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MFG Asset Management 2022-inreview

"In Conversation"

with Leon Panetta

Today’s challenges will shape the 21st century

Leon Panetta,Former Secretary of Defense and CIA director

Leon Panetta,
Former Secretary of Defense and CIA director

Leon Panetta,<br>Former Secretary of Defense and CIA director

Leon Panetta,
Former Secretary of Defense and CIA director

Leon Panetta has had a remarkable career, having been US Secretary of Defense, Director of the CIA, White House Chief of Staff and a Congressman representing California. Secretary Panetta joined Portfolio Manager and Head of Macro Arvid Streimann to discuss some critical global issues.

Q:  There’s a lot going on in the world today. The rise of a superpower in China, the war between Russia and Ukraine, and increasing partisanship. How uncertain do you think the world is today?

A:  I think we’re looking at a world that is both very dangerous and at a pivotal moment that could tell us a great deal about what the future holds in the 21st century.

In many ways, what happens in Ukraine will tell us a great deal about the future. I’ve never seen NATO more unified than it has been in confronting Russia and supporting Ukraine. If that combination of courage and bravery on the part of Ukrainians, plus the support of the United States and our allies – if that can come together and the result is a defeated or weakened Russian President Vladimir Putin and Russia, I think that will go out as a message to others like China, North Korea, Iran, and terrorists.

I think it can also tell us a great deal about whether or not democracies can sustain themselves in a way that can really give them the ability to strengthen and develop in the 21st century – as opposed to autocracies.

Q:  That gives an interesting sense of perspective. In investing, we look at the world with uncertainty and say, “there’s a reason to be worried.” How worried are you about the conflict in Ukraine?

A:  If you think about World War I, it set the power struggle for the 20th century. What ultimately happened was a failure of efforts to try to find peace in the world that led to World War II and the US confrontation with the Soviet Union. That table was set as the result of what happened in World War I. I look at the war in Ukraine as having that same impact in terms of setting the table for what happens in the 21st century.

I see three potential outcomes now that we’re seeing a war of attrition develop. If it’s a long war of attrition, that may play into Putin’s hands because I think he’s trying to wear down the United States and our allies and Ukraine. The longer this war goes on, the more concern there is about the unity and whether you can really hold these countries together. So, I think probably the worst result would be a long war of attrition.

The second possibility is a negotiated settlement of some kind. My concern is that this could have happened a long time ago if Putin wanted it to happen. I think he wants to gain more territory and more leverage. I think he’s concerned that unless they’re able to hit back, Russia somehow will lose face and be viewed as a loser.

The third is that it escalates and somebody makes the wrong kind of decision and suddenly we find Russia using either gas or chemical warfare or some kind of battlefield nuclear weapon. If that happens, one of the worst consequences is it could very well lead to World War III.


“The key right now is for the United States and our allies to maintain unity.”

My view is that the key right now is for the United States and our allies to maintain unity, maintain that dedication to supporting Ukraine. I think Ukraine President Volodymyr Zelensky is right, if he could bring this war to some kind of conclusion by the end of this year, then I think we could get a good result in the sense that Russia, no matter what they may maintain, will be viewed as having lost and Putin will have been weakened.

Q:  There are also questions as to Putin’s goals. I think the most common answer to that question is that he wants security for the Russian motherland - is that actually what he wants?

A:  I have to go back to, as director of the CIA, the basic intelligence on Putin is that he’s KGB. That’s what his background is. That’s where he comes from. I think having been in the intelligence arena for a long time, he’s paranoid. He’s very suspicious of the United States. I think his principal goal is to undermine the United States as well as other democracies. He has a czarist approach to Russia, to regain lost territories and rebuild the empire of Russia as it was.

If Ukraine can manage the capability of pushing the Russians back at a time when I think the Russian forces are depleted, then I think Putin has a very tough decision to make – does he face a total loss on the battlefield, or does he try to negotiate and at least gain some face in the end? The only way to get Putin there is through the use of effective force.

 

China rise as a superpower

Q:  The rise of China as an economic superpower comes from a consumer desire for cheaper goods. But it’s coming at a cost and we’re starting to see some fractures in the relationship between China and America. How do you see it panning out over time?

A:  China is a strong economy and we’ve developed relationships in terms of trade. If you’re going to deal with Chinese President Xi Jinping, you’d better do it from strength, not from weakness. If Xi reads weakness on the part of the United States or our allies, then he’ll try to take advantage of it. That’s what he’s done to date. When the US pulled out of the Trans-Pacific Partnership (TPP), Xi immediately went into those countries and tried to take advantage of that.

It's important that the US has a strong alliance in the Pacific, both economically and in terms of security. The US, Australia, South Korea, Japan, India, the Quad, the ASEAN countries ought to come together in a strong alliance, similar to the way the US and NATO came together.

China will look at that alliance and realise that they don’t have much of a choice but to try to reach out if they want to maintain their economy and where they want to go in the future.

I go back to conversations that I had with President Xi when I was Secretary of Defense. Normally in those meetings, both sides get their talking points out, say what they’re supposed to say, but it doesn’t really accomplish a hell of a lot. With Xi, there were no talking points. He basically sat down and was very frank and direct with me because we had just made the pivot to the Pacific in our defence policy and he raised concerns about that. He said, “What are you doing pivoting to the Pacific?” And I told him, “Look, we’re a Pacific power, just like you’re a Pacific power. And we have an interest in the Pacific, just like you have an interest in the Pacific and very frankly, there are areas where we could work together. Areas like dealing with North Korea and their problems. Like dealing with trade, dealing with disaster assistance. You’re a Pacific power, we’re a Pacific power, it would be much better if we were working together to do that.” And he reacted to that and said, basically, “You’re right. To a large extent, that would be a better path to peace and prosperity than having a confrontation.”

I think that Xi is much more pragmatic about what steps need to be taken to ensure that China has a strong economy and moves forward in the future. I don’t think it requires a confrontation of some kind or a crisis in the way Russia did. You can offer China the opportunity to resolve some of these issues, whether it’s technology, space, cyber, or other areas where we have to have a dialogue and figure out where we’re going.

At the same time, you have to make it very clear that China cannot advance their interest in the South China Sea, that they cannot show any kind of aggression towards Taiwan, that what happened in Hong Kong is unacceptable in terms of what happens in Taiwan. I really do think you could have a positive dialogue, but it has to be from strength, not from weakness.

It makes sense for us in the Pacific to try to develop a strategy for how we can work together, to try to make sure that the islands and other areas in the Pacific know that if they really want to develop their economy, if they really want to develop their security, if they really want to develop their country, they are much better off working with us than working with China.

 

Growing partisanship

Q:  When people talk about China, many say China’s foreign policy is an extension of its domestic policy. Maybe you could say that for other countries as well. Is the increase in US domestic partisanship a powerful influence on geopolitics?

A:  It’s an important issue that can tell us a lot about whether or not the United States can be a world leader. To be a world leader, the US has to show that it can govern its democracy at home.

If you want to look at threats to our national security, the biggest threat is the dysfunction in Washington. The partisanship and polarisation that often interferes with the ability of the country to come together to deal with major issues confronting our country.

There are going to be challenges in a free society. There are going to be differences. But, ultimately a democracy has to be able to govern and deal with the major issues.

There are signs that, despite polarisation and disruptions as a result of what happened on January 6th 2021, there is a willingness to work together. You’ve seen it on infrastructure, on Ukraine, on gun control. Political leaders were able to come together and compromise.


“To be a world leader, the US has to show that it can govern its democracy at home.”

It’s going to require leadership. In a democracy, we govern either by leadership or by crisis. If leadership is there and willing to take the risk associated with leadership – and make no mistake about it, whether in business or politics, if you’re going to lead, you’ve got to take risks. If you’re willing to take those risks, then I think we can contain crises in the future. If leadership is not there, then we’ll govern by crisis. And that’s when our democracy really weakens itself. The price you pay is the loss of the trust of the American people in our system of governing.

Ultimately, I have to place my trust in the American people that regardless of the politics, regardless of the loudmouths, regardless of the demagogues who often appear in politics, I think when you look at the country itself, whether it’s a red state or a blue state, there are common values that are represented. Having a good job. Raising a family. Educating kids, providing healthcare for themselves or their family. The rule of law. It’s ultimately those values that show up at election time and I see the American people willing to be the ultimate check in our democracy.