Just a few notes on the on-going war in Ukraine - Putin’s war on Ukraine.
First, for wars to end, you typically need one of the following to happen: a) A clear winner and loser, with the winner typically imposing the peace deal; b) Stalemate and both sides realise this and are forced into peace talks, 1980s Iran vs Iraq war; c) Outside intervention to bring an end to war – think there the NATO intervention in Kosovo.
It just not feel to me that we are in a place where any of the above three scenarios can play out just yet.
a) The Ukrainians thinks they are winning. Indeed, given the low earlier expectations for their ability to resist the Russian invasion, every day that goes by is a win. Its simply incredible that they are still fighting a month on, and fighting back, as reflected in some territory taken back around Kyiv in recent days. And even the spectacle yesterday of a Russian landing ship being blown up in Berdansk. Simply incredible. On the latter the Russian media were bragging only this week about the very same landing craft unloading APCs from Berdansk. Huge PR win for Ukraine.
Russia is losing in my mind, or seems to be. The Russian military has suffered from terrible intelligence, tactics, kit and morale. Indeed, if the Ukrainian estimates are to be believed they might have lost 15,000 killed, and up to 40,000 KIA/WIA/CIA. That’s like one fifth of the fighting force taken out, and Russia has few reserves to draw up. Indeed, its a sign of how desperate the Russians are that there is talk of the forces of Belarus being brought in. I think most credible political and military analysts would accept that if Russian troops are unwilling to fight in Ukraine, the Belarus troops sure as hell won’t. If anything they would quickly surrender to the Ukrainian side, giving them their kit.
But….Putin is determined to win. And he still likely has escalation dominance. He simply does not care about civilian casualties – that has been evidenced by the way Russia conducted the war in Syria, but also now in Mariupol, and Kharkhiv, et al. Putin uses terror as a tool of war. He is happy to terrorise populations and has grown accustomed to the West looking the other way. He thinks this will be the same this time around, and eventually the shear human toll on Ukraine will force its politicians to cave in to his demands.
There are still though some possible military wins for Putin within reach. It seems that he is taking the foot off the gas in/around Kyiv, accepting that there the Russian offensive had largely failed. But I think he still has the option of putting most of his resources into the South and South East. The aim here I think is to encircle the bulk of Ukraine’s forces, the JFO, in Donbas. The playbook here is the battles for Debeltseva and Illovaisk which led to the Minsk 1 and Minsk 2 peace deals back in 2014 and 2015. The position of the JFO in the Donbas appears more precarious than the position of Ukrainian forces around Kyiv. But if Russian troops manage to encircle the JFO it could be a defining moment in this conflict, risking tens of thousands of casualties from the Ukrainian side.
And even if Putin fails to encircle the JFO in Donbas, he can I guess still fall back on escalation via long range bombardment of civilian and military targets, to grind the Ukrainian side down, and hope the West tires of its support for Ukraine. We could also see the deployment of WMD by Russia – its not longer a low single digit probability – notable that Peskov and one very well respected Moscow based geopolitical analyst would not rule this out this week. The latter said on a call that Russia would only launch a nuclear strike “if it faced the prospect of a conventional defeat”. How reassuring! Like the military defeat they are currently facing in Ukraine?
But I also see a high likelihood of escalation with the West – to try and push them to stop arming the Ukrainian side. This week, Russia has issued threats against Poland – we also saw 40 Russian diplomats expelled from Poland. I still see the risk of Russia bombing Western arms convoys, and the possibility of Little Green Men appearing in the Baltics. Again, no longer low single digit probabilities. Maybe not my base case, but it could be a 20-30% probability.
I just don’t think here that Putin can lose without losing office in Russia. And, unusually for him, I just don’t see an easy offramp. At present, he is losing. 5,000-15,000 deaths, close to 10 years of Soviet war in Afghanistan. Incredible. And while Russians might ride thru sanctions, but they hate body bags. He needs a win. The fact that people like Chubais are bailing is I think significant.
b) On a stalemate we are not there yet. Both sides still see route to military win.
c) On external intervention it is interesting that there seems to be little effort from the West now for a negotiated settlement. I think the Biden team have decided that Putin cannot be given an off ramp win. He has to be beaten. And its his mistake to get into this battle, with a Ukrainian population which are willing to fight. I always thought that secretly this scenario was perfect for the US – have Putin involved in a damaging and long term war, which would sap his strength. It’s actually extraordinary that the Russians themselves argued this as a reason not to invade before the war – they even said they were not that stupid to be dragged into a war in Ukraine, to the benefit of the US. Well, yes, Putin has proven to be that stupid. So NATO is not willing to militarily intervene to end the war, with a no fly zone, but is willing to continue to arm the Ukrainians, and I think with ever more effective kit (S300s, maybe S400s from Turkey, SAMs). They will also roll out ever more aggressive sanctions on Russia – I would not rule out energy sector sanctions. The West is now in the sphere of trying to engineer regime change in Russia. There can be no peace/reset with Russia with Putin at the helm. And little hope of sanctions moderation for Moscow while Putin remains in office.
Just on the peace talks, the Turkish/Israeli routes seem to be going nowhere. The Turkish side just seems to be wishful thinking. The Turks are desperate for a deal given the frailties of the Turkish economy not helped by Erdogan’s unorthodox policies, but don’t really understand the Ukrainian issue. The Belarus route is more serious, but such serious problems remain, essentially the militarisation of Ukraine and the strength of security guarantees for Ukraine giving up NATO membership options. And the Russian team negotiating through Belarus seem just to junior/low ranking to really have much weight. It feels like Putin is just going thru the motions still with peace talks without being serious about any deal.
Second, on sanctions. The Russians are trying to stabilise their financial markets, hence the limited reopening of the local stock markets this week, and then that comment by Putin saying enemy states have to pay for energy in roubles. The latter is meant to force foreigners to transact in roubles, again to force the reopening and stabilisation of Russian markets.
Bottom line though is that self sanctioning is proving the new gig in town as ESG comes to the fore – foreign companies hate being called out for still doing business in Russia. Renault, Nestle, JPM, Soc Gen are all getting rolled over. In the end Putin has made Russia a pariah state, and there will be no/little foreign participation in its markets any time soon. And the long term Russia economic story is looking dreadful - no access to external financing, high borrowing costs, low investment, high unemployment, low growth and declining living standards with an accelerated brain drain.
On energy sanctions, the Germans and Hungarians are holding the line, arguing that stopping Russian energy imports would cause a brutal hit to the German economy, cutting real GDP by anywhere from 0.5% to 3%. But let’s not forget here that the Germans were foot-dragging on SWIFT, CBR sanctions and got rolled over. And they are on weak ground. The reason Germany is over-reliant on Russian energy is due to years of appeasement of Russia by German politicians and industry. Germany is saying we need time to adjust, but Ukraine does not have time. Its hour of need it now. And if Germany does cut off all Russian energy, they still have lots of fiscal space to pad the impact. For Germany it’s a choice between whether they can buy a BMW 5 versus a Series 3. For Ukraine its about its very survival. I would just end here by saying in the sanctions story, momentum is key. And as the winter ends, I would not rule out the Germans being rolled over. And remember opinion polls suggests a shift in sentiment by Western populations who see this as a systemic crisis and risk from Putin. They seem willing to bear some significant cost from higher energy prices to defeat Putin. But countries like Germany have such strong fiscal buffers that they should be able to shield the bulk of their populations from an overbearing cost. What price democracy?
Perfect.