trucker demonstrators joined him after Ottawa sanctioned crypto money exchanges as part of his emergency law. Us and British conservative whip it.

But even for the freedom fighters in Ukraine, freedom money is a double -edged sword. Here is the digital minister of the state Sunday :

I ask all major crypto exchanges to block addresses of Russian users. It is crucial not only to freeze the addresses linked to Russian and Belarusian politicians, but also to sabotage normal users.

You can see the bond here: the attempt to invite money into Ukraine without letting it flee from Russia. The traditional financial system is better equipped for such discrimination, as sanctions show.

But crypto should let money flow free. The lack of state control is not always bad, but it brings hard compromises. Is the throwing of dissidents worth a financial buoy, an leaked sanction regime against Russia? A nasty political struggle for crypto is brewed. ( ethan wu )

a good reading

an excellent political interview with Fiona Hill on Putin's ambitions.