"So I'm going to talk to you a little bit about winning the peace.
We only talk about winning the war, but winning the war is not nearly as important as winning the peace.
You can win the war and you can lose the peace.
Let's call that Afghanistan.
Let's call that Iraq.
Let's call that many other examples.
So if you're in a war, how do you win the peace? And winning the peace is a multi-generational question.
So if you gain some territory today, you didn't win the peace.
Somebody can come back for that territory tomorrow or next year or the year after.
So winning the peace is much more important and much more complex.
So for about 14 months now, I've been discussing with some of our best minds in intelligence and defense how they define victory and, more importantly, how they plan to win the peace.
I'll just give you one example and then I'm gonna go backwards in time and a little bit sideways and then come back out at the end with an answer if that's okay if you'll tolerate that kind of meandering.
So, um, if Ukraine recovers all the territory that's internationally recognized territory of Ukraine but doesn't get into the European Union and doesn't get a security guarantee, would that be winning the peace? Would that be victory of any sort?
But if it didn't regain its territory but got into the European Union through an accelerated accession process and got some type of security guarantee, but a lot of its land was still occupied, would that be a victory? Which one of those scenarios would be a victory? It's pretty obvious that the Ukrainian people twice risked their lives to overthrow domestic tyrants in order to get into Europe, and so that's really the only definition of winning the peace that works.
So if you want to get into Europe, let's imagine you're able - you're not, but let's imagine you're able to retake Crimea militarily. So then you have a predominantly, almost exclusively Russian population now inside your borders that can be instigated in a permanent insurgency against your country. What's that going to do for your EU accession process? What's that going to do for your security guarantee? Who's going to give you a security guarantee when you have a multi-million Russian population that doesn't want any part of your country?
And so, there are sentimental and understandable definitions of victory which relate to the atrocities that are committed. The whole war is an atrocity, right? The aggression, it's nothing but an atrocity, and we hear about the atrocities and it's just heartbreaking. At the same time, we need to win the peace."
So, how are we going to win the peace? Okay.
So, uh, if we agree that might be an interesting question, now we're going to step backwards and approach it from an angle that's maybe unexpected, or let's hope it's unexpected. And keep eating those desserts, even though you're watching your waistlines, because we're going to need the sugar levels to stay high for another 20 minutes or so. Honestly, at my age, this hour at night is a little bit warm. Somebody's talking, I'm ready to go down. Not that you people are my age, I see a lot of youth here.
Alright, I got Bruce, I got you on the other side of me. So let's talk a little bit about China. We have a lot of stories about China, and they're not true. Deng Xiaoping, who was a pretty remarkable fellow and was shorter than I am, so I will get a big place in my heart for somebody that I can look like this to, rather than Paul Volcker who was down the hall from me at Princeton. "Hey Paul, how's the weather up there?" You know, that kind of nonsense. He was 6'5", I used to be five six, anyway.
So, Deng Xiaoping, this little guy, he's looking over the water at Japan and he's saying, "You know, this place was bombed. 40 cities were firebombed with higher casualties than the two cities that were nuclear bombed, and this place was a wreck. And now they're the second biggest economy in the world. What happened right in his neighborhood?"
And so he's looking at that and he's saying, "They got a secret formula here. They manufacture stuff and they sell it to those crazy Americans. This gigantic American consumer market, this domestic market in America, is just so insatiable. If you can make stuff that the Americans want, if it's good enough that the Americans will buy it, you can grow rich. In other words, you can use the American middle class to create a Chinese middle class by manufacturing things that these crazy Americans will buy. Because that's what Japan had done, and because that's what South Korea did, and that's what Taiwan did. Both South Korea and Taiwan are former Japanese colonies, and Japan was very involved in the post-colonial transformations in both of those places.
So there's a formula here, and it was a very successful formula, and it's not very many countries, and it's East Asia. And so that's the strategy now. So to hell with this crazy Soviet model. And anyway, Mao Zedong, the lunatic that he was, destroyed the planning bureaucracy in China because he sent them all down to the village to do manual labor during his Cultural Revolution, and so he undermined the ability of the Chinese state to do the planned economy.
So that by the late '70s, when Deng Xiaoping gets credit for reform, the peasants themselves, not wanting to starve again, have recreated market relations in the southern cone of China, the monsoon rice-cultivating wet rice part of China. And 300 million or so peasants rejoined the market economy on their own, without any communist directives necessarily. There were some communist directives - you can trade onions, but you can't trade rice. They traded the rice and they said, "Okay, you can trade the rice, but you can only trade it on Tuesdays and Thursdays." They traded on Monday, Wednesdays, and Fridays too.
So there were lots of communist decrees about the market economy, and they were grudging concessions to allow market behavior that were behind the peasants'
And then the peasants built businesses, and some moved to the city. The FDI came from Japan and Taiwan, and it went through Hong Kong, which was a British financial center with the rule of law.
Remember how they say, "How come Gorbachev didn't do a Deng Xiaoping?" No Hong Kong, no Hong Kong. You have a financial system that awards money not for Communist Party reasons but for capital accumulation reasons. Okay, so you got Hong Kong, you got Japan with the FDI, and you got the American domestic market. You have ingredients here that no one else has, and you have Deng Xiaoping smart enough to do this, and you have Mao who leveled the playing field and made this possible. And then you have the Communist Party taking credit for the entrepreneurialism of the 300 million people who were let loose to engage in market behavior again.
So that's what happened in China. It's not the story we have. The story we have is the Communist Party from the top-down introduced reforms, and those reforms were successful. So the Communist Party in China gets the credit for the market revolution, never mind that the Communist Party officials stole the businesses that the peasant entrepreneurs created like parasites. Okay.
But the strategic move from Deng is to go for this. The hell with the Soviet model. We're going to divorce the Soviets, we're going to poison them and let them die, and we're going to go. America is going to be our economic partner. And Deng goes to Texas, he goes to a rodeo, he puts on a 10-gallon cowboy hat (you've seen the photograph), that was about eight gallons more than Deng himself was. And it works.
And then in the '90s, when Jiang Zemin, who's a Deng protégé, comes in, Jiang brings back the Soviet Union, which is now Russia, as a mistress. So Deng has divorced the Soviet Union, married the United States, and then Jiang brings the Russian mistress back into the picture because the Russians have a military-industrial complex, which is dead, it's dying. And Jiang and the Chinese bring it back from the dead and begin to build a Chinese army on the basis of the Russian military complex, which is the old Soviet doomsday military complex. So, this is the story of what happens in China, meaning that they ditched the Soviets and then they bring the Russians back, but only as a partner in building their military up. Okay.
And Russia is a mess. Some of you might have been investors there, some of you might have visited there, some of you might be refugees from that part of the world. The '90s is a mess. We have this vocabulary of reform once again, like with the Chinese Communists. We pretend that things are called reform that they're directed from the top, rather than the chaos and the breakdown and the collapse that they're experiencing. Okay, in the '90s, right, the Soviet collapse kept going way after 1991.
Putin comes along and he arrests the Soviet collapse. They get lucky with the 1998 debt crisis and financial collapse because it makes the exchange rate of the ruble is now such that Russian products are much cheaper abroad, and imports are too expensive, so it gives a boost to Russian domestic industry. And guess what? The Chinese boom that Deng has launched has now raised the global demand for everything - cement, fertilizer, ammonia, all the phosphates, metals, even junk metals. The Chinese can't get enough of everything.
So the Soviet Union comes back from the dead after 1998, after the financial crisis because of insatiable Chinese global demand for everything. China is growing at such a clip. The China-Russia direct trade is minimal, it's almost nothing. But because there's a finite amount of raw materials and industrial inputs globally, it doesn't matter if it's direct or not. The price of everything is rising, and those of you who rode the commodity markets understand. Commodity markets are volatile, but there was a long bull run in commodity markets based upon Chinese insatiable demand.
And so, lo and behold, Russia comes back, and this guy Putin is having seven percent growth, which people think is per year, which people think is oil. The average price of oil in his first term is $35 a barrel, and the average price of oil in his second term is $70 a barrel. And he's growing at seven percent a year. And when he gets to $100 plus dollars a barrel, his growth ends, and he hits a wall.
So, the idea that oil is where the Russian growth came from ignores the sensational Chinese demand globally. The Soviet Union produced a massive amount of low-quality stuff, and now the prices were really good. And so, this story adds to the Chinese story. Russia comes back from the dead, and China brings Russia back from the dead, just as America is building China's boom through this Japan model with Taiwan, Japan, and Hong Kong as the story. I'm simplifying a little bit because you don't have 15 weeks and $85,000 to hear the whole story. That's what college costs in America. I know it's kind of absurd, but anyway, we're simplifying a little bit.
So, you have the development of a Russian-Chinese relationship here that wasn't planned. It's circumstantial, it's what we call in the sciences an emergent property. If you know complexity and systems theory, it's not something that anybody intended. It's something that came together and happened.
Okay, and now China has risen and is very successful. Yes, about 700 million people lifted out of poverty, which is a breathtaking story. And if you've been back and forth to China since the '80s, which I have, you know it's real. At the same time, 600 million people in China live completely outside the market economy. They are not educated, they don't have healthcare, they don't have eyeglasses. They are destitute, no education to speak of, no human capital investment. They've just been left out by the regime, mostly from the interior part of the country. 600 million people, it's very substantial, but anyway, you have the 700 million people lifted out of poverty, many of whom joined this middle class, and there's a class of billionaires.
So then, what happens? Gorbachev gets the idea that communism is reformable, that you can have socialism with a human face, you can revive this thing. It doesn't have to be Stalinist, it doesn't have to be corrupt and inefficient, it'll get a second wind. So he begins to liberalize the political system.
And the same thing happens in the Soviet Union that happened in Hungary in 1956 and Czechoslovakia in 1968. The party decides it's going to open up and liberalize, have debate inside the party. And someone stands up and says, "You know, I don't want your party. I don't like your Communist Party." And they say, "No, that's not the deal we're having. We're liberalizing the Communist Party monopoly. We're allowing you to debate inside the party." And people say, "Well, no, no party, no Communist Party. What about a different party?" And so, you have this problem where political liberalization has no equilibrium, it has no point where it stops and is successful. You can't turn off the process once you open up; it begins to just unravel and the monopoly disappears. Because you can't be half-communist, just like you can't be half-pregnant. You either have the monopoly or you don't.
So, you can liberalize the economy, you can allow market behavior in the economy, but you can't allow liberalization of the political system because then you lose your monopoly. And it happened in Hungary in '56, in Czechoslovakia in '68, and in Gorbachev in the 1980s. And so, guess what? The Chinese Communists begin to study this question. They begin to study the Soviet collapse.
They say, "You know what? We can't do this. We can't liberalize our system, we can't open our system politically because we'll end up like Gorbachev or we'll end up like Dubcek or we'll end up like Imre Nagy in Hungary." So, we're not going to open it up politically.
And so, you have the Western world integrating China through trade and investment in order to bring China along to look more like the West politically with the rule of law and everything else. And you have the Communist Party regime in China refusing ever to open up politically because it's suicide.
So, we're playing the game of economic integration leading to political and legal transformation, and they're playing the game of never allowing political and legal transformation. And you can talk about this until you're blue in the face throughout the last 30 years, and you can write essays about it, you can write whole books about it, and you couldn't persuade people, especially the investment class, that the Chinese Communists were not going to commit suicide.
There's a guy I know, he's exactly my height, he talks like Joe Pesci, and he wrote this book that was pirated and translated into Chinese on the Soviet collapse. This book explains that you can't politically open up and stabilize the situation; it's just suicide, and he proves this in his book. Then he goes to China, and it turns out there's this pirated Chinese translation of his book, which they study at the party school. And there are all these guys with these dog-eared copies of the book, and who is the head of the party school? This provincial character named Xi Jinping. And so, all they're studying is "no Gorbachev, no political opening, never committing suicide."
And I discovered this because I'm looking across the table and there are these Chinese characters in it. So, anyway, it's very interesting. And now he's in charge, he's the CEO now, and his story is not a story of friendliness towards the West because the West is a threat to him. The model that you have in Canada and we have to a certain extent farther south, and that we have in Europe, Australia, and Japan, and Japan is Western but not European, Western is an institutional, not a geographic proposition. It's a direct threat to the Chinese.
The existence of Taiwan, which is an alternative political system, is a direct threat to them. And so, here we are now in this world that we've been in for the whole time, including under Deng Xiaoping, but we didn't understand this because we thought we were playing a different game of economic integration leads to political transformation, rather than "never on my watch because we're not going to be Gorbachev."
So, we kind of got in the wrong game or we didn't understand the game that we were in. And so, here we are now. This brings us to Ukraine and winning the peace. And then we'll go for questions. I could go on at length about this.
Honestly, I wrote the book. I mean, I don't know how else I know. That's a joke, but it's not a joke. It's true, actually. And yeah, I had a rough ride coming up. I didn't get to Stanford yesterday. You know, yeah, there were some challenges along the way. I got really high test scores for college, and they were too high, so they put me in this round room and told me to go find the corner, and I couldn't find the corner, so they denied me admission. Yeah, they got games like that now, still, too, honestly. Stuff like that happened to me, but whatever, here I am now in Canada.
So, I've obviously reached heights that were not imaginable way back then when I was on the floor in my own vomit, not having reached the bathroom when they had a carotid artery surgery. The guy who opened the back, then there were no statins, and so they had to scrape the plaque out of the artery, the carotid artery opened up, and the blood was gushing. And I started like this, and I didn't make it, and my medical career was over. I won the medal in freshman chemistry at the university, 725 students in freshman chemistry out of 1100, and I won the medal. And there it was, and so here I am today.
So, it was not a linear process, but anyway, just to finish up, now how does this work for Ukraine? It turns out that in order to win the peace, you need an armistice. You need an end to the fighting. You see, Ukraine needs Ukraine, but Russia doesn't need Ukraine. Russia has Russia.
So, let's imagine you have a house with 10 rooms, and I come into your house and I steal two of your rooms and wreck them. And from those two rooms, I'm wrecking the other eight rooms. You prevent me from taking the other eight rooms with your courage and ingenuity on the battlefield, but I'm still occupying two of your rooms and wrecking the rest of them. And you have more than a million, a million and a half of your children going to school in a language other than Ukrainian, in Polish and German. And so, another year passes, and another year passes, and are they still Ukrainian?
And you don't have a budget, you don't have an economy, you don't have customs duty, you don't have tax revenues, and you're dying. That whole courageous, ingenious Ukrainian Army that we saw is dead. They're gone, they're dead, or severely wounded. And you're burning through your ammunition and burning through stuff that nobody's increasing production. We're just giving stocks. If you want to increase production, you want to open up two new assembly lines to produce munitions when you're a private company, and they give you a two-year contract, and you say, "Okay, I'll deliver in 2025." But maybe the war is over in 2025, and you've just built two new assembly lines. So, you need a 10-year contract, not a two-year contract before you're going to open up two new assembly lines, otherwise you get stranded assets. That's where we are in the war. You're not winning if someone is destroying your house, no matter how valorous, no matter how amazing your resistance has been, because the Russians, they got their own house. It has a thousand rooms. They don't need your house, but you only have one house, Ukraine.
So, an armistice sooner rather than later, regaining as much territory as possible, but a demilitarized zone, an EU accession process that's more accelerated than the ones the Western Balkans are going through, a security guarantee which is not going to be NATO. If you've been to Germany, you understand NATO works on consensus. There's no possibility of Ukraine in NATO, none, and discussion of that publicly can only undermine NATO unity. There's the possibility of a South Korea outcome, which would be very dissatisfying. There's North Korea, a menace. The families were separated, the destruction, and the rebuilding, and everything else, and the threat continues. There has been no peace treaty, only an armistice on the Korean Peninsula. The Cold War is over, except it's not over.
Yet they have a security guarantee, and South Korea is one of the most successful countries in the world. So, that would be a big victory for Ukraine if it came out looking like South Korea with an armistice and a security guarantee. It might not be bilateral with the U.S.; it might be bilateral plus where Poland joins and the Baltics join, and Scandinavians join. But it's not going to be a NATO guarantee. The sooner you get to that, the better.
So, if Vladimir Putin signs a piece of paper, what's that piece of paper worth? Is he going to keep his word, commit to an armistice, and keep his word? Of course not, never.
Except, if he signs the paper in Beijing, because if he signs the paper in Beijing, he can't flip the bird to Xi Jinping. He's on the hook; that's his only bridge left. He's burned every single other bridge.
So, you want the Chinese to oversee the peace process, to oversee the armistice, because that's the only way you can get Putin to keep his word. I know it sounds crazy, but the Chinese peace proposal is not fake; it's the only solution.
And so, Biden delivers his guy to accept the armistice, and Xi Jinping delivers his guy to accept the armistice, and they sign in Beijing. Otherwise, this guy can pause and go for Kiev next year or the year after, or five years. You take Crimea back, but then you have this insurgency problem, and in 10 years or 50 years, Russians will come back for it. Maybe next year, they'll come back for it. Boris Yeltsin demanded the return of Crimea to Russia in 1991, before the Soviet Union had even dissolved. So, the idea that Crimea will walk away from this somehow is tough for winning the peace.
In a situation of atrocities, where they're murdering your civilians, raping your women and girls, kidnapping your children, and destroying your cultural artifacts to eliminate any evidence that you exist as a separate nation and culture, it's a very hard argument to accept that not being able to impose reparations and war crimes tribunals and regain all your territory is winning the peace.
We're nowhere near that yet, but we're closer to it now than we were 14 months ago. And we'll see if the Ukrainian offensive, if it happens, they actually don't have any munitions right now because they spent them in Bahmut, the ones we sent in January, the most munitions we've sent in the war, and they spent them over a territory that has no strategic significance. Now they're demanding more; they're begging for more.
Even if you take back some territory, how do you win the peace? How do you get the Russians to stop and not try to take it back again next year or the year after? You need to win the peace, not just the war. It's very unsatisfactory, demoralizing, difficult politically, and it's the best outcome on the table right now, short of a miracle.
A miracle would be Russian disintegration in the field, not the Russian army just disintegrating. We've been hearing about that for 14 months, and there's no evidence of it yet. It might happen, but there's no evidence. We've been hearing about Putin having trouble and maybe being overthrown, but there's no evidence of that. It could happen, but he would have to be overthrown not by an escalatory replacement, but by a capitulatory one.
So, the miracles we've been hoping for have not happened yet. They could happen; war is unpredictable. But if you're looking soberly at the evidence, you're looking at the U.S. and China getting together to impose an armistice on each side so that the fighting stops and Ukraine can get rebuilt, get the kind of institutions that could assimilate $350 billion at the lowest estimates in reconstruction funds, which is twice pre-war GDP. Reconstruction, at the lowest estimate, is twice pre-war GDP, and that money is going to come in and not be stolen and disappear with the institutions they have now. I don't think so.
So, you have to build those institutions for that EU accession process in order to assimilate the reconstruction funds properly. It's not an uplifting story, but it is the story that's on the table.
Anyway, thank you for your attention.
