Weekly Overview Cables - Ukraine War, Russia's troublesome paramilitaries, oil price caps begin to bite, and the great tank indecision,

note*: Many of you have emailed requesting an analysis of the Biden - Kishida meeting. We will discuss this in the upcoming cables. 

Ukraine war updates.

• Ukraine’s counteroffensive & outlook.

• The Battle for Bakhmut continues as Ukraine is able to fend off Russian attackers.

• In itself, this is already a significant indicator of challenges faced by the Russian army.

• Even months after a major mobilization of 300k troops announced last fall, and even after the withdrawal from Kherson and a consolidation of forces across the entire frontline, the Russian army is still struggling to capture a relatively small and strategically insignificant town in Donbas.

• On the other side, Ukraine may finally receive active US help in targeting Crimea.

• The Biden admin is currently considering providing Ukraine the weapons needed to target the Crimean Peninsula.

• This is a much-needed strategy that has been advocated by these cables since the very beginning of the war.

• Targeting Crimea will not only place the peninsula under threat - signaling to Russia that its control over Putin’s crown jewel is under question (giving him another incentive to negotiate in good faith), but it would also allow Kyiv to hit crucial logistics & supply hubs, and air bases that are used to support Russian troops across the entire frontline.

Putin’s paramilitaries continue to create headaches.

• The US imposed additional sanctions on Russia’s Wagner Group - designating it as a transnational criminal organization.

• Even though this will most likely not affect the leadership and Prigozhin himself too much (one assumes Prigozhin and his inner circle have repatriated their assets a long time ago - and have accepted the reality that there is no safety for them outside Russia), this designation will nonetheless affect Wagner’s recruitment operations.

• Now, as the National Security Coordinator for Strategic Communications John Kirby states, approximately 40,000 out of 50,000 contractors with Wagner are convicts who have few options but to accept any offer to escape custody.

• But recruitment of more professional and experienced combatants will prove to be more challenging, since new recruits would have to be ok with the following two conditions:

• 1) Following the US designation, there will be less pressure on Ukraine to treat Wagner combatants as prisoners of war: this is already not happening (since they are not soldiers of the Russian army), but one can imagine how a possible ceasefire could prompt Ukrainians to engage in a large-scale prisoner of war exchange.

• This will surely not apply to Wagner contractors - they will have to accept the risk of rotting in Ukrainian prisons (that is, if they are captured by Ukrainians before they get hammered to death by their own Wagner commanders for desertion attempts).

• 2) New recruits would have to accept the reality that as criminals, they will not be able to travel and/or engage in any employment/business activities in the civilized world once the war comes to an end.

• Again, not really a pressing issue for current convicts, but: a) Wagner probably scraped the bottom of the barrel already - most likely, there is not a large pool of convicts left to recruit from, and b) This will have an effect with recruitment efforts targeted towards those that have more to lose - take an example of Serbia: a young man joining Wagner would have to give up any hope of normal live as a future EU citizen back in Serbia.

• (side note: Wagner’s aggressive recruitment tactic is now creating friction between Russia and their traditional allies: President of Serbia complaining about Wagner’s attempts to recruit local men.)

• And then there is Kadyrov - who is riling up Putin’s ultra-nationalist right wing base by his opposition to grooming requirements imposed in the Russian army (Kadyrov insists that his ‘‘warriors’’ be allowed to keep their long beards).

• But the challenge from Kadyrov is not limited to ‘‘military culture debates’’ only - there is some evidence that Chechens are taking their Qadis (magistrates and judges who implement sharia law) with them to the occupied territories of Ukraine.

• It is yet to be determined what the role of these Qadis will be - will they only instruct/discipline Chechen fighters? Or is Kadyrov pursuing some grander ambitions of imposing Chechen way of life on occupied territories.

• The reported number of Qadis (300, according to Kadyrov himself) is high enough to suggest the former.

• Details remain murky, but if Kadyrov is truly pursuing a delusional sharia state in occupied Ukraine, well then that is bound to cause an internal crisis in Russia.

• Freeing ‘‘Russian-speaking’’ Slavs is the official line of Putin’s propaganda machine - that does not fit quite so well with Qadis adjudicating sharia law.

• And it is not even necessary for Chechens to actually do this - mere perception/possibility of this (and such rumors will be further spread deliberately by the enemies of Kadyrov) is enough to cause serious political problems for Putin.

Price cap will bite - Putin is aware.

• Only a month ago, Putin was calling the G7/EU oil price caps as ‘‘stupid’’ promising “unlimited” ability to finance the invasion of Ukraine.

• Just a mere month later, Putin is adopting a different tone altogether - directing his reports to adjust budgetary expectations to take into account the falling price of crude (which makes 40% of Russia’s state revenues).

• This was his instruction to the deputy PM Alexander Novak:

• “You need to look at this discount so that it does not create any budget problems. Discuss it and deliver your proposals”.

• He has a good reason to worry: Russia’s Federal Budget for 2023 assumes the sale of its Urals brand oil at the price of $70 per barrel.

• Urals is currently trading at $48 per barrel - that is a significant problem for Russia - a 31% drop in revenues entering Russian treasury is a major fiscal problem.

• Putin will most likely have to introduce new taxes to cover the shortfall.

• (side note: perhaps this is the reason for Moscow’s major state institution buildings having air defense systems set up on their rooftop: it is inconceivable that Ukraine would strike deep into Moscow anytime soon. But the visual is a good way to raise public alarm and signal that the war is serious and requires sacrifices. So get ready to pay more in your taxes.)

• The price of Urals brand dipped shortly after the introduction of the price cap in December - so far, the policy is working as intended without any major instances of under or overcompliance (which is also undesirable: there was a risk that companies may worry about being in breach of sanctions, and flat out refuse to deal with the Russian crude. We don’t want that to happen either - since this would only spike the prices of crude in the market).

• And as advocated by these cables, the price caps will receive a much-needed review in March.

• More bad news for Russia: price cap could be lowered even further - all the way down to Russia’s marginal cost of production (estimated at around $35-45 per barrel).

• And this must be the goal - gradual and controlled chokehold over Russia’s revenue - without causing huge price spikes in the market.

Germany’s conduct on Leopard 2 undermines NATO in a number of ways.

• Germany is still refusing to send its heavy Leopard 2s to Ukraine.

• The first obvious damage is operational - and hinders Ukrainian progress.

• The chief Commander of Ukrainian forces has requested 300 main battle tanks to support further counterattacks against Russia - and these must be delivered urgently, so that they could be used before Russia gets a chance to mobilize any further (500k additional troops according to Ukrainian intel).

• So then, Germany’s refusal to provide Leopards will slow down a possible Ukrainian counteroffensive - depriving Kyiv of an advantage of an attack before Russia manages to expand its available manpower.

• But the manner of Germany’s refusal, and the content of its arguments for a refusal causes far more longer-lasting harm to the entire NATO - beyond just slowing down Ukraine.

• Perhaps the most eye-catching moment of the (otherwise muted and relatively sparsely attended) World Economic Forum was the German Chancellor Olaf Scholz’s response on the question of German tanks.

• Scholz informed the American congressional delegation that Germany will not send Leopards to Ukraine until the US agrees to transfer its own M1 Abrams tanks.

• This strange rationale and the condition on joint deployment with the US harms NATO - undermining its deterrence and displaying Germany’s doubts around the solidity of NATO’s Article 5 - which enshrines the principle of collective defense.

• Article 5 -the promise that other states will come to your aid and coordinate a common defense - is as useful as NATO allies will allow it to be - it relies on a presumption that all 30 members believe in the iron-clad nature of this commitment.

• When Germany refuses to take on ‘‘risks’’ by supplying Ukraine with tanks, it is signaling that it may not believe in the strength of the Article 5 commitments.

• Since why would Berlin need to get America’s skin in the game to guarantee shared risk-taking if it already 100% believed in the robustness of Article 5?

• Unfortunately, this was not the first time that this has happened.

• Back in March, it was Washington that was guilty of NATO-undermining embarrassing policy gaffe when John Kirby (in explaining the reason for refusing Poland’s offer to send MIG-29s to Ukraine via a US air base) said the prospect of the jets flying from a US-NATO base “into airspace that is contested with Russia over Ukraine raises serious concerns for the entire NATO alliance”.

• In other words, he implicitly lowered the value of Polish lands as a NATO territory - after all, if both Poland and Germany are NATO members, then why should it matter in which country and air base the MIG-29 is stored before its eventual transfer to Ukraine?

• Similarly, when Germany conditions its own aid on America’s equal involvement in transfer of tanks, it is signaling its discomfort in escalating on its own - in other words, Berlin is indirectly signaling its belief that Article 5 may not be as iron-clad as it should, and so (and in order to reduce the direct risks to themselves) Germans are thus forced to take extraordinary measures of getting the US involved as well - sharing the direct risk of a specific conduct.

• This is not the way a NATO ally should behave - it was not so back in March (when the US was guilty of the unacceptably embarrassing policy faux pas), and neither is it acceptable now.

• We should however remain careful about letting Washington and London off the hook for not deploying their own tanks (or doing so insufficiently as in the case of the UK).

• Also - how hard is it really to train on M1 Abrams or to manage its logistics?

• Without delving into granular details of each tank, one can simultaneously agree with the following two propositions: 1) It is entirely feasible that Leopards are easier to train and/or maintain/ supply, and 2) At the same time, the simple logic of competitive weapons production states that the difference cannot be overwhelming - otherwise, the US would by that logic, be fielding a fleet of significantly more inferior tanks (at least when it comes to ease of training/deployment and upkeep - even if not necessarily firepower/precision).

• After all, if the burdens of upkeep and training of M1 Abrams’ are that much higher than that of Leopards, then this is a red flag for domestic tank manufacturers in both the US and UK - why are we lagging in ease of use and maintenance to such an extent that training an ally in need becomes impractically hard?

• (side note: we have former military leaders and Tank Brigade commanders amongst our leadership - this is a request and an invitation to comment or email with your insights on M1 vs Leopard 2s).

• Downstream implication.

• The matter did not however end on this point.

• Germany’s conduct was never going to be assessed in a vacuum - other NATO allies were always going to have something to say.

• And say they did.

• Poland, Finland and Denmark are willing to send their own Leopards.

• Now, transfers of Leopards require permission from Germany, but the aforementioned states are willing to undermine Germany and supply these tanks without seeking any approval from Berlin.

• Speaking at Davos, the Polish PM Morawiecki expressed willingness to send over 14 of Poland’s own Leopards (reminding everyone that Warsaw had already previously supplied 250 older T-72 tanks).

• Now if this does indeed happen, and if Ukraine gets at least a portion of its 300 western tanks request fulfilled, then that is indeed good news.

• This is also problematic for different reasons however - it sours internal cohesion between NATO states, and destroys a lot of political capital and goodwill.

• Embarrassing Germany on the global stage may even force its hand in the short term, but such moves are corrosive to an alliance in the long-term.

• Moreover, and when it comes to retaining moral weight and political capital necessary for the leadership of NATO, the US actions must align with the rhetoric of its leaders.

• For example, this was how the US Defense Minister Lloyd Austin expressed his regret at Germany’s hesitation and refusal to supply Leopard IIs:

• “This is not a moment to slow down — it’s a time to dig deeper….The Ukrainian people are watching us, the Kremlin is watching us, and history is watching us.[emphasis added].

• Agreed - history is watching us and we should not disappoint Ukraine by slowing down.

• So then, why is Washington still hesitant about delivering ATACMS missiles for HIMARS, as well as the small-diameter bombs: both would significantly extend the range available to Ukraine for missile strikes.

• Such a capability would allow Ukraine to target logistics hubs and ammo depots located further within Russian control.

• This would then force Russians to use smaller trucks to transport ammo and supplies from further afar - slowing the entire Russian counter-offensive.

• At the end of the day, even if you mobilize additional 500k troops, if you cannot get them supplied with food and weapons, they are nothing more than cannon fodder - at best, effective in stalling Ukraine’s counter offensive - rather than having any utility for forward operations conducted by Russia.

• Unfortunately, the latest tranche of American military aid, once again did not contain any of the long-range strike systems necessary for Ukraine’s effective counter offensive.

• Credit where it is due though - the latest $2.5bn in military aid contained many new and advanced weapons systems: 59 Bradley Fighting Vehicles, 90 Stryker armored combat vehicles, 53 Mine-Resistant Ambush Protected vehicles, eight Avenger air defense systems, 350 Humvees and High-speed Anti-Radiation Missiles (to neutralize Russia’s air defenses).

• This is great - but still insufficient.

• Lloyd Austin must re-read his own comments before the next announcement of American aid - now is the time to dig deeper.