Stratfor's Friedman Sees A Yawner In Ukraine, Challenges In Russia, Opportunities In Poland, Mexico And Japan

March 10, 2014

George Friedman is one of the leading geopolitical strategists of our time. He is the Founder and Chairman of Stratfor, an intelligence and consulting firm. The bestselling author and political scientist is sought out by various organizations from around the globe for his geopolitical analysis and advice.

Dr. Friedman recently sat down with ETF.com to discuss the Ukraine, the future of Russia and any predictions of contagion in Eastern Europe. He sheds light on the political standoff between China and Japan over the disputed islands in the East China Sea, and what the future holds for the world's second and third largest economies. Dr. Friedman also gives his thoughts on which regions and countries he sees growth opportunities in the coming decade, and the regions where he predicts further roadblocks.

ETF.com: Let's start things off with Ukraine. How do you see the situation in Ukraine resolving? And more specifically, do you see risks of major contagion in Eastern Europe and the global economy?
FRIEDMAN: Ukraine has lost its president. The parliament is the same as before. The factions are the same as before. The ability of Ukraine to move toward the West is limited. And the Russians have not really done anything besides look aggressive. They have moved around their forces in Crimea, but they have forces under treaty in Crimea. So that's not a major event. They really haven't moved forces into Eastern Ukraine.

So there's an attempt by the West to present Putin as being particularly aggressive, which is their privilege, but to this point, it really hasn't been. They talk about an invasion of Ukraine, and that just hasn't happened.

The markets are panicking. What they're panicking about is not clear. The Ukrainian market is not really contagious. It is a basket case. The markets it might affect would be the Polish, which I think are not going to be affected.

But really what we have here is a massive overreaction by the markets to what's going on, which they'll correct in the next few days.

ETF.com: From an investment perspective, is Russia still a legitimate place to invest in? Do you see this as an opportunity or a major red flag for investors?
FRIEDMAN: It depends if you're an investor or a rational being. For a rational being, nothing has happened in the past week to make Russia less attractive. If you're a standard investor, it appears that the world has collapsed.

Again, I have to really emphasize a fact: let's understand what hasn't happened. So if it was a good place to invest last week, why would it be bad this week? Now, there may be structural reasons not to invest in Russia that had been there for a year or two, but nothing has happened here to make it significant.

ETF.com: Do you have a long-term investment view on Russia or Eastern Europe?
FRIEDMAN: Well, it depends what long-term investment is. In the very long term, Russia is weak because it's primarily an energy exporter. And as an energy exporter in a world where new technology is coming out to shift the price of energy, potentially, it's highly vulnerable and it doesn't have other things to invest in.

If you're a consumer of Russian energy, you have a short-term problem, which is that you have to have Russian energy, which is why all the talk about sanctions is nonsense. But on the other hand, in the long term, you might have other opportunities. So given that Russia is primarily an energy play, the long term—over the next five to ten years—it probably isn't going to be there. Over the next couple of years, I doubt that very much will change.

ETF.com: Moving on to Asia, How real is the threat posed by China and Japan over the Senkaku-Diaoyu Islands? Do you see that as a major threat to global securities and investments in those two markets?
FRIEDMAN: No. It's saber rattling. And the difference between war and saber rattling is that in war, you don't signal your intention with saber rattling. The Chinese do not have a major blue-water navy that's capable of engaging the U.S. Navy. They have to assume that if they make a move in these areas, the U.S. Navy will intervene on behalf of U.S. allies. And I think we would. This would really put the Chinese in a terrifically bad military position.

This has been going on for several years, these various island issues. And they're very useful for internal political consumption, but no one's really made a serious, aggressive military move. Nor do I think they will. Because in the end, the United States is a dominant naval power, and the Chinese and the others really can't possibly face the United States.

ETF.com: Do you have a view on China and Japan over the next decade?
FRIEDMAN: On China, we've been very negative for the past five, six years. The Chinese problem is that a little over 1 billion of their people live in abject poverty. And their labor rates right now mean it's more expensive to hire somebody in China than in Mexico. So the comparative advantage of the world has disappeared, which is one of the reasons you see Chinese businesses moving elsewhere.

It will take quite a while for the inefficiencies of the Chinese economy to work itself out. In the meantime, they need to have 7, 8 percent growth rates, because their rate of return on capital is so low. So to maintain any sort of balance of the system, they have to grow very quickly. And in a world where their wage rates just aren't competitive, that's going to be very hard to do.

We're kind of optimistic about Japan. We like the fact that Japan has done everything it could possibly do to displease investors and is still the world's third-largest economy.

The lost generation, in our mind, was not a lost generation. They were not interested in satisfying Western investors. Their debt is held internally. They're really indifferent to what the world thinks. And their primary goal is to maintain full employment. And they did that while maintaining a very modest, but real growth rate. Given the size of the Japanese economy, even small growth rates are impressive.

So our view of Japan is that this is a country that is going to be moving forward over the next five, 10 years fairly impressively. Now, investment is difficult because the Japanese market is not altogether open to foreign investment. They have plenty of capital to invest themselves.

 

 

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