Far Crimea: war comes to Russia’s door

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The Economist Hello and welcome to the intelligence from the economist, I'm Rosie Bloor. Today on the show, how the value of SpaceX affects you and me, and remembering Alan Greenspan, the maestro of monetary policy.

But first... Last week after Ukraine suffered a particularly massive overnight bombardment, President Volodymyr Zelensky issued a warning. If Ukraine burns, your Moscow will burn too. Since then, the intensity of Ukraine. Chinese strikes on Russian territory has been stepped up. Smoke obscured Moscow's skyline as oil refineries were set ablaze. The Crimean Peninsula, which has been under Russian occupation since 2014, has also been attacked.

The campaign aims to bring war to Russians' doorstep. The question is whether it will alter the course of the conflict or simply provoke further escalation. Crimea has been under attack from Ukrainian drones for months now. Matt Steinglass is our Europe editor. Most recently, drones have hit power lines, causing blackouts. The Ukrainians blew up an oil terminal in Kerch. And they have repeatedly hit ferries, which served as one of the peninsula's main arteries of supply. Lories are having a lot of trouble getting through.

They have to take a long highway. but that highway is also vulnerable to Ukrainian drones. It's littered now with the hulks of burnt out cars and trucks. And last week, Mikhailo Fyodorov, Ukraine's defense minister, said that Crimea could, in effect, become an island. That's what he's trying to accomplish. Matt, why is it that Crimea has been so heavily targeted? Crimea is an extremely significant place for both countries.

The military conflict between Ukraine and Russia really got started back in 2014 when Vladimir Putin launched an invasion of Crimea. The reason why Vladimir Putin was so eager to get Crimea was partly military. It served as a huge naval base for the Black Sea fleet. But it was also spiritual. Crimea is a place that Russians claim was the site of an important conversion to Christianity a thousand years ago, which they see as a civilizational marker. It was also a region that they tried for hundreds of years to seize from the Ottoman Turks, hence the Crimean War in the 1850s against England and France. And it became sort of a jewel of the empire, both of the Russian Empire and for the Soviet Empire.

It boasts absolutely beautiful beaches and became a resort area under the Soviet Union. It still is a resort area. Vladimir Putin thinks of it as the spiritual source of the Russian nation. So it is no surprise that he has been very reluctant to talk. about the latest Ukrainian campaigns to make it all but unlivable. You say that Vladimir Putin's been reluctant to talk about the campaigns. How much do Russian people actually know of what's happening in Crimea then? One reason why the Ukrainians are eager to attack Crimea is because when you attack a resort area

that many Russians are familiar with, it registers more deeply in the Russian consciousness than if you just attack random areas of regions that border on Ukraine. Russians are starting to get the news that you can't travel easily to Crimea, that you can't buy fuel there anymore. They shut down all fuel sales at petrol stations last week because they can't effectively get petrol into the peninsula. And that's extremely important for the Ukrainians because Vladimir Putin's control over his country's media system is so tight that it has not been clear until now just how much Russians understand about how badly the war is going at the front and about the costs that Ukraine is imposing.

Now, Crimea is not the only area where fuel is rationed. About half of Russians regions now have rationed petrol because Ukraine's drone strikes on refineries have been so effective. But nevertheless, Crimea is a very good place to hit if you want Russians to understand that there really is a war going on. And Matt, do we know how people in Crimea itself are responding to these attacks? We've had reporting from inside Crimea and the reports that we're getting very substantially, depending on who you're talking to. If you talk to people who are members of Crimea's indigenous population, the Crimean Tatars, they were very reluctant to embrace the Russian takeover.

This is their ancestral land. Under Stalin, they were banned from the region deported and only returned decades later. Their attitude is that they have to stay and tough it out through the Ukrainian attacks because they are insistent on remaining in their ancestral homeland. Russians in the peninsula, people who consider themselves Russian and backed the Russian takeover, find it increasingly difficult to live there. Many of them are becoming pessimistic about the region's future. We heard from business owners in Sevastopol, for example,

that whereas 10 years ago when Sevastopol was taken by Russia, there were a lot of plans for modernizing the city, turning it into more of a commercial port rather than just a naval base, maybe going into winemaking. And now no one sees a future there. And people with money are trying to find places to buy in Russia proper and moving away. We did not hear that the allegiance of people who back Russia was shifting at all. People are anxious in many cases about the idea of a Ukrainian return to the peninsula. Some Ukrainian officials have vowed there will be retribution for people who they consider traitors. But people are tired. They're exhausted by the war. And the overwhelming sentiment is they just want it all to be over.

You talk about strikes on Crimea as one way to bring the war home to Russian people. What about attacks on the rest of the country? Ukraine's ability to strike in places very far from its own borders has changed the level of awareness that Russians have about how the war is going. And it's certainly strategically useful for Ukraine to hit refineries and port terminals in places as far away as St. Petersburg. Or I think they hit Ufa this week, which is 1,500 kilometers from Ukraine's borders. But it's also very important to blow up things that are visible to Russians and that show them that their televisions are not telling them the whole truth about the war. So a few days ago, when Ukrainian drones hit a big refinery and oil storage area in a neighborhood of Moscow and blew the lid off of an oil tank in this incredibly striking sort of science fiction-looking way, that makes a big impression. There are huge towers of smoke rising over the city. If their television is telling them that everything is going great and they're gradually conquering Ukraine, and meanwhile, things are blowing up in neighborhoods in their city, then they know that they are not being.

told the whole truth, and that creates a sense of doubt, and hopefully, eventually, some pressure to end the war. Ukraine's attacks on Russia are strategic then and, as you say, psychological. Are they also having an economic impact? Ukraine's attacks are having an economic impact, but it is not doing the kind of damage to the economy that you would expect. So initially, for example, at the start of the war, Russia's GDP rose quite quickly because the government was spending enormous amounts of money to recruit soldiers,

to buy more military equipment, and so forth. Meanwhile, just in recent months, the war in Iran bumped up the oil price, and because Russia is a huge exporter of oil, that's beneficial to that. Inflation was running at 10%. It's now about half that. Wages are stagnating recently, but overall, since 2019, they're up by about 25%. All that means that Russia's government can continue to finance the war for as long as it wants. So where does all of that leave Russian support for the war?

It's very hard to get a clear sense of public opinion or a meaningful opinion inside a country like Russia. What's more meaningful is sentiment among elites, both very wealthy oligarchs or people placed high in the government's administration. Reports emerged in May that Mr. Vladimir Putin's, political party, United Russia, had conducted some secret focus groups, and that most of the participants in the focus groups said they just wanted the war to end, regardless of whether Russia salvaged anything that looked like a victory from it. One would think that Vladimir Putin would be looking for an off-ramp at this point. The risk that he runs is of being seen to fail. It would be wise for him to figure out a way to do what Donald Trump did in Iran, end the war, and to

clear victory. Matt, thank you so much for talking to me. Thank you, Rosie.

Before we go on, I want to tell you about The Economist Insider, our video series, where our senior editors take you into our newsroom to debate one of the big stories of the moment. This week, we look at the Trumpification of Latin America. Just a few years ago, the region was known for its left-leaning leaders. Now, the right are surging back into power, driven by voters demanding a crackdown on crime. This weekend, Colombia elected a new president, who could be the Trumpiest of the lot. Zani Minton Beddows, the Economist's editor-in-chief, and a panel of my brilliant colleagues chew over the risks and potential rewards of this political ship.

If you're a digital subscriber, you've already got access to Insider. There's nothing extra to sign up for. And if you're listening free, you can watch extended clips from Insider via a link I've put in the show notes.

Two weeks ago, SpaceX went public with the biggest stock market listing in history. Josh John Roberts is our capital markets correspondent. It valued the company at nearly $2 trillion, and it's been on a wild ride since. At one point its share price had rocketed so far that it was worth nearly $3 trillion. At one point it had fallen by about a third. Since then, it's been all over the place. All of this is a sign that investors' enthusiasm for artificial intelligence is really hitting a manic phase in markets.

You say it's been a wild ride, but it's been a wild ride. Those are wild numbers. Who's actually making money out of this? A lot of people. Just after the IPO, Elon Musk, SpaceX's founder, became the world's first trillionaire. The investors who bought the newly issued shares on the IPO date saw a massive pop. So it popped by 20% on its first day of trading, another 20% the next day. At one point, it was trading it over 60% above its IPO price. So obviously, if you had sold then, you would have immediately made a lot of money, having just bought those shares. a lot of investors buy when it's issued and then sell after that first pop.

On day three of SpaceX's trading, there were stories about investors who regretted having sold on day one or two because it popped up even further. But since that peak, at one point it had fallen by nearly a third. So investors who had bought at that peak would have actually lost quite a lot of money. When you have a massive IPO like this, what effect does it have on the stock market more generally? Or those of us, normal people who really aren't doing anything to do with SpaceX? A lot of normal people actually did buy this stock. So unusually for SpaceX, 20% of the shares that were issued in its IPO were issued to what the industry called retail investors. That means ordinary investors like YorMe, individuals, not fund managers or institutional investors. So some of them would be involved. For the stock market as a whole, there are a few things this means. SpaceX almost immediately followed up its share issuance with a debt issuance. It raised $25 billion by issuing bonds. the supply of new assets, shares and bonds, is increasing. The amount of money that companies are asking for from their investors is increasing. So a stock market that previously threw off lots of cash,

as these big tech giants made lots of money, is increasingly sucking in cash instead. And that's a kind of sea change for markets. Is it a problem that people are investing in inherently risky stocks? You talk about a mania. We don't know where all this is going. Yeah, well, markets are there to price risk. So in a way, it's a good thing that investors are taking risks in general. That doesn't mean that every risk that investors are taking is going to pay off or is necessarily wise. One of the weirdest things about this SpaceX IPO is SpaceX has actually never made a profit. Last year, it made revenues of $20 billion. It lost $5 billion. Obviously, investors are betting that's going to change. You wouldn't bend on a company that you expected to lose money forever. But a lot of what SpaceX is doing is untested stuff that, as you say, is very risky. It's got XAI, an artificial intelligence company under it. That's expecting to make money in as yet semi-unknown ways from deploying artificial intelligence.

Data centers in space is another big SpaceX thing. We don't know whether that's going to work. We certainly don't know whether it's going to be commercially viable or how profitable it might be. And obviously, the big one, how you make money from launching rockets and potentially taking people to Mars, I think you'd have to be pretty bullish to not describe that as very risky. So where does the $3 trillion valuation come from? That feels almost plucked out of thin air. Usually the way an IPO works is that the company and its bankers go out and do a roadshow.

They go in front of lots of institutional investors, show the company plan, test appetite for its shares, and work out by asking investors what they'd be willing to pay, roughly where the shares should price. This one didn't work like that. It involved Elon Musk essentially saying a few weeks in advance these shares are going to sell for $135 each, which gave you the valuation. The even weirder thing is that the market then digested that.

That is the price that they were sold at, and even popped afterwards. So there are a couple of interpretations of that. You could say this was all showmanship. The real secret road show did happen. Elon Musk tested what the appetite was. it was $135 and so that's what he sold it for. That could well have happened. I prefer the Elon Musk distorting markets theory, which seems to be that this unique individual

can kind of make markets work as he wants them to work. And we've certainly seen that in this case. Isn't there something of a disconnect, though, because Elon Musk is not the same as SpaceX, the whole company, and he cannot lead it forever. So then how do you value what? actually there? Nobody can forecast a company's earnings more than a few years into the future. So a lot of the time what investors are really doing is trying to figure out short term whether it's going to go down or up. And you need to take way more into account to work that out than just what the company's future earnings will be. The charisma and reality distortion field around Mr. Elon Musk is key for this because it determines whether people are going to be buying

those shares a few days down the line, a few weeks down the line. Now, none of this is to say that there aren't fundamentals, they don't matter. But trying to pass the confusing, sometimes seemingly irrational behaviour of other investors is a key part of what valuing a company means these days. So what you're saying is it is more sophisticated than witchcraft. It's not a science. At what point do we say that the market know actually how much this is valued at? At what is where it's at? Well, I would hesitate to pick a point if I'm honest. But for example, the big index providers that decide when to include a newly issued stock

in their indices, they tend to allow for a seasoning period to allow this sort of thing to happen. For a couple of the indices, for including SpaceX, for example, the seasoning period is only five trading days or 15 trading days. So right now or very soon, it's getting included in some indices. We have to say the very biggest and most tracked index, the S&P 4,000, the S&P 500 index of American shares, they're going to wait a year before they include newly issued stocks in their index. So if you want to take the most conservative view, maybe wait for about a year before you think investors really have a firm handle on this.

And if we're thinking about those big indexes, then if we're thinking about pension funds, things we may not think we're investing in SpaceX, but actually all of us will be. Is that right? Eventually pretty much, yes. So once SpaceX is included in all of of the indices, especially, as I say, the S&P 500, which is very widely tracked, index funds will automatically begin to buy it. It's important to say they won't buy massive amounts of it at first because not many of its shares have been sold to the public so far. So at the moment, we're talking about fractions of a percent. In a year's time, we might be talking about a few percent of the index. Index funds are invested in by enormous amounts of people. Lots of people

put their savings in index funds, I certainly do. Even if you don't do it consciously, your pension is likely invested in lots of index funds. So it's not quite true that people are forced to buy shares like SpaceX, but in practice, unless you go to quite a great effort to avoid it, most of us will be buying shares in SpaceX. So we're all invested in Elon Musk's vision. We all need to take a view on whether it's really going to Mars. Josh, thank you very much. Thank you, Rosie.

Alan Greenspan always liked to go by the numbers. Anne Roe is the Economist Obitories editor. As a boy, he poured over the statistics of his favourite New York Yankees. When he was a bit older, he played saxophone in the Henry Jerem orchestra.

In between the sets, when his colleagues were smoking a little reefer, what he was doing was sitting reading a book on finance or J.P. Morgan and keeping up all the time with the data, the economy, the business cycle, all these things had also interested him a good deal.

He went on to New York University. He rode in 1945. And when he went there, it was the era of Maynard Keynes, the great economist who had advised America on how to come out of the Great Depression. And Keynes' vision was all about government spending, state intervention, and generally a good amount of heavy spending in order to make the economy grow. And gradually, Alan Greenspan fell out of sorts with that. He was actually becoming a friend of a thinker called Ayn Rand,

who had completely different ideas who thought the economy should not be interfered with by the government too much. It should be left to its own devices and what was most. important was the free will of the individual. And this friendship gradually led Alan Greenspan towards the Republican Party. He wasn't really a political preacher much at this stage, but obviously his philosophy was aligning with that one. Because he had become a sort of Republican, he joined Gerald Ford and actually became.

the chairman of his Council of Economic Advisors, advising the president on what to do economically which suited him very nicely. With a deep awareness of the responsibility conferred by your trust, I accept your nomination for the presidency of the United States. It was actually Ronald Reagan who gave him the plumb job in his life, which was to be the chairman of the Fed. This made him immediately the most important economic figure in the world. And he was extremely aware of his own importance and the Fed's importance,

which meant that he would always defend the Fed against any sort of political interference. The central bank system absolutely had to keep its independence from the politicians. That was easier said than done because politicians always wanted easy. money, or they wanted him to lower rates, or they wanted him to raise rates for various political reasons. But he held his own, and in fact, he insisted that President should take his advice. He consulted weekly with Presidents and the Treasury Secretary just to put forward his idea for how the economy ought to be managed. And of course, he was always going according to the data and the numbers and not in order to please the electorate in any way.

When Reagan appointed him, he got off to a rather rocky start because only two months into the job on October the 19, 1987 came Black Monday. When the stock market crashed and lost 20% of its value in a single day, the worst crash had ever been in a single day. He managed to handle it, and he suggested to the government that it ought to cut the deficit and that that would inspire confidence in the economy.

That seemed to work, so he steadied the ship. And when Bill Clinton became president, the economy was really beginning to boom, and he was in charge of it. He made very sure that he consulted weekly, even daily sometimes, with the president and with the Secretary of the Treasury, and he kept the boom going along for more or less the whole of that decade. If people thought it was overheating, he would simply tell them to be cool.

He believed there would be a productivity miracle that would manage to keep the economy thriving as it was without risking inflation. He was right for much of that decade, but then by the end of it, he was beginning to let it get away from him. It seemed, after all, that the boom was becoming inflationary. He warned of irrational exuberance. The stock market was getting a little too excited. And eventually, of course, it crashed. There was a recession.

There was then a jobless recovery. and there was then a dangerous-looking housing boom. So the economy was going all sorts of different ways that were perplexing even to him, and he had to somehow keep command over it, but no longer quite so surely as he had before. By the time he left his job, he had extremely good reputation and left it to great applause,

but he got out just before the global financial crisis. He still defended the Fed when people came and asked him what he might have done otherwise. He defended the low interest rates which had sparked growth. And he was blaming the had economic conditions in America at that time on the failure of the Obama administration as he saw it to stimulate growth. In fact, he thought it was blocking growth.

But all the same, when he produced his memoirs, it was clear that he was beginning to wonder whether he had kept the sure touch that he had seemed to have in the 1990s and indeed long before it. It seemed possibly that the man who had always gone by the numbers had not read them quite so well as before. Perhaps there were, after all, some sour notes in a career that had seemed to make the American economy sing.

Anne Rowe on Alan Greenspan, who has died aged 100. That's it for this episode of the intelligence. weekend intelligence slot, you can hear the final episodes of Topville Road Trip, our fantastic new podcast series on America at 250. The editors of the intelligence are Chris Impi and Jack Gill. Our deputy editor is Sarah Larnuke and our sound designer is Will Rowe. Our senior producers are Henrietta McFarlane and Alise Jean-Battiste. Our senior development producer is Rory Galloway, and our senior creative producer is William Warren. Our producer is Anne Hannah and our assistant producer is Kunal Kash Patel.

With extra production help this week, from Emily Elias, Ellen Asly and Katie Peterson. We'll all see you back here for Topville Road Trip tomorrow.