Isolate Russia at Your Peril

Many of us have a favorable perception of Russian vodka. And of Swiss chocolates, French wines, and the like.

We often believe some specific product (vodka) is likely of good quality if it originates from a particular country (Russia).

We also hold broad-based country-of-origin quality beliefs. For instance, I respond very favorably to “Made in Japan” and somewhat unfavorably to “Made in China” labels across several product categories.

We are, by instinct, cognitive misers, so we are not to be faulted for using the country of origin as a signal of product quality.

But what about the stock market? Should it also skimp on information processing and use country-of-origin information as consumers do to simplify their life. It should not. But it might if the country of origin is Russia! Let me elaborate with an example from the pandemic.

The onset of the pandemic and the accompanying uncertainty rattled equity markets— the S&P500 registered its fastest 30% decline, and the market fear gauge VIX, its highest close. A scared and confused market was desperately craving assurance.

The initial fiscal and monetary policy initiatives calmed the market, but it wanted medical news about taming Covid-19.

The first Covid-19 related medical result was regarding Gilead’s antiviral drug, Remdesivir. The market lustily cheered this result despite Remdesivir’s limited efficacy— its use reduced the hospital stay of Covid-19 patients from 15 to 11 days but did not reduce the mortality rate. The market probably cheered the general finding that antivirals can work against Covid-19.

Next, the market awaited the results of vaccine trials; news of an effective vaccine would herald the beginning of the end of the pandemic.

The first positive news about a vaccine trial came eventually. But the US stock market plain shrugged it off. Why did a market willing to clutch a straw on the medical front completely ignore positive news about a Covid-19 vaccine? Well, the country of origin of the vaccine was Russia. The market seemed to have acted no different than how I let the country of origin influence my product evaluations.

As we know now, the Russian Sputnik V is among the successful Covid-19 vaccines. But in 2020, the market, a forward-looking mechanism, did not validate this vaccine initially.

What do I make of my observation that the market used country-of-origin information to disregard the Russian vaccine? That the US stock market completely ignored the news of a Russian vaccine is telling, more than anything else, of the widespread and deep-rooted downgrade of Russia in the American mind. A contemptuous mindset is generally problematic.

During the Cold War, America was paranoid about Russia and carefully analyzed everything Russia did. Now it treats Russia with disdain. The pendulum has swung too far.

Following the dissolution of the Soviet Union, there was a unique window of opportunity to establish a new world order of sorts. America and Russia could have forged a symbiotic relationship given that the “evil empire” had fallen. Foes could have become friends.

The Cold War was grounded in ideological differences regarding political and economic systems. After these differences disappeared, there was a need to reimagine the US-Russia relationship. But we are so locked in our existing thought and behavior patterns that it is hard for us to change even in the face of a paradigm shift. American policymakers mostly continued with business as usual.

Russia, reeling under the burden of radical political and economic restructuring, was no longer the threat it was perceived to be during the Cold War. It was time for European countries to be fully responsible for their defense.

The Warsaw Pact, established to counteract NATO, died in 1991. NATO should have scaled down and disbanded. Instead of scaling down, NATO went on a reckless expansion spree. The only apparent goal of this expansion was to isolate and corner Russia, at least as seen by Russian eyes. This isolationist policy has come to haunt us now.

Unfortunately, the only viable response available to the United States, and its allies, to the Russian invasion of Ukraine was to administer a booster dose of isolationism through economic warfare.

The boomeranging effect of this latest isolationism is already reverberating through commodity and securities markets. There is a chance that the current economic warfare could trigger considerable and widespread economic pain, especially for vulnerable bystanders.

Russia is not a run-of-the-mill country that can be militarily and or economically isolated without far-reaching consequences for everyone else. Instead of isolating Russia, the United States should engage Russia just as it engages Germany, France, Italy, and many such European countries. Take the NATO expansion to a ludicrous end by making Russia a member!

I guess Biden is not the guy who can even think of something different regarding Russia. He is affable; he gave an entertaining commencement speech at my son’s graduation ceremony. He is suited for making graduation speeches but not treading a different international relations path. Currently, he is busy scaling up our proxy war in Ukraine by doling out one military package after another.

After the war in Ukraine ends, America needs to take a hard look at what it has learned from its Russia experience since the early 1990s and, in the future, discard its isolationist approach, which has not worked.

I believe the main policy lesson is—Isolate Russia at Your Peril.

Notes

Country of origin is one of the multiple cues such as price, brand, warranty, and retailer reputation that we use as signals of product quality. Relying on cues to ascertain product quality might result in less-than-optimal decisions, but it saves us time and effort. This time-saving effort makes sense for us but not for stock markets.

In May 2020, Russia released the results of the first two phases of the Sputnik vaccine trials and registered the vaccine for use three months later. Russia approved the vaccine without phase three results. There was scientific skepticism regarding Russia having approved the vaccine without phase three results. This skepticism might have been valid. But Russia is a science and technology powerhouse. These guys knew what they were doing. In any case, fast-tracking Covid-19-related medical trials were the norm everywhere, including in the United States.

A somewhat rigorous data analysis is required to examine the market’s reaction to the Sputnik vaccine. However, to make my point, my observational example is alright.

After the Cold War ended, USA and Russia did work toward arms reduction and economic cooperation, but whatever they did was within old policy frameworks.

I have used Russia and USSR interchangeably.