Weekly Overview Cables - Ukraine war, Macron - Biden meeting, and "talks" with Putin.

*note: many of you have emailed with questions around Turkey’s new military ops in Syria - we shall discuss this in Thursday’s post.

Ukraine war updates.

• Ukraine’s counteroffensive & outlook.

• The Ukrainian forces have reportedly reached the east (left) bank of the Dnieper River - across from Kherson City.

• This will allow for a new base of operations into the rest of the Kherson oblast.

• And since the ground has frozen in many regions of Donbas, further mechanized warfare maneuvers are now back on the table.

• At this point, it is important for the Ukrainian leadership to remember about the importance of credibility.

• A senior adviser to the President of Ukraine, Mykhailo Podolyak announced that Ukraine lost 10k soldiers in this war so far.

• This is a fantastically low and thus, uncredible figure.

• For context, the Chair of the US Joint Chiefs of Staff, General Mark Milley had estimated that around 100k soldiers were killed and wounded from the Russian side in this war - and that Ukraine most probably had a similar casualty rate.

• If a most senior US general estimates deaths of 30k (under the standard 3x killed to wounded ratio) and Ukraine sticks to the 10k figure - that is an enormous disparity.

• Either the US is 3x off, which is unlikely - given how its superior and precise intel has been one of the main reasons for Ukraine’s success thus far - or Ukraine is under-reporting casualties?

• Why?

• To appear stronger than they truly are? Who are they kidding?

• Credibility is more important than blatant propaganda.

• Nothing wrong with information war/disinformation campaigns - but for these to be effective, they must be believable.

• And if anything, the true number is likely to elicit more sympathy from the Western public - highlighting the extent of sacrifices made by Ukraine.

• The Russian population turns against the war.

• In the meantime, the leaked (to an independent Russian news website Meduza) internal-only poll conducted for the Kremlin, shows that only 25 percent of Russians want the war in Ukraine to continue.

• This is down from 57 percent in July; meanwhile, 55 percent want negotiations, up from 32 percent in July.

• These are very significant changes - and as long as the West remains united in imposing ever-tougher sanctions and helping Ukraine to inflict more battlefield losses on the Russian military, the numbers should get worse for Putin.

The EU and the G7 Coalition agree to start with pragmatism on the Russian oil price cap.

• We have recently discussed how the EU must avoid the situation where perfect is the enemy of the good - when it comes to imposing initial price caps on Russian oil.

• The price caps were to be agreed by December 5th, and a lot of time was wasted on certain member states’ (like Poland’s) maximalist goals of lowering the cap to around $30 a barrel.

• (side note: having said this, at least from a signaling perspective, this is quite useful in warning Russia that the worst is yet to come if they don’t reverse the course quickly).

• There is always time to escalate - once a minimum working agreement is in place.

• It is therefore great to see that the EU now has a consensus with the wider G7 coalition on a starting point: all 27 members have agreed to cap the price of Russian oil at $60 per barrel.

• This is already a significant milestone, and given that Russian oil is currently trading at $88 a barrel, even at this relatively mild set point, the cap will already cause a significant dent to Russia’s state revenue.

• And furthermore, with this agreement in place, the EU and G7 have secured a very powerful lever to press the Kremlin.

• (side note: as a reminder, the price cap prohibits the G7 coalition and EU companies from insuring, financing or shipping oil from Moscow unless it is sold below the agreed upon price cap.)

• Russia’s economy is already projected to continue its monthly negative 4.4% Real GDP slide.

• With a significant dent to oil revenues, the economic conditions in Russia will worsen.

• But the power of this new leverage comes with what the EU/G7 can threaten to do (and should do) if Russia refuses to move into the trajectory of withdrawing its troops from Ukraine.

• The EU/G7 must agree to hold monthly price cap review meetings: where a further 5% lower price cap is imposed every month - if there is no indication that Russia is willing to withdraw from Ukraine.

• This will not only amount to a powerful disincentive for Russia’s continuous military operations, but it will furthermore allow markets to gradually adjust to new pricing - preventing supply chain issues, and unacceptable price hikes leading to another wave of cost-push inflation.

Mr Macron goes to Washington - again.

• This past week, President Biden hosted President Macron’s second state visit to Washington (previous one was under the Trump admin).

• At the end of his visit, Macron was treated to a fancy state dinner with full honors.

• This is not a minor matter of protocol - Macron is now a European leader to receive the most honors, pomp and special treatment from Washington within the past five years.

• And as such, there will undoubtedly be some major political (if not policy) implications: what about heads of other, more traditional allies?

• What about the PM of the UK? When is he going to receive similar honors?

• After all, the UK is most definitely a closer strategic partner and a military ally than France - it is the British and not the French military doctrine that instructs all of their nuclear (trident missile carrying) submarines are to be handed over under the US command if the UK leadership, and the government in Westminster was to be wiped out in a nuclear strike.

• And what about Australia?

• Are these countries to be taken for granted? Or should they follow in Macron’s steps, and in order to secure similar honors and attention, start acting difficult on purpose?

• (side note: given the current geopolitical realities, neither the UK or Australia is in position to throw tantrums for special attention).

• And this is not a trivial matter: how the UK is perceived in Washington affects its day to day deals vis-à-vis France and the rest of the EU.

• The UK is stuck in trying to get a better deal post-Brexit fiasco (from the issue of illegal migration/English channel crossings, to financial regulations, to the border checks in Northern Ireland).

• And the perception of a weakening relationship with Washington will harm Britain’s leverage in these dealings.

• This is something that the Biden admin should remain alert to, and must avoid dropping the ball vis-à-vis traditional closest allies of the US.

• But back to the trip itself.

• There were in fact some good reasons for Macron receiving such honors.

• Improvement in the Washington - Paris relationship are necessary due to the following factors: 1) Macron’s upcoming and increased role as an intermediary in the potential talks with Putin (and the importance of rhetorical alignment and discipline that comes with it), 2) The French leadership in securing EU’s steadfast position on Russian sanctions, and in reviving the military production capacities of the bloc, and 3) Smoothing over differences and avoiding a major (and extremely politically costly and time-consuming) conflict over the implications of the Inflation Reduction Act.

• Alignment on Putin.

• In addition to reiterated military & financial support for “for as long as it takes”, a crucial base level of alignment was established on; 1) Future negotiation minimums, and 2) The war crimes investigations.

• On the future west - Russia negotiations, an important minimum condition was added to the Biden-Macron joint statement:

• “The United States and France reiterate their duty to uphold applicable international obligations and the principles and purposes of the UN Charter.”

• Translation: no territorial concessions in return for political settlements (since accepting Russia’s territorial gains secured from this invasion would clearly violate the UN Charter).

• However, note the phrasing of this stance: both Biden and Macron avoided saying this in explicit and clear terms - opting only to imply the intent.

• Why?

• Because, in the exceptionally unlikely scenario that Ukraine itself agrees to certain territorial concessions, the US and France would not want to trap themselves into a negotiation stance that is stricter than that acceptable to Kyiv.

• Once again, such a scenario is almost inconceivable.

• A more likely eventuality is that Ukraine frees all of the territories taken post February invasion, and agrees to park the issue of Crimea - and yet, on the balance, even this is quite unlikely to happen.

• The reality is that unless there is a radical reversal of fortunes on the battlefield (in itself only likely if the West would suddenly withdraw funding and arms shipments - again almost inconceivable), Ukraine will prosecute this war to the max - demanding (quite rightly) nothing short of a full Russian withdrawal.

• But back to the statement - in addition to minimum negotiation red lines, both leaders also committed to holding Russia accountable for war crimes:

• “They also reiterate their steadfast resolve to hold Russia to account for widely documented atrocities and war crimes, committed both by its regular armed forces and by its proxies, including mercenary entities such as Vagner and others, through support for international accountability mechanisms, including the International Criminal Court, the Ukrainian prosecutor general, UN Human Rights Council Commission of Inquiry, and the OSCE Moscow Mechanism, sanctions, and other means.”

• And the French Foreign ministry confirmed its support for the prosecution of war criminals, backing the proposal of a special tribunal being set up for this explicit purpose.

• This makes France the first Western state to clearly and formally endorse this proposition - earning them some wiggle room for more unsavory and “pragmatic” realpolitik maneuvers vis-à-vis Russia.

• But going back to the statement - note what was missing: talk of forcing Russia to pay reparations.

• This is a conspicuous absence - no doubt done deliberately to secure some negotiation chips vis-à-vis the Kremlin

• Military revival of Europe.

• Both leaders agreed to the following objective:

• “The United States and France intend to continue our cooperation to enhance the efficiency of the defense export authorization process, with a view to developing stronger and interoperable defense industrial bases in Europe and in the United States as a means to deliver better military capabilities for the benefit of the Alliance. [emphasis added]”

• Now, one could argue that this is music to the ears of Macron - with his tiring yet never-ending rhetoric around ‘‘strategic autonomy”.

• But the truth of the matter is that a revival of the European defense industrial base is strongly in the US interests.

• As of right now, Europe is a drag on America, and far from an equal military partner.

• Finland’s PM Sanna Marin was right to admit that Europe is ‘‘not strong enough’’ on its own, and that it would have withered without America’s support.

• Indeed, most recent stats are revealing and extremely worrying.

• For example: even the UK, a nuclear NATO power with a proud military tradition, is lacking in conventional weapons and ammunition.

• In fact, at the peak of fighting in Donbas, Russia was using "more ammunition in two days than entire British military has in stock".

• The EU vs Russia disparity is not mainly in technology (although even here, and compared to America, significantly less focus was devoted towards the design and manufacture of the next-gen weapons and missiles), but rather, in stock of essential weapons and ammunition (and active, combat-ready personne).

• In other words, this is not a complicated problem to solve - Europe simply needs to produce more ammo and weapons.

• And this requires a significant investment into Europe’s defense industrial base.

• And this is of course 100% in the US interests: not only would Europe be able to share a higher proportion of burden in supplying Ukraine with ammo, but they would also move towards self-reliance in relation to Russia’s security threat: all this would allow the US to redeploy more of its resources towards the Pacific - to confront China.

• In addition, and in the long-term, the development of a well-functioning and prolific defense base in Europe will help the Pentagon directly - it would force our own domestic suppliers to remain competitive in pricing their weapons and ammo - thus, in the long term, reducing the costs of armament for the US military.

• Dealing with a new sticking point in the US - EU relations.

• Not everything went smoothly during Macron’s visit.

• The French President is annoyed with Biden’s Inflation Reduction Act and the ‘‘super aggressive’’ $368bn worth of government subsidies and incentives offered to domestic producers of green consumer goods - including the manufacturers of electric vehicles.

• Now, Macron (and other EU leaders’) argument is that this amounts to direct state aid and therefore, a violation of the WTO rules.

• Before we focus on what the EU should do instead of complain, three things to note here:

• 1) Since when is the EU such a strict guardian of the WTO rules?

• How are the EU’s planned tariffs on imports from countries that don’t intend to cut carbon emissions in line with the WTO?

• Isn’t this simply protectionism under another, more politically acceptable and palatable name?

• 2) Although it is understandable that Macron is annoyed (outflow of investment from the EU and France into the US will now be counted as a foreign policy/macroeconomic policy for him - just like the personal criticisms he faced for losing lucrative defense contracts with Australia - once AUKUS came into play), what is it exactly that he is proposing?

• That Biden goes back on his signature legislative accomplishment?

• That is not happening and would break all rules of political science.

• More realistically therefore, by loudly portraying his extreme displeasure, he is warning against further similar policies.

• Yet even this is unlikely to matter: with the House of Representatives in the hands of the GOP come January, no more IRA-style fiscal largesse is likely to happen anytime soon.

• So Macron’s rhetoric is only directed towards his own domestic base - he is creating a blame game to justify future failure in preserving the investment of domestic electric manufacturers - many of whom will seek to open subsidiaries and seek greener pastures in the US.

• 3) The EU could of course go to WTO court - but that is unlikely to produce any result in any reasonable time-frame.

• The last major dispute over Boeing - Airbus took 17 years of adjudication with little legal bite over so many years .

• (side notes: and besides, the Biden admin had shrewdly blocked appointment of judges (under national security grounds) to the WTO court - defanging the administrative powers of the court - probably in anticipation of such challenges to his state subsidies).

• The right solution.

• The EU should simply copy the US, and offer similar subsidies and incentives to their own domestic electric manufacturers.

• Crucially, they must do so as a bloc and not as individual countries - preventing the repeat of the $206bn German energy subsidy plan for households and businesses suffering from the extreme spike in energy prices

• (side note: and naturally, this is extremely unfair towards the businesses of smaller and poorer EU states, who’s businesses will struggle to compete with the German businesses -who will now get to enjoy a relief in energy, and thus, production costs)

• The EU can most definitely spend $300-400bn on their own green energy subsidies.

• In fact, they have raised a joint €750bn post-pandemic fund: borrowing jointly and spending across the bloc.

• Surely they can repeat half this feat for such an important project - they will in any case have to do so at some point: the EU is too dependent on China for rare earths and other materials and tech for a full green transition.

• Better start now: this is good for the EU and for the entire world.

• And it is a practical solution to a problem that will not be solved with Macron’s loud complaints.

US - Russia talks must not be framed as negotiations.

• In a joint press conference with President Macron, Biden indicated a willingness to talk to Putin about ending the war in Ukraine:

• “I'm prepared to speak with Mr. Putin, if in fact there is an interest in him deciding he's looking for a way to end the war. He hasn’t done that yet.  If that’s the case, in consultation with my French and my NATO friends, I’ll be happy to sit down with Putin to see what he wants — has in mind.  He hasn’t done that yet. [emphasis added].”

• Now, there is nothing wrong about talking per se, but exploring what Putin wants and what he has in mind implies a negotiation.

• In fact, it is a negotiation - pure and simple.

• And agreeing to negotiate without Ukraine in the room, is a worrying development.

• This is exactly what Putin wants: he has been framing Ukraine as an arms depot for NATO - an entity that lacks its own agency, a political organization that is not, and cannot be, an independent sovereign state.

• It was therefore not at all surprising to see the Kremlin jump at an opportunity to confirm this frame by responding (through spokesperson Dmitry Peskov) that “The president of the Russian Federation has always been, is and remains open to negotiations in order to ensure our interests”.

• Again, this frame plays right into the Kremlin’s propaganda: that the real conflict is taking place between Russia and NATO, and that Putin is willing to talk to Ukraine’s ‘‘handlers’’ (to use the Russian state media term).

• Consequently, all of Western leaders must avoid contributing to, and bolstering this narrative.

• They need to remember their promise that no negotiations are to take place over Ukraine’s head.

• Indeed, Biden’s remarks emphasized consultation with the French and other NATO leaders but had no mention of Ukraine whatsoever.

• He is literally confirming the Kremlin’s NATO vs Russia frame: this needs to stop immediately.

• Of course (and only few days later), the French President was quick with his contribution to the pro-Kremlin narratives by legitimizing Putin’s demands for NATO’s security guarantees:

• “That topic will be part of the topics for peace, so we need to prepare what we are ready to do, how we protect our allies and member states, and how to give guarantees to Russia the day it returns to the negotiating table” [emphasis added].

• Really? Security guarantees for a country that started an unprovoked war?

• How about instead of this nonsense, we discuss the security guarantees we are willing to accept from Russia?

• How about guarantees that a similar invasion will not happen again?

• Did Macron suddenly forget who the aggressor and the aggrieved parties are in this war?

• But this is of course classic Macron - the rest of the Western leaders, and Biden especially must hold themselves to a stricter rhetorical standard.

• And on a broader point, even introducing the possibility of serious talks must come from Russia first.

• Putin is operating under the assumption that he can and will outlast the West in the war of attrition: seeing the West introducing the topic of talks will only serve as a confirmation of his belief that the West is gradually losing its will and interest in supporting Ukraine for ‘‘as long as it takes”.

• The reality is that now is precisely the time to impose further pain and suffering on the Russian military - driving home the point that a voluntary withdrawal of troops (in return for certain political - never territorial - concessions) is the most face-saving option for Putin.

• And until that happens, Ukraine must be armed and funded to the max - with little delay or hesitation.