Geopolitical musings from D.C.

The IMF AGM is always a great chance to catch up with friends in the DC think tank community and to jam on some of the bigger theme issues impacting on the global economy and markets. This year themes for me, at least were Ukraine (surprise, surprise), broader geopolitics (Middle East, US - China, Venezuela, et al), and Türkiye - after the recent Erdogan visit, alongside a plethora of individual country stories.

On Ukraine, the visit coincided with the Zelensky visit to the WH - the third I think this year, with prior expectations built around the prospect for some deal in the offing in terms of a big drone deal - Ukraine supplying drones to the US - in exchange for the supply by the US of Tomahawk missiles to Ukraine. Ukrainian hopes had been built by the apparent Trump 180 on Russia a few weeks back with tweets around his UNGA appearance and suggesting that Ukraine actually had a path to victory. Ukraine has also been upping the ante with its campign of deep strike drone attacks on Russian oil refineries. There was a growing sense here that Russia was looking increasingly vulnerable and that Trump would help Ukraine to further seize the initiative by a) announcing a big arms deals with Ukraine (Tomahawks for drones) and b) a tightening of the sanctions noose around Russia.

In the end Ukraine was disappointed - again by Trump - who seemed to pivot back to Putin again, lured in again by Putin’s offer of yet another summit, this time in Budapest. Tomahawks were off the agenda, and no signficant additional sanctions were unveiled on Russia. Indeed, Trump stalled on the sanctions front (again) by suggesting the timing was not right to levy more sanctions on Russia when peace talks were set again for Budapest. Nine months in and the reality is that the Trump administration has done almost nothing additional on the sanctions front to hurt Russia, and not that much to really increase military support to Ukraine. It has not increased the costs on Putin - lots of talk, and hot air, not much action.

Cynics (your truly) would perhaps suggest that Putin knows exactly how to play Trump, and each time Trump looks set to impose signifcant costs on Russia, Putin peels Trump off by the offer of some new peace effort. Trump seems to fall for it each time.

I would suggest that Trump READS MY LIPS - Putin only respects power, and strength, and is actually fearful of the US and NATO, and does not want to risk a war with each, and cannot possibly survive a full Monty US led sanctions blitz on Russia.

So we are left in the wings again, waiting weeks again for the next Trump - Putin summit in Budapest which is unlikely to deliver anything signficant except stalling, and a huge PR win for Putin and Orban, and little much for Trump, Europe or Ukraine. Trump does not realise it but in meeting Putin at these summits he bestows legitimacy on Putin, bringing him in from his rightful position as an ICJ indicted war criminal, and projecting him as a peer of Trump on the global stage. This is exactly what Putin wants, another Yalta 2 style shindig, excluding and belittling Europe, but bigging his own position up. Trump might remember here that Russia might be a nuclear power, but it has been fought, literally into the ground, over 3.5 years by Ukraine, which was supposedly a military minnow compared to the supposed Great power Russia. Indeed, over the 3.5 years of this war, Ukraine, which lacks a navy, beat Russia, a naval power in the Black Sea, and continues to humiliate Russia via its deep strike attacks on the Motherland. Putin has not been able to secure the security of his own borders, let alone securing a victory over Ukraine. But where Putin cannot secure victory on the battlefield Trump keeps giving Putin victories on the diplomatic and PR front. Far from securing an early peace Trump, by pulling punches and bowing to Putin, is extending this war.

The other discussion point related to Ukraine was where Europe and the G7 are now with respect to the Reparation Loan (RL) for Ukraine. This is the €140 billion facility which it is hoped will fill Ukraine’s financing gap left by Trump’s decision to stop funding Ukraine and the realisation that the war will extend beyond 2025. Back in September the EC made clear that Ukraine’s financing numbers no longer added up, a fact now reaffirmed by the IMF. The Fund has suggested its EFF for Ukraine faces a $65 billion shortfall. And actually Europe, Japan and Canada, are on the hook now for the full $100 billion annual Ukraine financing bill, for years to come. The penny has finally dropped in Europe, that their tax payers will no longer write blank cheques and not when $330 billion of Russian tax payer cash is sitting in Western bank accounts. Hence the idea of the Reparation Loan. The EC released a non paper setting out the framework for the RL, targeting first the €190 billion in CBR (the RL is the 190 less the 50 ERA) assets at Euroclear. The idea is that the EU issues a debt instrument to Euroclear in exchange for the CBR assets with the monies then on-lent to Ukraine. CBR assets are not confiscated, Russia’s property rights remain intact, but instead of holding bunds, Gilts, Oats, et al, it now has a claim on the EU, albeit with long term (30 year, zero coupon) loans only paid back once reparations are agreed with Ukraine.

From D.C. I still heard footdragging from some European politicians. The line is that the risks of the RL scheme needs to be shared across the G7, hence the $100 billion plus of CBR assets in the U.K., US, Canada, Japan, et al needs to be brought to the table. My understanding is that U.K. and Canada are up for the RL, and will add the CBR assets in their jurisdiction to the pot. The Trump administration has been encouraging Europe to utilise CBR assets for a scheme to fund arms purchases from the U.S. a REPO bill supports confiscation of CBR assets in the U.S., through Executive Acton. But this relies then on Trump signing off on the decision. The laggards in Europe (Belgium, France perhaps, elements in Germany) are trying to hide in the G7 pack, perhaps hopeful that Trump might stall the whole thing given his bromance still with Putin. Possible, but in the end needs must for Europe. The cupboard is kind of bare now when it comes to funding Ukraine. There is no plan B, aside from the RL. And without a plan b, and if the RL is not rolled out, then Ukraine is underfunded, risks losing the war, which would be a catastrophic blow to Europe, and would force a massive increase in European defence spending - to multiples of the $100bn pa cost of funding Ukraine. And, as noted above, with the RL, the IMF EFF is underfunded, which would risk the macro destabilisation of Ukraine and the same result, the defeat of Ukraine. So one way or another, the RL will happen in my view - it’s a case of we can do this the easy way, or the really hard way.

Actually the highlight of the week for me was not the IMF AGM, but a 3.30am panel in Kyiv where I was able to tell the Belgium ambassador exactly what I thought of the Belgium position on the immobilised CBR asset front. Diplomacy is not my forte, and I gave him both barrels, and took no prisoners. The fact that Belgium, which has been a serial free rider on the US, and NATO for defence for the past 30 years, spending way less than 2% of GDP on defence, and is one of the lowest per capita aid givers to Ukraine since the full scale invasion ($188 up to 2024, less than Iceland, and while still sitting on the windfall profits for the period from the invasion to April 2023), is holding Ukraine, and European defence to ransom on this issue, did not go amiss.

In conclusion, the €140 billion RL will happen, with £25 billion thrown in from the U.K., and let’s hope eventually the $50 billion (I hear) in the US, and $30bn in Japan. That should cover Ukraine’s financing needs for a few years out, and up the stakes and costs for Putin, and it’s exactly what the West should be doing. It’s just so painful that it has taken over three and half years to get this far - with the RL idea not new, and suggested way back soon after the first move to immobilise CBR assets. And the way the EC is going about the above is just so suboptimal - the loans to the Ukraine should be channelled thru a sovereign wealth like structure to maximise the investment returns to Ukraine, manage and coordinate recovery and reconstruction - but see my various thoughts there on the Agency for Ukrainian Reconstruction and Accession (AURA) to the EU.

On China, the Middle East, and then Venezuela, Argentina et al, there is a common theme here in my mind and the attempt to fit all these into a grand Trump strategy or Doctrine - in Latam at least the Donroe Doctrine as some have suggested. I guess the pitch there is that for Trump everything is seen thru the lens of the battle for hegemony now between the US and China. The US is pulling in to focus on its backyard, Latin America, hence the bailout of the Milei administration in Argentina, and the seeming push for regime change in Venezuela. This seems to be about securing the home continent, all to help in the bigger picture battle with China. I also heard the pitch from one market geopolitical strategist that the tariff spat with Europe was ultimately just aimed at bringing Europe into line, to get them serious about boosting defence spending to make them a worthy ally for the US in the looming war, actually, with China.

I don’t really buy the above for lots of different reasons.

First, I just don’t think Trump is a long term strategic thinker. I think for Trump it’s all about the now (literally day by day), and the instant gratification of himself. Sure, he has some core instincts, beliefs - aversion to immigration, dislike of big government, taxes, the judiciary, Deep state, the climate change narrative (too long term for Trump, and bad for business). Then there is the love of money, real estate and particularly gold. Trump I think also wants peace - as war and instability gets in the way of what Trump knows best, real estate. Trump likes strong leaders - Xi, Putin, Erdogan, Kim, leaders who get their way, by hook or crook, as he aspires for the same “unchained rule”. His own 60s upbringing gives him an aversion to nuclear war - there is some self preservation motivation herein. I also tend to explain away Trump’s relationship with Putin in the same way - Putin is a typical mafia boss that Trump might have come across in his NYC real estate dealings, and he might have learned there that you don’t cross them. Or you cross them at your personal peril.

But there is a whole industry now post fact fitting some great strategy or doctrine to Trump - whether that is on China, or a peace process for Ukraine. For some here I think it is almost a covering letter for a pitch to join the administration for some higher role.

Second, on China, and to his credit, I think Trump probably understands, unlike most of the China hawks in his administration, and actually across D.C., that a battle for hegemony with China ends badly, in war and mutual destruction. Actually not just mutual, as a U.S. - China war would risk the survival of the planet and would be terminal likely for the global economy and markets. I wonder for the US China hawks - not Trump - what they imagine is the basis of a peace deal, even if the two sides fail to go to war. Is China going to must surrender, without a fight? Perhaps here with AI, the Genius bill, drones, et al, technology will ultimately declare the winner, without a fight, as one side or the other will secure the overwhelming military technological advantage. And perhaps the U.S., and the Trump crew think that with all the focus now on AI investment, stable coins, the US just has the edge. Perhaps, but perhaps not - and China’s dominance in critical minerals space might just be the deciding factor. But herein I think Trump realises that the U.S. and China will just have to cut a deal, the mother of all deals, which is appealing for Trump. But the China card keeps delivering for him electoral support at home, hence all the rhetoric and too and fro on the tariffs front.

Third, Trump was totally correct that Europe needs to increase its defence spending. But the way Europe sees things this is to now counter the threat from Russia, understanding that the U.S. security backstop for Europe is no longer there. There is no way that Europe is planning to stand alongside the US in some future war with China. It’s strategy is to buy time - say whatever needs to be said to Trump, to play to his ego, to keep the weapons sales to Europe flowing, to supply to Ukraine, to enable it to hold the line against Putin long enough until Europe can stand on its own two feet, and have an autonomous defence capability from the US. That might also mean flirting with China, to let the US know that Europe has other options. And I think we saw that in the U.K. over the past week when the Starmer government failed to declare China a threat to national security in the parliament spying case. The U.K. government was willing to annoy the US, so as not to burn all bridges with China. Perhaps Europe also thinks that China could be important in finally bringing Putin to the negotiating table in Ukraine on the assumption that the Trump peace effort fails. And I think here that in terms of both interests and values the European mainstream no longer see MAGA US and European interests aligned. Whereas perhaps at least in terms of interests, Europe and China might be more closely aligned, at least in keeping global trade free, and in keeping multilateral institutions functioning.

On the Middle East - man, if Trump actually delivers a lasting peace, he deserves the Nobel prize he so covets. But, with the two main actors, Hamas and Netanyahu and the far right in Israel, still having more to lose from peace, holding the peace will be very difficult. Netanyahu clearly overplayed his hand in the military strikes on Qatar, and the Gulf states and Türkiye moved quickly to seize the intiative and offered Trump solutions. I did not quite get the key role of Türkiye in bringing Hamas over the line on the ceasefire deal, and now with its military commitments to help police the peace in

Gaza. Türkiye has the most capable military amongst Muslim states in the region. It can offer Trump solutions in Gaza, but also Syria, and on to Lebanon. But an expanded role for Türkiye in Gaza, and now also in Syria rings alarm bells in Israel. For Trump the challenge will be in managing the Türkiye - Israel relationship in the region. If Trump is succesful herein, he could secure a lasting peace in Gaza, Syria and Lebanon. But its a tough ask. But for the US, Türkiye offers solutions - useful to Trump for the peace push in Ukraine, Trump’s claim to have secured the Armenia - Azerbaijan peace (impossible without Türkiye), a potential Armenia - Türkiye deal to open borders, Syria, Lebanon. And because of all this I think we can see room for progress in the US - Türkiye relationship when it comes to tricky issues like S400s, F35s, Halkbank et al.