Weekly Overview Cables - Ukraine War, Putin's planned offensive, Zelensky's fighter jet pitch and monitoring the efficacy of price caps on Russian oil.
*note: we will discuss the issue of Sweden & Finland/NATO and Turkey’s continuous refusal (more like delay) to grant Sweden admission in the upcoming cables. This was one of the most emailed questions. In the meantime, there is an opportunity for Sweden to gain favor by going above & beyond in the earthquake-related aid that it will provide to Turkey.
Ukraine war updates.
Ukraine’s counteroffensive & outlook.
Russia continues to target Ukraine’s critical infrastructure: launching over 100 missiles with specially adapted S-300 surface-to-air missiles in ground attack mode, as well as the air and sea-based Kh-101/Kh-55 and Kalibr-28 cruise missiles.
In the meantime, Ukrainian forces have successfully repelled the Russian attack at the eastern Ukrainian city of Vuhledar.
According to the British military intel, Russian forces likely lost dozens of armored vehicles during this failed attack.
The Russian military blogs exploded with venom against perceived incompetence of the Russian military leadership - targeting the commanders (specifically, Rustam Muradov) responsible for the attack, and claiming that the very same commanders of the 155th Naval Infantry Brigade responsible for the failed November 2022 of the very same city, were once again at the helm of this recent attack.
If true, this is a powerful indicator of an extreme shortage of competent commanders within the Russian military.
The footage shared by the bloggers in Russia’s telegram space, demonstrates a highly dysfunctional and uncoordinated attack relying on incompetent tactics.
Naturally, what these (generally pro-Kremlin) bloggers did not say however, is that similar incompetence is likely to continue, and in fact, most probably get much worse - as the proportion of recently mobilized troops keeps rising and the casualties of more experienced soldiers/commanders continue to weaken the Russian military by causing a dent in the stock of competent personnel.
Zelensky intensifies his in-person pitch for fighter jets.
This was a good week for Ukraine’s renewed pitch for fighter jets.
After receiving a curt ‘‘no’’ from Biden and not so unexpected rejection from the German Chancellor Olaf Sholtz, Zelensky relentlessly pitched for the supply of fighter jets in his trip to London, Paris and Brussels.
(side note: there was a peculiar moment when the Italian PM complained that the French and Germans wanted to monopolize the leadership on the Ukraine war by not inviting her to a dinner with Zelensky. The Irony… this time one year ago, EU members were trying to outdo each other with pathetic phone calls to Putin… fast forward a year, and now the fight is over who is seen as leading the aid in Ukraine. Here is an idea for the Italian PM: send Ukraine fighter jets and become the first Western nation to demonstrate strength and resolve in the face of the Kremlin’s “red lines’’ - that will earn you far more points than attending a dinner with Zelensky).
After a major speech at the British parliament, Zelensky secured a tentative agreement to consider from the UK - with a pledge to train Ukrainian pilots in the meantime.
It is however unclear whether receiving training on British Typhoons is going to be of much use for Ukraine - they need F16s and/or Swedish Gripens.
The UK barely has enough Typhoons (only 101 currently operational) to send on any further, and it makes much more sense to train an already limited number of capable Ukrainian pilots on a system that is available at higher numbers and has a deeper reservoir of spare parts available across many different NATO states.
(side note: there is also some suggestion that Typhoons would: a) struggle to take off from shorter and rougher runways in Ukraine, and b) are not a great fit for low-altitude missions - which are necessary due to Russian SAMs).
Russia did of course retaliate and threaten the UK - this much was expected.
But why wouldn’t Russia throw around these threats when it witnesses unwillingness from the West to risk crossing the Kremlin’s ‘‘red lines’’?
If the leader of the free world rules out the supply of fighter jets with a very short ‘‘no’’, then why wouldn’t the Kremlin double down on their threat display rhetoric?
Paradoxically, the more signs of hesitation the West will continue to display, the more likely it is that Russia will escalate its threats - raising the tensions further.
Once the NATO leaders understand that they must always display both the capability and will to deter Russia (as was demonstrated by the former CIA director who issued a no nonsense threat to wipe out all of Russia’s Black Sea Navy and Army in Ukraine - which then received a very muted response) for Russia to stop creating the very arbitrary ‘‘red lines’’.
Until this uncertainty and hesitation continues, the West will keep handcuffing itself - unnecessarily prolonging the war and suffering in Ukraine.
Putin is gearing up for another major offensive.
According to Ukraine’s military intel, ahead of the Russian invasion’s 1-year anniversary, Putin is planning a major onslaught with 500k Russian troops .
At this point, Russia has had almost 200k casualties and lost nearly half of all of its tanks.
Yet Putin is not slowing down - nor is he interested in genuine negotiations (for all those pushing Ukraine to ‘‘talk’’ to Moscow): this is a sunk-cost fallacy in full force and display - he is not going to back down without securing a major symbolic and/or territorial win.
With so much at stake (his regime) and so much already lost, he is not going to even pretend to negotiate and attempt to freeze the current conflict once again (as he did in 2014/2015).
Russia’s mobilization efforts are fully revved up and Putin has largely secured himself a serious pipeline of cheap drones and medium-range ballistic missiles from Iran (and there are new additional reports that Russia and Iran are to jointly build a drone production facility within Russia - with a capacity to make 6,000 drones. This would shorten the transport routes, and ensure a steady pipeline free from potential Western interference in the logistics of drone transports to Russia).
He has some reasons to speed up the attack: 1) calculating that he needs to do this before Ukraine is to receive its new tanks and/or fighter jets/other advanced weapons, and 2) before fiscal difficulties in Russia worsen much further (more on that later below).
The first factor is perhaps more important - it is going to be March/April before the Ukrainian crews receive enough training, and before logistical/maintenance pipelines are built for Kyiv to make use of the American Abrams M1s, British Challenger IIs and German Leopard IIs.
(side note: further complicating the matter is the basic fact that Abrams M1s operate based on Turbo engines vs Diesel engines used by Challengers and Leopards - this requires a different approach to training and logistics, and adding an extra layer of logistical friction. There would need to be crew members specifically trained on maintaining Abrams M1s - this is why sending merely 31 tanks was inadequate. America will not need tanks in the foreseeable future. Potential conflict with China and/or Iran will involve the Air Force and Navy - Washington is not going to engage in land attacks against either of these adversaries. And protecting NATO’s eastern flank is done best by arming Ukraine)
Regardless of Putin’s beliefs, NATO and Ukraine must prove him wrong.
Ukraine needs urgent long-range strike and fire capabilities to hit Russia’s long logistical supply lines.
Mobilizing so many troops will come with supply lines full of fuel and basic needs.
This is where the Gray Eagle drones, fighter jets, and longer range ATACMS for HIMARS can make a major difference - destroying Russia’s major logistical and fuel hubs further behind the frontlines, and cutting Russian soldiers’ access to critical supplies that would now depend on fragile and overextended logistical supply chains.
The arguments against supplying Ukraine with longer-range weapons due to fears of escalation/concerns that Kyiv would use these to strike targets further within Russia (beyond the limits that Washington/NATO is comfortable with) have long been moot - since Ukraine has engaged in these attacks against legitimate military targets using their own retrofitted soviet-era drones and special ops/sabotage units (this was a great report from the Guardian - involving several interviews of the sabotage unit soldiers - highly recommend you read it).
But this argument received a further death blow after last week’s report that Kyiv virtually never strikes a Russian military target using Western missiles without receiving direct aid in targeting/intel from the US.
In other words, and given this is such a tight-partnership and relationship, what is the likelihood that Ukraine would ever use longer-range ATACMS to strike targets that Washington disapproved of?
And in the process, harm this crucial relationship, and put further aid under question?
Not very likely is it?
In other words, the West must stop coming up with implausible excuses and arm Ukraine with weapons that it needs to win this war - and in the short-term, at least help Kyiv withstand the upcoming onslaught.
Evaluating effectiveness of Russian oil price caps: early results and challenges.
Last week, and in addition to the G7 price caps of $60 on Russian crude oil, the EU agreed to a new limit on the price of Russia’s premium oil products such as diesel (limit of $100 a barrel) and that of relatively more low-end products - $45 per barrel for fuel oil.
These are welcome developments, and it is now time to start looking at the overall picture - evaluating the efficacy of the price caps to date.
At a first glance, there are some worrying signs: Russia’s oil exports (accounting for the 10% of the globally traded volumes last year), took a major hit after price caps came into effect.
But as of February 2023, they are back to the levels seen last June.
In itself this does not say much: after all, the goal of the price caps was not to reduce the supply of Russian oil in the market - it was instead, aimed at lowering the price at which it was traded - this would then reduce the revenue gains for the Russian treasury.
Russia supplying oil - but not making much money - is exactly the objective sought by this policy.
But is this oil truly being bought at or below the price cap level?
Russian Urals brand oil is now trading at below price cap levels of $60 per barrel.
Yet this doesn’t in itself prove that buyers are indeed paying Russia at the price cap or below: market rates and what individual buyers will pay, are two different things.
There were some early reports that Russian oil is being sold at a significant discount in India ($32-$35 per barrel).
But that was at the beginning phases of the price cap: when buyers were scrambling to find alternative insurance and/or service providers (like basic shipping) that would be happy to violate the Western price caps.
Since then, it is indeed possible that things have changed.
Given that Western service providers and agencies are now out of the picture, it is entirely possible that Russian/Indian/Chinese insurers and carriers would not provide accurate pricing data.
For small private buyers, it makes sense to inflate the price paid to Russia (pretending to abide by the cap) and then write-off some tax (and force clueless competitors to pay the inflated price and end up at a disadvantage).
On a state level (pretense or at least lack of clear reporting) gives a diplomatic way out
So then, given that Russian oil is no longer being sold to Europe, it is very hard to actually verify their traded price points.
But this does not mean that we have to await better verification measures before forming preliminary judgement on the efficacy of price caps.
At the end of the day, the fundamental test of this policy (which did not intend to reduce the volume of Russian oil in the first place) is as follows: are Russians making significantly less money?
And the answer to that question is a resounding yes.
Russia’s Finance Ministry released a report that shows a large increase in their federal budget deficit: a 14x increase from $2bn (January 2022) to $25bn (January 2023).
(side note: this is Russia’s biggest first-month deficit since 1998 - not a comparison to country’s happy years)
Furthermore, oil and gas revenues dropped 46% from January 2021 levels.
These are truly significant numbers.
To be clear, they are not (yet) catastrophic - since Russia has a large cushion of cash collected in a rainy day fund.
But the current rate of expenditure is clearly unsustainable - Russia’s sovereign wealth fund stands at $148.4bn (also down $38bn in a month to January 2023 - when government used funds to plug the deficit), and Russia is yet to launch a major counteroffensive, and plans on mobilizing even more recruits.
Even if price caps don’t go below the current levels (which, after periodic monitoring, they surely will), at current rates of expenditure, Russia is moving towards some really unpleasant fiscal scenarios…
(side note: and by announcing cuts of around 500,000 barrels per day/ 5% of total output starting in March, the Kremlin is in a desperate attempt to prop up the prices. At a first glance, this is not a major cut, but: a) this is to reduce supply of Russia’s crude specifically, and b) China is revving up its engines after abandoning covid zero policies - demand is likely to increase even further - fewer available barrels of Russian oil will force Beijing to agree to higher prices vis-à-vis the Kremlin)
Having said all that, and realistically, China would not let Russia to fail spectacularly - but Washington must ensure that Beijing is not rushing to help either.
(side note: and for this to happen, Washington must maintain more bargaining chips vis-à-vis Beijing - this is why these cables have called for a slowdown in the tempo of sanctions against China. Current level of chokehold is good enough. Strategic sequencing is key - Russia must fail before full attention is pivoted back towards China.)
In the meantime, Russia’s leadership is scrambling to secure new sources of revenue and imposing new taxes.
Andrei Belousov, Russia’s First Deputy Prime Minister wants the government to impose a one-off windfall tax with businesses, claiming that “last year’s financial results were very good” for many Russian businesses.
(side note: but the strengthening Ruble means that taxes this year will be adjusted and Russian businesses will already pay an extra $24.6bn in 2023 - this does not seem enough however, given future expectations of expenditure)
In addition to formal measures, there are also some questionable fiscal tricks: the Russian Union of Industrialists and Entrepreneurs (RSPP) was ‘‘invited’’ to contribute $2.7bn to the Federal Treasury.
To what extent this was truly an invitation to contribute voluntarily is questionable..
If you are however a wealthy Russian businessman, and are planning to refuse this voluntary contribution, then our suggestion is that you avoid standing by the windows these days.