Weekly Overview Cables - Ukraine war, Biden-Xi call, and sanctioning Russian oil.
Ukraine War Updates:
Donbas battlefield & outlook.
HIMARS keeps on delivering, and Ukraine is preparing for a counterattack of Kherson.
All indicators of Kyiv’s shaping operations, including their targeting of the key bridges (to prevent Russian resupplies across the Dnipro river - Russia’s pontoon bridges will prove inadequate for the speed & scale of the necessary operations), point to these plans.
Of course, these cables have advocated for the recapture of Kherson back in June - way before HIMARS granted Ukraine a strategic advantage and a breathing space for focus.
If Ukraine was to retake Kherson by early fall, things will change dramatically in Ukraine’s favor.
Europeans facing cold winter will have definitive proof that their sacrifices are paying off on the battlefield with Russia.
Here in the US, Biden admin will also have a concrete success story to point at - crucial to do so ahead of midterms - when isolationist all “gas prices and nothing else” / isolationist faction of the GOP will keep hammering the point that the US should refocus its resources to dealing with domestic issues.
(side note: we are yet to see if similar pressure will come from the fringe left/”the squad’’ faction of Dems)
Russia on the other hand, is still struggling to adjust.
They are targeting Bakhmut and Donetsk city - the former is well-defended and is unlikely to succumb easily.
In addition, there is intel that Wagner mercenaries (usually reserved for specific missions/high-casualty battles) are now fighting side-by-side with the regular Russian formations: this is unprecedented and points to dwindling manpower resources.
Russian war crimes and psyops.
As Russia is struggling to regain initiative on the battlefield, they have once again resorted to brazen and gruesome war crimes.
First there was the incident of a Ukrainian POW filmed (and the video was thereafter widely shared in Russian telegram channels) having his genitals mutilated (prior to his ultimate execution).
Even ISIS did not mutilate the genitals of the captured Western soldiers (limiting their savagery and barbarism to beheadings/executions).
Then there was this outrageous massacre of 53 Ukrainian POWs involved in the defense of the Azovstal factory in Mariupol.
Russia claims that a Ukrainian HIMARS launched GMLRS rocket hit the Olenivka prison (where they were detained) killing the POWs in their sleep.
But this does not make any sense for a number of reasons:
a) Olenivka is a well-known prison, and Ukraine was aware that their POWs were detained at this location.
b) Olenivka was located only 15km off the front lines - even if Ukraine was unaware that their own POWs were detained here (in itself, an inconceivable scenario), why would they use expensive and strategically valuable HIMARS ammo (meant for deep strikes behind frontline) for a target this close to the frontlines? They could have easily used an ordinary artillery gun, or at the very least a self-propelled howitzer.
(side note: and Russia was already breaching Article 19 of the Geneva convention by keeping this detainees at a location so close to the frontlines)
c) The photo evidence of destruction is not consistent with a potential impact of HIMARS’s GMLRS rockets: the old building is still intact, and bodies are burned (not torn apart from impact).
GMLRS rockets don’t cause extensive fire damage - they destroy concrete structures: damage to the facility and burned bodies point to the use of thermobaric weapons.
d) Curiously, and defying laws of probability, not a single Russian guard was killed in the incident..
e) Satellite imagery indicates that a number of graves were dug near the facility - fully 2 days prior to the strike.
Indeed, all available evidence points to Russia’s direct strike against a facility using some sort of thermobaric weapons - burning the POWs in their sleep.
Russia simply could not stand the idea of Azovstal defenders living as heroes - and they probably expect to intimidate other Ukrainian soldiers to give in easily and not put on a heroic resistance like those captured in Mariupol.
Although, these most recent atrocities, the opposite is more likely: how many Ukrainian soldiers would like to risk genital mutilation and being burned in their sleep as opposed to taking their chances and fighting until the very end?
(side note: speculation, but by burning the bodies, Russia could have also tried to cover up evidence of the torture perpetrated against the POWs)
And then there is this indirect/circumstantial evidence pointing to intent: the Russian embassy in the UK tweeted that in any case, the Ukrainian POWs “deserved to be executed in humiliating death”.
(side note: Recall also how Putin awarded the unit responsible for massacring civilians in Bucha. War crimes are now the official MO of the Russian military).
We are now witnessing some incredible bloodlust from Russia - negotiations and peace settlements are becoming less likely with every such incident.
The US-led NATO must therefore be ready to support Ukraine for however long it takes to defeat Russian invaders - and delivering HIMARS in single units, is simply not going to cut it.
EU - Russia gas war.
Thus far, the EU is pursuing the policy of resolve in relation to the Russian blackmail gas cuts (Nordstream 1 operating at 20% capacity).
EU’s (so far) voluntary 15% gas cut commitment initiative, coupled with: a) European Commission’s initiative to increase the military budget by €500 million, and b) Germany’s approval of further military aid to Ukraine: 100 tank howitzers worth 1.7 billion euros to Ukraine, indicate that the EU leaders are (thus far) reluctant to consider policy of appeasement vis-à-vis the Kremlin.
At issue, is not just consumer discomfort and a risk of a very cold winter - gas powers 34% of the EU’s industrial production: everything, from cars to the crucial commodities like steel, will become more expensive.
Inflation and the cost of living crisis will worsen further (potentially allowing Biden to contrast the relatively more favorable state of affairs in the US, with comparatively more dire conditions in Europe - important ahead of midterms).
We have previously delved deeper on a range of policy options to boost supply of energy - from LNG imports, to using alternative and underused energy sources.
And luckily, Europe still has a number of options open to it - but unfortunately, certain European statesmen remain adamant in their blanket and irrational refusal to consider resorting to clean nuclear power.
Indeed, just two weeks ago, Joachim Bühler, CEO of safety inspection association TÜV, argued that Germany's working nuclear plants, as well as the three plants closed in December, can operate under perfectly safe conditions - now and in the near future: "The plants are in a technically excellent condition".
It is extremely challenging to understand Germany’s dogged refusal to use nuclear power - when their French neighbors have been doing so for decades without any major incidents.
Unless Germany wants to resort to dirty coal, or seek help from its LNG importing fellow EU members with potential capacity to share surpluses in winter (like Spain - oh the irony of southern Europe bailing out Germany - when Berlin refused to do the same in late 2000s - following the Euro crisis), then German statesmen must finally return to rational policy-making, and turn on those nuclear plants.
Biden - Xi call.
Was handled well by President Biden.
In particular, Biden avoided further unnecessary provocation whilst refusing to backtrack on the potential Pelosi Taiwan trip in August.
After offering Xi the basic platitude that the US policy on Taiwan “has not changed”, Biden emphasized Washington’s opposition to “unilateral efforts” to change Taiwan’s status quo.
In other words: our one-China policy remains, but do not think about any moves on Taiwan.
And after broad discussions (acting as a diplomatic filler) on areas of cooperation (like public health) Biden then proceeded with raising the issue of Uyghur genocide and forced labor.
Naturally, Xi is not going to change his genocidal policies after this chat, but raising this issue was important due to what it implied: that the US was not in crisis-management mode, and was focused on longer-term issues.
This implied confidence delivered the important message that Washington did not perceive Chinese threats as too credible - a true crisis would not allow for a room to discuss longer-term issues (can you imagine Kennedy berating Kruschev for Soviet Union’s domestic human rights issues during the Cuban missile crisis? An actual emergency does not leave room for much else).
Indeed, China’s own readout mentioned Xi himself talking about longer-term issues as well: a leader of a country ready to target the plane of the US House Speaker would not discuss topics of “protecting global energy and food security” with Biden.
This however, did not stop Xi from engaging in further belligerent and theatrically over the top rhetoric on Taiwan:
“The position of the Chinese government and people on the Taiwan question is consistent, and resolutely safeguarding China’s national sovereignty and territorial integrity is the firm will of the more than 1.4 billion Chinese people. The public opinion cannot be defied. Those who play with fire will perish by it. [emphasis added]”
Xi is clearly a big fan of parable-style deliveries.
But at this point, his threats are not all too credible.
Indeed, the US has observed zero evidence of any military shaping operations to enable Chinese actions to back its fiery rhetoric.
On the other hand, the US Navy has adjusted its presence in the Indo-Pacific: this is exactly the step that had to be taken to demonstrate America’s preparedness to act in the face of threats.
Overall then, nothing too unpredictable happened on the call, and Biden maintained a strong frame (backed by US Navy’s repositioning in the Pacific) without causing further unwarranted escalation.
And on his part, Xi acted largely as expected.
(side note: just a day after the Biden - Xi call, the US Congress passed the CHIPS act - an important bill to boost America’s competitiveness in the production of advanced semiconductors. This is a major blow to China. We will discuss further implications in the upcoming cables).
Oil Sanctions - dangerously too slow in implementation.
These cables have long advocated for, and welcomed the news that the G7 agreed to impose price caps on the exported Russian oil.
Such an informal buyer’s club will: a) force Russia sell to the participant buyers at a price point just above the marginal cost of production, and b) would lower its export prices everywhere in general - since, even countries that do not formally participate in the price caps, will most still most likely exercise their new leverage - demanding a lower price (comparative to their previous payments).
All of this would reduce the revenue flowing into the Russian coffers - hindering Putin’s ability to fund his war machine.
And there were some early successes - Treasury Secretary Janet Yellen’s South Korea trip produced some concrete results: South Korea expressed willingness to follow US-led plans to impose a price cap on Russian oil.
And this agreement was declared publicly - creating a social proof momentum for other states to follow.
Unfortunately however, and for ostensibly no good reason, the overall implementation of these price caps is taking too long.
The G7 has now agreed “to have a price-capping mechanism on Russian oil exports in place by December 5”.
(side note: that coincides with the day when EU’s ban on Russia’s seaborne imports of crude come into force).
That is four months away - an unacceptably long time.
This only incentivizes Putin to double down, and do everything possible to secure enough battlefield gains to end up in a stronger bargaining position by the time the price caps come into force (and start to put a dent in Russia’s treasury).
In addition, a longer timeline allows Russia to lock in long-term contracts with its established buyers - so that they cannot demand a lower price on a whim.
And Putin is already pulling off tricks to maximize his revenue: Saudi Arabia agreed to import 647,000 tonnes of Russian oil in the space of a three month period of April to June 2022.
That is almost double the amount of Russian crude oil imported by Saudi Arabia in the same period of 2021.
What is exactly happening here?
A win-win for both parties: Saudi Arabia imports significantly discounted Russian oil (cheaper because they were stuck in Estonian ports, looking for a buyer) for its power plants, and thus avoids using its own oil that it sells at a higher price globally.
Russia finds a buyer for its unwanted orders.
(side note: Saudis insisting on a lower price is a good indicator of how even countries not formally joining the price caps will use their new leverage to demand a lower price from Russia: a real-life proof that price caps should work really well once in full swing)
Of course, this is yet another evidence of our regional ally going behind Washington’s back and propping up Putin’s regime (hence why these cables have always advocated for a relationship with Saudis to be based on transactional leverage not unlimited, unearned, and ultimately, one-sided goodwill).
In the meantime, Putin will keep pulling off moves to preserve his market dominance and sustainability of securing high oil revenues.
Just a week after Biden’s trip to Saudi Arabia, Putin had a phone call with MBS - emphasizing “the importance of further cooperation within the OPEC+ group of oil producers”.
In other words, with a mere phone call Putin wants to undo what Biden ostensibly achieved in his Saudi trip - increasing Saudi oil production.
The Saudi decision will be announced on the 3rd of August.
And it is unlikely that there will be no increase in the output - whether that is 750k or even 1mil barrels per day however, the market is unlikely to swing too dramatically in any case.
(side note: MBS’s trip to Paris and a photo-op with Macron, is yet another indicator of his growing leverage vis-à-vis the west - and whatever he decides to announce in early August, he would be foolish to give up too much - he is much more likely to maintain a drip drip campaign to maximize his leverage: using this newfound power to secure further Western trips to whitewash his reputation after the Khashoggi murder. This is important for MBS’s long-term ambitions: he will need Western investors for his grandiose infrastructure projects in the Kingdom. And what better way to secure their acquiescence, than with a photo album of Western statesmen groveling and shaking his hand).
In the meantime, and until an agreed-upon price cap is in place, the West must use its powerful levers over global finance and logistics operations to squeeze Russia further.
Western companies have a monopoly over the insurance market for ships that carry oil: they must enforce de facto price caps.
If Russia wants to put its oil on tanker ships, then it must be forced to sell oil at a lower price to secure the necessary insurance.
Fast implementation is key: a specific price point need not be fixed and can in fact be reviewed periodically - a simple rule - that, say, Russian oil priced only at a 50% discount of the Brent crude price would be insured, would suffice in the meantime (in practice this would imply that Russia would be forced to sell at $40-$50 per barrel. This is still higher than their marginal cost of production, and Russia would thus still be incentivized to keep selling in spite of their dissatisfaction).
In addition, sanctions experts broadly agree that eliminating the convertibility of Russian energy exports could prove devastating to the Russian Ruble.
Russian banks could for example, be sanctioned to eliminate specific carve-outs for energy-sales payments - preventing conversions to US dollars, euros, Japanese yen and British pounds.
This would force Russia to trade its oil with Chinese yuan, Indian rupees and any other trading partner currencies.
Hoarding these currencies (and accumulating large trade surpluses in the process) will not do Russia any favors if/when the time arrives to sell these off to prop up the Russian ruble - they are simply more illiquid/harder to exchange on the open market than the US dollar.
Denying Russia US dollars, euros, pounds and yen, until the price caps kicks in, is going to produce a lot of harm to the Russian economy.
And enforceability/implementation of this policy need not be too difficult: Western banks already have years of experience in implementing currency convertibility restrictions - just ask Iran.