Finance Leaders Forum: A Conversation with Professor Stephen Kotkin, Kleinheinz Senior Fellow at the Hoover Institution

October 20, 2023

Mizuho is sensitive to the events in the Middle East that occurred during the second week of October and the global repercussions. This discussion about the conflict between Ukraine and Russia and relations with China is still reflective of the situation in those regions but should be noted that it was recorded in mid-September as part of the Mizuho Finance Leaders Forum.

John Buchanan, Chief Information Officer at Mizuho Americas, sat down with Professor Stephen Kotkin, Kleinheinz Senior Fellow at the Hoover Institution at Stanford University, for a Q&A on the Geopolitical Landscape with a focus on China and the Russia-Ukraine conflict. China’s Communist party is a political monopoly that will stay its Leninist course while there’s no end in sight for the Russia-Ukraine conflict, Professor Kotkin told forum attendees.

Russia may yet surprise the world with an attack on Ukraine in time for U.S. presidential elections next year.

China’s political party is a structural monopoly that shows no signs of loosening.

“If I can’t have it, no one will,” underpins Russia's foreign policy strategy with Ukraine and China’s with Taiwan, Professor Kotkin said.

Finance Leaders Forum: A Conversation with Professor Stephen Kotkin, Kleinheinz Senior Fellow at the Hoover Institution

The Russian-Ukraine conflict shows no signs of slowing and may even intensify next year during the U.S. presidential election, and the repricing of risk in China is far from over, Professor Stephen Kotkin, Kleinheinz Senior Fellow, Hoover Institution at Stanford University told Mizuho Americas Chief Information Officer, John Buchanan during a Q&A discussion on geopolitics at Mizuho’s Inaugural Finance Leaders Forum on September 14th in New York.

“So this is the ninth year of the war. It started in 2014. It didn't start in February 2022,” Professor Kotkin said. “And it's existential for Ukraine. And the Russian president has staked his historical role on this. And so it could go on for some time.”

During the interview, Kotkin referenced the Tet Offensive in the Vietnam War in 1968 when the North Vietnamese and Viet Cong launched an offensive against South Vietnam and the United States. The surprise attack at the time, which failed on the battlefield, proved to be a political triumph, leading the American public to believe that the war was unwinnable.  Lyndon Johnson decided not to run for re-election.

If the Russians launch an offensive against Ukraine next year, it would be a “political triumph, whatever the battlefield effects,” Kotkin said. “President Biden is up for re-election, just like Lyndon Johnson. So this is basic history 101 and if I know it, the Russian president knows it.”

Noting that it could tip the balance politically, he said, “The US and its South Vietnam allies were able to win all the tactical battles during Tet.”

But that wasn’t the issue. The fact that the North Vietnamese even mounted an offensive was shocking to the military, the media and politicians.

“It just means that we could be surprised in a negative way here,” Kotkin said.

 “No wider war” = Risk Fatigue

John Buchanan then segued the interview toward how company leaders can appropriately weigh the risk of the years-long conflict.

The U.S. has given more than $44 billion in military aid to Ukraine since 2014 to help it hold its borders, preserve its territory and promote interoperability with NATO, according to the U.S. Department of State.  

Despite sending military aid, there is no appetite for an all-out war, Kotkin said. The U.S. does not want soldiers on the ground fighting in Ukraine and neither do other nations, Kotkin added. “So we do things, but we're cautious and we don't do some things because we're afraid to cross the line,” he said.

The U.S. has respected Russia’s sovereignty; Putin has respected NATO’s power.  The Biden administration has observed limits in sending certain kinds of support to Ukraine to not provoke a wider conflict, Kotkin said, but Russian President Putin has not attacked the Western military supplies at the point of origin and entry.

“So the policy of President Biden from the beginning, which has not been well articulated, is no wider war,” he said. “We don't want a direct NATO-Russia engagement. We don't want Putin to instigate trouble in other areas of the region or world to make the war in Ukraine a more global war or more regional war.”

The public framing of the war, however, is that the “international order is at stake,” Kotkin said.

“If we don't stop Putin, Xi Jinping takes Taiwan, or worse things happen. So the stakes are said to be existential for global order and democracy,” he said. “And yet, we can't fight on the ground.” Both of these points cannot be true simultaneously.  If the world order is at stake, we should be sending half a million troops – Americans, German, Poles, to the fight.  If we’re not sending them, how can the world order be at stake?"

For financial leaders who need to make decisions related to the region, this strategy of supporting Ukraine but not provoking or getting involved in a wider war is contradictory, making it hard to manage risk, Kotkin surmised.

China Risk Still On

The conversation then shifted to whether or not it’s time to reprice risk in China. Kotkin laid out his argument that the repricing has been going on for some time and arrived at: “I don't think we're anywhere near the end of the repricing of risk in China.”

Among the reasons: China’s middle income trap, which is generally defined as nations with high growth rates while the bulk of its citizens still fail to advance that then fall of a cliff growth-wise.  

While China is known for its top-tier universities, and half of the population is considered middle class, the other half has been left behind.  Almost two-thirds of Chinese didn’t graduate from high school.

China’s “supposedly fantastically efficient authoritarian regime” is less a panacea for lifting a portion of its population into the middle class, as analysts claim, and more of an Achilles heel, Kotkin said.

He noted that the Communist Party can rule only as a monopoly and said its leader Xi Jinping was chosen to keep it that way with its Leninist party structure.  It is not personal whim.

“He's playing for keeps,” Kotkin said. “This is not something that's passing like, oh, next year it's all going to be finished, I didn't mean to reinsert party control over the private sector. I didn't mean to destroy the tech companies that control the public sphere and are a threat to the Communist Party's monopoly. I didn't mean to eliminate the private sector education companies which socialize youth and values that are different from the party's values. I take it all back.”

Companies operating in China, if they want to stay, will in many cases need to create fully-standing subsidiaries that are completed unrelated to the core firm, Kotkin said.  Many have already done this.

If the United States imposes sanctions on China, American companies will remain at risk, “and you can reduce your exposure by creating a solely China version of your company to try to stay in the market and ride it out without losing your entire investment,” he said, adding China overall is still a very complex risk environment.

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