Weekly Overview Cables - Ukraine War, Crimea bridge sabotage, and dealing with the OPEC+ oil cuts.

Ukraine war updates.

• Ukraine’s counteroffensive & outlook.

• Russia’s humiliation continues with a steady pace as Ukraine’s battlefield accomplishments pile up.

• A significant amount of territory on the West bank of the Dniepr river, and in northern Kherson was recovered this past week.

• Kyiv is clearly on a sprint to press its advantage before Russia could reap any rewards from its mobilization.

• And there is now another benefit to Ukrainian gains - as its military drives Russian troops further back towards their actual borders, the nuclear fallout risks to Russia itself of using tactical nuclear weapons against Ukraine, continues to rise.

• This is because any strike on Ukraine’s military formations will now most likely involve a significant amount of casualties amongst Russia’s own troops (who lack bulletproof vests - let alone a proper radiation protection gear).

• So even if Putin wanted to risk turning Donbas into an uninhabitable radioactive hell (in itself contradictory to the policy of annexation - wreck your own land?), the cost to his own troops would surely give him a pause.

• This in turn raises the possibility that a potential/initial nuclear strike could take place in an inhabitable location (like the Snake Island) and carried out (initially) for demonstrative purposes only.

• And if the first such strike involved little human loss, the policy dilemmas for the US will now increase.

• Would the US really follow through on its threat to annihilate all of Russia’s Black Sea fleet, and military formations in eastern Ukraine using non-nuclear/conventional methods?

• (side note: and yes, even though the threat was delivered by now retired General and former CIA Director David Petraeus, this was also deliberate: a solid credible threat delivered by someone not in the current admin - allowing for plausible deniability. In other words, the US delivered a highly credible threat that requires no formal response (and therefore, prevents a never-ending escalatory rhetoric cycle) - a very admirable and clever move from DC).

• In the meantime, there was yet another shrewd tactical move from Ukraine: offering the US a complete targeting oversight in an effort to secure long-range (primarily ATACMS) rockets.

• That Ukraine needs to play this game to secure these missiles is already embarrassing to the US.

• But with this particular move, Washington’s continual resistance to supply Kyiv with these essential rockets becomes even more untenable.

• Against this background of Ukrainian momentum, embarrassments for the Kremlin keep on piling up.

• The Kremlin had to fire and replace its operations commander in Donbas.

• General Sergei Surovikin will now take over, and will have the honor and privilege of having further/future humiliation attached to his name.

• This personnel refreshment is, however, unlikely to stop further criticisms in the near term.

• More and more regime puppets now speak up openly against the Russian military leadership - questioning their competence at every opportunity.

• Kirill Stremousov - deputy head of the Russia-backed puppet administration in Kherson region, has blamed Russian setbacks in Ukraine on “incompetence” and “corruption” amongst Russia’s top military leaders.

• Meanwhile, the two long-term Putin allies (and personal henchmen), the Chechen leader Ramzan Kadyrov and head of the Wagner mercenary corporation Yevgeniy Prigozhin, have joined voices in attacking Russian field commanders.

• Prigozhin agreed with Kadyrov’s description of these commanders as ‘‘pieces of garbage”.

• Related to this in-fighting, the Washington Post came out with a report that President Biden was briefed on significant infighting within Putin’s inner circle: that allegedly, some high-ranking individual “has voiced disagreement directly to the Russian president in recent weeks over his handling of the war in Ukraine”.

• This is great (yet unsurprising) news.

• Three things to note here:

• 1) Firstly, good news: the atmosphere within the Kremlin is dire enough for a direct criticism of Putin.

• 2) Secondly, whoever this individual is, he is not afraid to speak plainly with Putin - this indicates Putin’s weakening charisma within his own inner circle.

• 3) Finally, Putin is not yet delusional enough to dismiss all criticism and fire that person (we would have presumably heard about it if that was indeed the case).

• Yet one has to also be mindful of risks in sharing this intel offered to Biden with the wider public:

• 1) The first risk is obvious: the potential purges in the Kremlin to find the mole that supplies the US with this exclusive intel.

• The more specific the intel is, and the higher up the alleged occurrences are, the smaller is the implied pool of people that the FSB needs to investigate.

• It is one thing to reveal Putin’s final decision to invade (back in February), quite another, to reveal who exactly berated Putin and how.

• 2) Putin might become paranoid of the Kremlin moles and shut himself off from his inner circle.

• That would lead to fewer people having access to Putin, and that a potentially vital true battlefield intel will not be revealed to him until it is too late to do much.

• All this may lead to Putin acting with a misguided picture of reality - not a good outcome when a leader sensitive to his grip on power becomes ever more paranoid and worried about losing the war.

Crimea Bridge Sabotage.

• By successfully targeting and blowing up the bridge connecting mainland Russia with Crimea over the Kerch strait, Ukraine has once again taken initiative to impose a new narrative in this war.

• This epic birthday gift to Putin (the sabotage took place on Putin’s 70th birthday) sends multiple important signals: a) that Ukraine is not deterred by Putin’s mobilization and nuclear threats; b) that Putin’s “red lines” don’t amount to much in practice, and that; c) if Ukraine is not afraid, neither should the US or Europe.

• The bridge itself carried both strategic and symbolic importance.

• It was one of two primary ways to connect Russia with Crimea, and allowed for the consistent supply of Russian forces on the peninsula.

• The other is via the city of Melitopol in Zaporizhzhia - an important train/logistics hub for the Russian army.

• Its importance is now even higher than ever before, and Russia will need to defend it well against the increasing Ukrainian attacks.

• (side note: there are also the maritime routes - but these can be contested at any time, and thus do not allow for the necessary consistency of supplies)

• But perhaps the most devastating effect is to Putin’s charisma and prestige.

• The Kremlin propagandists will try to dismiss this strike as a ‘‘terrorist attack’’ by the ‘‘illegal /nazi Kyiv regime”, reframing away from the military prowess/success of the Ukrainian special ops.

• But such attempts to diminish the strike will most likely not fly.

• Nationalists will be further angered by this demonstrative incompetence (a CCTV video is circulating Russian telegram channels - suggesting that the truck carrying the bomb was ‘‘checked’’ by the police and yet nothing suspicious was found..)

• Overall, this was an incredible demonstration of resolve and lack of fear by Ukraine.

• Some have contrasted Ukraine’s acts and rhetoric with President Biden’s comments about the possibility of a nuclear “armageddon”.

• And even though: 1) These cables have always berated the President for rhetoric that indicates hesitancy around establishing escalation dominance and, 2) The President of the US must not comment like a media pundit/observer, this particular comment was not as weak as many analysts suggest.

• Context and tacit messages matter.

• By describing the possibility of a nuclear armageddon, president Biden is in fact implying America’s willingness to par and escalate.

• Since it takes two to tango, and a nuclear armageddon requires proportional escalation from both sides.

• In other words, a charitable explanation of this comment is that Biden was signaling directly to Putin: revealing willingness to par and respond - something that could result in devastating outcomes yes, but a scenario where Putin’s nuclear escalation would not go unanswered.

• One thing that this comment is unlikely to be: an off-the-cuff remark.

• At this sensitive period, one should expect that all of Biden’s comments about the possibility of a nuclear showdown, have been carefully vetted by nuclear escalation experts - no matter what his usual propensities for ‘‘gaffes’’ may be.

• Indeed, Pentagon spokesman John Kirby’s remarks that these comments were reflection of the current ‘‘high stakes’’ with Russia, is probably a confirmation of the aforementioned analysis that the comments were intended to imply America’s to par and escalate.

Saudi Arabia stabs the US in the back - responding to the OPEC+ fiasco requires a belated change in foreign policy.

• Last Wednesday, the OPEC+ alliance announced a significant oil production cut of 2 million barrels a day (amounting to a 2% cut in the worldwide production).

• The primary purpose was to obviously maintain the current prices of crude: the never ending COVID Zero in China, and the overall growth slump expected in 2023 was going to dampen the demand for oil.

• (side note: the actual impact on the price is unlikely to be too dramatic. For a start, many OPEC+ members were already not hitting their production quotas. There was a slack of around 1million barrels a day. So then, this increase amounts to only 1 million barrels a day in real terms. If we apply the approximate Moody’s analytics rule of thumb that a production cut of every million barrels results in a $10 increase in the price of crude oil (and translating into a $0.30 cent increase in the gasoline prices in the US - that is, if the WTI follows Brent benchmark, and it likely will) then the price of crude will likely settle at around $90 in the medium term. Not a catastrophe, and certainly much lower than the fantastical prices of late winter/early spring of 2022).

• But the timing of the cuts raises the possibility that there were other supplementary incentives involved as well.

• Since, why would Saudis not wait until after the implementation of the G7-advanced price caps on Russian oil?

• That way, commodity markets would not have had time to price in the impact of the proposed production cuts before the Russian price caps went into full effect.

• In other words, the desired impact on prices would have been stronger if only Saudis would have waited until the Russian price caps were beginning to bite in practice.

• But that would have forced Saudis and Russians to wait until after the midterms - and an opportunity to hurt President Biden politically, would have been wasted.

• This is of course a speculation - but one that does make sense.

• Arguably, causing another hike in gas prices and hurting Biden just before the midterms benefits both Putin and MBS.

• As discussed in the previous cables, a republican President (or ideally, Trump) pursuing more orthodox policies in the Middle East (which typically, means not involving the White House pressure to calm it down in Yemen), benefits Saudis more than the Biden presidency.

• And losing midterms makes it more likely that the remaining two years of the Biden admin will become legislatively unremarkable - increasing the odds of losing the 2024 elections.

• And when it comes to Putin - well his interests are obvious.

• At the time when 75% of Americans are still in favor of policies to support Ukraine (an insight that makes one feel proud and inspired), dampening this enthusiasm by reminding Americans of the personal financial costs would not be bad - especially when combined with signaling (mobilization/annexation) that the Kremlin is in for a very long war.

• Of course, this does not mean that another OPEC+ production cut (post Russian oil price cap coming into effect) is out of the question.

• But neither is it likely to be of significant amount - since (with a general shortage in the market) this could enable Russians to insist on a higher price for their capped oil (from the countries that still purchase above the G7 price caps).

• After all, Saudis will benefit from the large enough price differential between price capped Russian and worldwide crude.

• They can keep on importing cheaper Russian oil for domestic energy use, and continue to sell their own crude at market prices - a delicate balance must therefore be achieved to maintain a large enough price differential between the two.

• There are a number of ways this can play out in the medium to long-term.

• One thing is clear however: Saudis stabbed America in the back, and clearly sided with Russians.

• This is why these cables have always advocated against Biden’s trip to the Kingdom in July.

• The US President supplied a ton of political capital and removal of the pariah stigma (with that shameful fist bump) for little in return.

• In fact, the present status quo in the US - Saudi relations is worse than the conditions pre-July meeting in Jeddah.

• Responding to this fiasco.

• The US will have to adjust its policy towards Saudi Arabia, and simultaneously engage in specific interventions to increase domestic oil production and prevent price hikes.

• We have previously discussed (at length) all the ways how the US could apply pressure and use its leverage against the Saudis - there a number of options: from geopolitical plays, to shutting down the sale of offensive weapons and ammo used by Saudis in their military ops against Houthis.

• But it is important to note that this should not include the removal of air defense hardware such as Patriot and THAAD batteries.

• And this is the policy currently proposed by the senior Congressional Dems reeling from the political betrayal by the Kingdom at such a high-stakes context.

• Although the sentiment is shared, the policy itself is wrongheaded.

• This is not the time to encourage bolder Iranian policy - Tehran most likely already feels more confident in the JCPOA/nuclear deal negotiations - since its oil is even more valuable to counter the OPEC+ cuts.

• (side note: they see the desperation to boost global crude supply in America’s possible sanctions relief in return for Venezuela’s oil)

• This already strengthens their hand.

• Confident of their boosted leverage, they should not be further incentivized to capitalize on rifts between America and the Saudis.

• And besides, one can bet that any new oil field attacks (similar to those in 2019) without US Patriots to guard against, will most certainly be used by Saudis as an excuse to justify further production cuts (adding to Iran’s leverage even further).

• Consequently, and as long as the clearly self-damaging policies are avoided, it is is heartening that the White House is finally changing its tone.

• White House spokesperson Karine Jean-Pierre said that it was “clear” that Opec+ was “aligning with Russia”.

• President Biden in turn described this move as ‘‘shortsighted” - a measured response: one that reveals displeasure whilst not escalating rhetorically and imposing a drastic/immediate policy change on Washington.

• Now that the White House is signaling a change in attitude, there are a number of pressure plays (as discussed in previous cables) open to Washington.

Energy policies to counter the OPEC+ cuts.

• Realpolitik plays aside, the White House must also deal with the potential energy market fallouts.

• Washington must scramble to ensure stability in the price of gasoline, and to further ensure medium to long-term revitalization in the domestic oil (and green energy) production.

• What not to do:

• Brian Deese, the director of the White House’s National Economic Council, did not rule out export bans/limits on exports of petrol and other refined end products.

• Although the statement that ‘‘nothing is off the table’’ is the correct sentiment to display flexibility and decisiveness - calming down domestic markets - export restrictions (ostensibly, aimed at securing supply for domestic use/preventing price hikes) will certainly do more harm than good.

• For this is a short-term measure that will cut into the earnings of US exporters, and will worsen the energy crisis in Europe - and further price hikes on that continent must be avoided at all costs.

• Since, not only would a worsening European energy crisis play straight into Putin’s hand in the short -term, but even in the medium to long-term, the US will have to come to the rescue anyways: dealing with a much bigger problem then.

• Not all short-term emergency measures are bad however - some, like releasing 10mln barrels of crude oil from the Strategic Petroleum Reserve (SPR) in November - are a correct policy to pursue.

• And with the latest OPEC+ decision, these releases will probably need to be both expanded and extended for a longer time.

• In the meantime, the Biden admin must hurry to implement policies that will create powerful incentives to revitalize the domestic oil production/refinery operations in the medium to long-term.

• When COVID first hit, a lot of refineries stopped production (due to lower demand for oil), and did not make necessary investments into maintenance and minimum operational capacities.

• As of last spring, the refining capacity in the US was approximately a million barrels a day below what it was prior to the pandemic - a major reason for recent hikes in the price of gas.

• There a number of good options, but mainly, and at the minimum, the following will likely produce the biggest ROI:

• 1) Use the Defense Production Act to mandate industrial production of key materials that are necessary to decrease oil/refinery production costs and thus expand energy production. These materials could include everything from steel pipes and fracking sand, to on-site equipment needed for the field personnel.

• 2) Provide subsidies to oil refineries.

• This could be essential to kick-start operations.

• Oil refiners must see a clear incentive to invest into production and operational costs.

• The government can reduce their cost and protect them from extreme downsides with subsidies.

• 3) Backstop oil refinery/production investments.

• The Federal government could provide insurance against the worst case commercial scenarios - or guarantee government purchases (which could then be used to refill the strategic petroleum reserve) at certain levels/quantities to protect investors against the extreme downsides.

• Both subsidies and investment backstops are important especially now - with many investors seeing the long-term trend of energy transitions, and are simply not incentivized enough to invest: the risk/reward ratio is on many occasions too asymmetric & unfavorable.

• With the possibility of financial catastrophes removed, more money will flow into necessary refinery/production spheres.

• 4) Suspending the Jones Act.

• This is a legitimate and well-intended law that prevents foreign vessels from carrying fuel between US ports.

• The world’s biggest shipping companies are not American, and one can clearly imagine how reliance on foreign nations could become a threat to the US national security - especially, if a well-subsidized Chinese shipping company deliberately offers the lowest rates to take over the market: this would create another powerful chokepoint activated at the whim of the CCP, and would therefore amount to a significant lever for Beijing.

• But in times of energy emergency, this legislation could and should be suspended - with few safeguards to ensure that only shipping companies of allied nations (NATO or major non-NATO allies) could render such services.

• More entrants into this space could reduce energy prices in the US by decreasing the transport costs: that could then produce a major dent into the cost-push inflation in energy markets.

• None of these mean that the US should not pursue long-term green energy transition.

• Offshore wind is still in early stages of development on the east coast of the US.

• Increasing the number of offshore leases is therefore essential.

• In addition, tax incentives and subsidies must not only be limited to the actual production of green energy, but must also include incentives/subsidies for the production of raw materials necessary for the manufacture of electric vehicles/batteries, solar panels/wind turbines and for the nuclear reactors (and more of these must also be built).

• But none of these are going to matter in the short-term.

• Washington must therefore pair its SPR releases with policy to boost domestic production of oil/refineries.

• This will not only produce the fastest and highest ROI in preventing the price hikes domestically, but will also enable the US to come to the rescue of Europe - and rescue they need.