Russia

Cost/benefit of de-escalation in Ukraine

Putin has moved to escalate tensions with Ukraine putting a huge and unprecedented Russian military force on its Western border and also launching a concerted “coercive” diplomatic effort sketching out new red lines for NATO.

A consensus still seems to be that he de-escalates from here. But I ask myself can he do this without losing face if, as seems likely, NATO and Ukraine concede to very few of his demands? This seems likely to be important in his decision set from here on.  

Looking at his wins so far:

(+) He has got the attention of the Biden presidency and the West in general. Biden gave him a summit call earlier in January. There was this Friday the Blinken - Lavrov meeting after the earlier Sherman - Rybakov summit.

Remember here that the likes of Sullivan had persuaded Biden to pivot to Asia and focus on the three Cs: Covid, Climate and China. This year it has all been about the R, Russia. Putin has made clear that he is not just a footnote in US foreign and security policy but the first chapter and maybe a whole book to be written later this year.

Putin has enhanced his image as the guy who sets the shots, the poker player with all the cards. The guy that everyone has to play with if they want solutions to problems he very typically creates himself.

(+) He has got NATO to focus on security challenges in Europe - by setting outrageous red lines in terms of no NATO deployments to members that joined after 1997, he has made people question further enlargement, particularly to Ukraine. This could be a bargaining strategy of setting outrageous demands to settle for something less, and what he wanted all along.

(+) He has further exposed weakness and divisions in the West - within the EU and with the US. Herein note Macron’s ludicrous idea that Europe can decide on its own security arrangements - good luck defending Europe against Moscow’s overwhelming conventional military superiority without U.S. troops. And also Germany - tribulations over NS2 and showing incredible double standards by not providing defensive weapons to Ukraine, and not allowing others (Baltics) to do so.

(+/-) He has helped forge the consensus that Ukraine will de facto never join NATO, or at least not for a very long time. But surely that was the reality anyway. Win?

(+/-) Energy prices have been driven higher helping improve Russia’s balance sheet. That said this could have been achieved without a military escalation and by just restricting energy supplies to Europe - which it seems to have done according to the IEA chief Birol.

(+) He has once again revealed to the world Russia’s significant military capability and his willingness to use it to support “coercive” diplomacy. It’s a showcase for the huge upgrade and investment made in the Russian military over the past decade. Maybe here only positively showcased if successfully used in action - at present it might still be a Potemkin Village.

So they are the wins if Putin goes no further from here. But what about the other side of the ledger?

(-) His bluff will have been called. Sure he was able to drive thousands of troops up to the border and threaten but he lacked the gumption to pull the trigger. He erred to caution. He had the chance to take Ukraine and he bottled it. Next time around his escalation may not be taken seriously. He made all this effort but got no serious concessions on Ukraine or from NATO on security in Europe. He is seen as a man who talks a lot and threatens but when faced with a tough response on the other side does back down.

(-) Far from showing divisions in the West, Putin’s coercive diplomacy has shown him as the real threat to European security. Even in Germany and France the PR campaign has been lost by Putin and public opinion is shifting against him. The West is uniting around the idea that Putin is the problem and needs to be countered.

(-) This crisis and the pressures put on energy market markets in Europe will re-enforce the view that Russia is an unreliable energy supply. Irrespective of NS2 this will accelerate Europe’s diversification against Russian energy and Russian trade in general. This will weaken Russia’s economy and increase its dependence on China. This might not be that appealing for Putin as ultimately Russia faces a huge security threat from China in its Far East.

(-) Ukraine did not buckle. It cemented opposition in the country to Russian rule. Ukrainians rallied to join self defence units. Ukrainian sovereignty was enhanced. The West came out clearly in defence of its sovereignty and right to self determination.

(-) Ukraine is now being re-armed at an accelerated pace. If that was a prime focus of Moscow’s concerns Ukraine and it’s allies are now working more intensively to enable it to be better able to defend itself. US military aid increased yo $600m, the Brits. Balts, Dutch, Czechs, Poles, Canadians all stepped up military support.

So next time if Putin decides to pull the trigger the costs to win any military victory will be much higher.

(-) Putin is further damaging Russia’s image as an investment destination. Geopolitical and sanctions risks have increased. Fewer foreign investors will want to invest in Russia and those there will reduce exposure. That means higher cost of capital and lower growth. It means lower living standards for Russians, and a greater risk to Putin of a Kazakh style social revolution. This has weakened Putin at home - even though he will meet that with more repression. But the latter just creates a vicious cycle of less foreign investment, lower growth and living standards.

Net - Net I would argue that Putin will come out as a net loser from the current crisis. Does he see it the same way. If so will he escalate from here?