Text size

The stock market had a solid week, with the Dow finishing up 109 points, or 0.66%, and the S&P rising 24 points, or 1.22%. The two bellwethers are again within 2% of their all-time highs.

Clearly geopolitics is as much responsible for the market's ebullience as growing signs of U.S. economic improvement, rock-bottom interest rates, and better-than-expected corporate earnings in the second quarter imparted lift. This latest market surge began a week ago Friday when a Kremlin official made a conciliatory statement about the Big Bear's desire to de-escalate the crisis in Ukraine.

And certainly -- despite a report that Ukraine artillery had destroyed a Russian armored column crossing its border on Friday -- last week brought more signs of reduced temperatures in some hot spots. Even the Israeli-Hamas face-off in Gaza appears to be winding-down in a series of cease-fire agreements.

Last week also saw the Obama administration ratchet up its involvement in Iraq. U.S. airstrikes stemmed the tide of the assault of the Islamic State of Iraq and Syria (ISIS) into Kurdistan. We're even working hand in glove with our new frenemy, Iran, according to our sister publication, The Wall Street Journal. The Iranians were helpful in getting the incompetent Nouri al-Maliki, prime minister of Iraq, to step down last week in favor of a more inclusive Shiite figure. And there was the successful rescue of thousands of Yazidis, a sect that had been faced with slaughter by ISIS for its heterodox beliefs, which combine Islam with Zoroastrianism.

The situation for Ukraine's Kiev government seems to be improving with the aid of the U.S., Europe, and the International Monetary Fund, despite its sinking currency and an economy in shambles. Government forces are tightening the noose around Luhansk and Donetsk, the last Russian-supported rebel redoubts in eastern Ukraine. Russian saber-rattling and bluster have been reduced to attempts to get a convoy of 300 trucks with "humanitarian aid" into the besieged cities. But as the convoy makes its desultory way from Moscow to Ukraine, Kiev, fearing "provocations" or clandestine attempts by Russia to sneak in arms and other military supplies, insists that any cargo be offloaded at the border and delivered by the International Committee of the Red Cross.

If peace isn't exactly breaking out in Ukraine and the Middle East at least some stabilization seems to be occurring despite all the stories of ISIS resorting to barbaric tactics in trying to establish a Sunni caliphate statelet in the swathes of territory it has conquered spanning the border of Syria and Iraq.

Of course, in the hall of mirrors that is Middle Eastern politics, ISIS is fighting our opponent, Syrian despot Bashar al-Assad, while trying to topple the democratically elected Iraqi government we support in Baghdad. This likely means that any U.S. airstrikes can't stray over the Syrian border to ISIS sanctuaries there. Likewise, while we're apparent teammates with Iran in Iraq, our interests diverge with Iran's in Syria. Iran's Revolutionary Guard and its Lebanese proxy Hezbollah are fighting on Assad's side.

TO GET A READ ON WHAT the future holds for the Mideast and Ukraine, we telephoned one of our favorite experts on geopolitics, George Friedman, founder of the private intelligence service Stratfor, headquartered in Austin, Texas. His judgments tend to be more nuanced and long-term than those of the press or Wall Street. He sometimes can veer into the semi-apocalyptic realm. Indeed, ongoing crises are good for Stratfor, which boasts an enviable roster of global clients, including major corporations and numerous government intelligence and foreign-relations arms. But sometimes, it's better to be safe than sorry. And Friedman has had a pretty good batting average.

As far as the Middle East goes, he foresees a decade or more of sectarian and tribal battles -- bloody civil wars that will rip apart the artificial nation states created by the 1916 Sykes-Picot Agreement that sought to reorganize the Middle East detritus of the old Ottoman Empire.

He calls the likely process the "Lebanonization" of the Middle East, pitting Shiite against Sunni, ethnic group against ethnic group, clan against clan, and tribe against tribe in pitched battles, red of tooth and claw. Syria and Iraq probably won't survive in their current form, despite the best efforts of the Great Powers to keep them intact. "Bashar al-Assad, for example, will just become another warlord presiding over a much smaller enclave," Friedman contends.

The U.S. will have no choice but to stay involved politically and militarily because of the region's heft in the world energy market, particularly if the fighting spreads to Jordan, Saudi Arabia, and the Gulf States. Saudi Arabia, for example, has a restive Shiite population on its Persian Gulf coast, where much of its oil-production capacity rests. It also must worry about blowback from radical Sunni groups like ISIS, which it helped spawn and finance, but now worries about.

About the best that can be hoped for, says Friedman, is that exhaustion eventually sets in throughout the region, as it did in Lebanon following its bloody civil war from the mid-1970s to the late '80s. That yielded a weak central government with numerous religious, ethnic, and clan factions, all with their own militias and ever-shifting alliances of convenience. All of this is likely to foster turbulent energy, bond, and stock markets in the decade ahead.

As for Ukraine, Friedman has a different view of Vladimir Putin's performance there than does much of the Western press. Whereas Putin is commonly viewed as the consummate power politician, a chess player many moves ahead of the competition, Friedman claims that he has so badly bungled the Ukraine situation that he might be deposed as president of Russia in the not- too-distant future.

"Forget his sky-high voter approval ratings in Russia," Friedman asserts. "There are rumblings of discontent inside the Kremlin over his apparent loss of Ukraine to the West, in conjunction with a poorly performing economy being driven into recession in part by U.S. and EU economic sanctions arising from confrontation in Ukraine. One shouldn't forget that Khrushchev was dumped by close Kremlin associates in 1964 as a result of the diplomatic humiliation the USSR suffered in the 1962 Cuban missile crisis and economic woes over the next year and a half."

No nation on Russia's periphery is more important to Moscow than Ukraine. After all, it once was Little Russia, the very font of Russian civilization and culture, going back more than a millennium to the Kievan Rus confederation of Slavic tribes. Ukraine has always acted as a key geographical buffer to the Russian heartland, which now is faced with the European Union and perhaps even NATO pushing right up to the border of Mother Russia. Likewise, Friedman points out, the economies of the two nations have long been closely integrated. Much of Russia's military equipment is produced in Ukraine.

The original demonstrations in Kiev that led to the March ouster of Ukraine prime minister and Putin ally Viktor Yanukovych were triggered by Putin's insistence that Yanukovych torpedo an association deal with the European Union and instead accept a loan bailout and trade agreement with Moscow.

Then Putin and his intelligence services misjudged the depth of the anti-Russian feeling in Ukraine unleashed by the demonstrations and the violence of regime countermeasures. Perhaps Putin believed his own ham-handed propaganda that rebellion was being fostered by Western intelligence agencies and neo-Nazi elements in Ukraine.

Finally Putin counted on at least the eastern, Russian-speaking half of Ukraine to revolt against the new Kiev government. But even with plenty of covert Russian support, financial and military, the uprising never really happened, except in a small section of Southeast Ukraine around the cities of Luhansk and Donetsk. Crimea was relatively easy for Russia to hive off, since it was originally part of Russia and populated with lots of Russian military personnel. The rest of Ukraine has proved a tougher nut to crack.

Putin has exhausted most, if not all, of his options, says Friedman. He can't risk invading Ukraine unless he moves very quickly. In six weeks or so, autumn rains will make much of the country's eastern marshes a muddy quagmire that will bog down any tanks he sends in. And, according to Friedman, Putin can't be assured of military success given the sad state of his military forces. "Look how badly the Russians have bungled the planning and execution of the humanitarian aid relief convoy, and it gives you some idea of the actual disarray in Moscow," Friedman asserts.

Besides, any invasion or other overt support for the Ukrainian rebels is likely to induce more sanctions from the U.S. and EU. This would only exacerbate Russia's economic despond. And for this very reason, Russia this winter isn't likely to cut off its natural-gas flows to Europe, which account for about 30% of the Continent's supplies. Russia is too dependent on the cash from energy exports, contends Friedman.

So about all that Putin can do is bet that the government in Kiev will eventually collapse or be pushed back into the Russian orbit. It was the preternatural venality of Ukrainian politicians that allowed Putin to eventually subvert the 2004 Orange Revolution. But this time around, Western governments and the IMF are keeping a closer eye on Kiev. As long as they don't lose interest, Putin's latest ploy will prove no strategy at all, but merely a figment of hope, adds Friedman.

So if the geopolitics of the Ukrainian situation teaches us nothing else, at this point, one should go long the U.S. economy and stock market and short Russia.

Randall W. Forsyth is on vacation.

E-mail:jon.laing@barrons.com

