Weekly Overview Cables - Ukraine war, yet another mysterious assassination in Russia, Kyiv ready to negotiate on Crimea, and OPEC+ strikes again.
(note*: Macron - Xi meeting, and near-term implications will be discussed on Thursday’s cables)
Ukraine war updates:
Close observation of daily activities on the frontline - from movement of infantry and armored vehicles, to use of ammo - suggests that Russia’s “winter offensive” is about to culminate - with Bakhmut still remaining under Ukrainian control.
In the meantime, the long-standing strategy (first started in October 2022) to degrade Ukraine’s power generation & electrical grid infrastructure, has all but failed definitively.
A combination of Western air defense systems (NASAMS and Iris - T in particular) and Ukrainian ingenuity for creative, improvised and quick fixes to the damaged infrastructure, have limited the effectiveness of Russian air strikes.
On April 8, Ukraine’s Energy minister Herman Halushchenko announced that Ukraine was now resuming energy exports - for the first time since October 11, 2022.
In other words, not only can Ukraine now generate enough energy (and do so consistently) for itself, but they are also now confident enough (about continuous supply) to export to other countries.
And it seems that Russia has realized the futility of continuing this campaign: UK’s defense intel has reported that the scale and frequency of attacks against Ukraine’s power infrastructure has gone down significantly since early March.
Against the background of discouraging Russian performance on the battlefield, there has been an announcement of new additional US military aid worth more than $2.6 billion - funds that would be used to purchase new gear like advanced radars, and replenish ammo - like the missiles used in NASAMS air defense system.
Ukraine counterattack plan “leak”.
Something rather unusual did also take place last week: there has been a “leak” of Ukraine’s counteroffensive plans in the spring - it is hard to judge whether this was a genuine leak, or a misdirection/information warfare.
On the one hand, 1) There have not been leaks of precise locations and timing of the potential counterattack (something that we would expect if the aim was to confuse and misdirect), and 2) Precise timetables of the delivery of weapon (and identification of specific allies) to Ukraine have been included in the leaks - something that has a serious potential to damage trust and cohesion between allies.
On the other hand, there is no definitive proof that this was done by oversight or accident (but then again proving this is by definition almost impossible).
At this moment in time, we can only guess - and hope that any potential damages will be limited in scope (if the docs are indeed genuine and were released due to an accident/oversight).
Yet another high-profile assassination in Russia.
A prominent Russian - part “milblogger” (military blogger), part warzone reporter, and 100% far-right fascist Maxim Fomin (also known as Vladlen Tatarsky) was assassinated last week - during a small talk that he was delivering to those of similar minds.
Apparently, a woman handed over a bust (ostensibly, a gift containing the explosives) to Fomin - who died instantly.
Said woman was later detained - but it is unclear if she herself (sustaining major injuries during the explosion) was the assassin.
A lot of details remain murky, but Russia was quick to blame Ukraine for this act of ‘‘terrorism”.
Kyiv denied any role in this (as they naturally would).
But Fomin’s close proximity to Wagner leader Prigozhin (and his willingness to provide a media platform for the latter - amplifying Wagner messaging and complaints aimed at the Defense Ministry) - creates a more complicated picture: Wagner and Prigozhin has many enemies (many within the FSB and Defense Ministry - not least the Defense Minister Shoygu himself. Another potential enemy is Alexander Beglov: Governor of the region (St Petersburg) where the assassination took place..), and so a move against Fomin could serve the dual purposes of a) acting as a warning shot against Prigozhin, and b) actually limiting Prigozhin’s media reach.
Nonetheless, and in the absence of concrete and reliable evidence, all of this is thus far, a mere speculation of motives and opportunities.
But beyond the questions around who specifically was responsible for the assassination, there are additional and wider implications for the Putin regime - implication of looking weak and rather helpless in preventing such acts of sabotage from taking place in locations so close to the beating heart of all central power structures.
It is only a matter of time before the extreme the extreme right/nationalist “club of angry patriots” (note: this is not a joke. This is in fact a real name of the organization formed on April 1st by the most prominent pro-war activists - led by the infamous Igor Girkin/Strelkov - a person who is arguably most responsible for the war breaking out in the eastern Ukraine back in 2014: pulling in Putin to back a movement - that unlike the annexation of Crimea - started in a rather decentralized, ad hoc fashion) start attacking the Kremlin for its failure to administer domestic order and security - Putin will then miss those good old days when it was only his army that was being criticized for inadequate performance on the battlefields of Ukraine.
Ukraine declares willingness to negotiate on Crimea.
Andriy Sybiha, the deputy head of Ukraine’s Presidential administration (and so, in effect, Zelensky’s direct messenger) made a rather interesting comment on Crimea:
“If we will succeed in achieving our strategic goals on the battlefield and when we will be on the administrative border with Crimea, we are ready to open [a] diplomatic page to discuss this issue…It doesn’t mean that we exclude the way of liberation [of Crimea] by our army. [emphasis added]”
One could (quite persuasively) argue that such a statement is rather premature - Ukraine is barely holding onto Bakhmut, and there have not been any Ukrainian battlefield gains on any of the fronts - let alone in the Crimea axis - to even broach the subject.
But then again, one could also argue that talking about the future when Ukrainian troops arrive at Crimean border, before there have been any battlefield advances, and before Ukraine is yet to start a counteroffensive, is precisely the right way to motivate troops and ordinary Ukrainians: hinting towards future near-term gains could boost morale at the time when nothing concrete has been achieved.
But clearly, (and beyond mere morale boosts) this statement was made with specific strategic and tactical objectives in mind.
So what are those?
What are the potential benefits of voicing this possibility?
And what are the likely downsides?
Strategic and tactical gains.
1) Genuine optionality:
What if the current counteroffensive stalls after some limited progress on the battlefield, most of the Western gear and ammo gets expended, and there is not enough Western funding/support to finish off the remaining Russian troops?
The likely timeline for Ukraine reaching the borders of Crimea (if successful) is late summer and early fall at the very earliest.
By then, political realities may be wildly different.
There is no guarantee of a fractured US Congress delivering further significant funding for Ukraine.
Beyond that, what if the day’s realities in the US would mean that Trump’s return to power becomes more likely?
(side note: a combination of a) Trump successfully squeezing the juice out of the witch hunt narrative (following the hush money indictments), b) fractured GOP field unable to gather around one anti-Trump candidate, and c) slowdown in the economy/potential recession, could all make this a realistic possibility - even if still not a likely outcome)
Given that Trump promised to negotiate and conclude a political settlement in Ukraine in a day (an impossible feat, but one that hints at willingness to offer extreme concessions - Trump’s concessions to Taliban in 2020 would probably pale in comparison), and even vocalized his own personal belief in an ultimate outcome where Russia would eventually take over entire Ukraine, it is reasonable for Zelensky to negotiate a status for Crimea (or at least keep that option available) from a position of strength (standing at the border with his army ready to attack) rather than delay this possible agreement towards some later date - where geopolitical realities could be highly disadvantageous to Kyiv.
Under this scenario, freezing the issue of Crimea, and offering concessions (only to be renegotiated after Putin’s departure from the scene) may be an attractive strategic option that Ukraine may genuinely seek to secure.
2) Tactical battlefield optionality.
These cables have always maintained that Putin resorting to the use of tactical nuclear weapons is a remote possibility that cripples policymakers in the West.
The costs of such an action would be exorbitant (as made clear in a threat of actual military escalation by the major NATO powers) and using nuclear weapons comes with enormous risks - from fallout risks, self-harm/danger to their own soldiers and civilians, to actual failure to detonate (Russia has never used these in an actual battlefield - there is zero experience in successfully detonating the tactical nukes in war, and furthermore, since the 1996 Comprehensive Nuclear-Test-Ban Treaty (CTBT) no tactical nuclear weapons have been detonated by Russia) and embarrass the Kremlin further (crushing its power to use the nukes as an effective deterrent).
Having said that, if there is one thing that could trigger Putin to resort to nukes, then that is his crown jewel Crimea.
(side note: even then, the use of nukes would come as a very last resort. New defensive trenches formed near Crimea suggest that Russia has a plan A to defend the peninsula using conventional means first and foremost - before resorting to any possible nukes)
Suggesting willingness to discuss Crimea’s status is therefore a tactic that empowers Kyiv with battlefield optionality: Ukraine can press forward without creating extraordinary worries for Putin - reassuring him that they can talk about Crimea when such time arrives.
In other words: you don’t need to resort to nukes - we can pause and.. chat..
3) Political signaling of flexibility and pragmatism.
Such signals will rise in value as this war drags on for many more months.
A combination of 1) a diminishing existential risk to Ukraine (especially if their counteroffensive proves effective at least to some extent), and 2) economic slowdown in the West, will reduce the enthusiasm to support Ukraine for “as long as it takes”.
For it is one thing to save Ukraine and prevent its total collapse, and quite another to support Kyiv in its endeavor to recover all of its territory - including those lost before the 2022 invasion - like Crimea.
To be clear, these cables fully support the maximum war aims of Ukraine - all of its territories must be recovered, end off.
But there are also some fundamental political realities..
It is less likely that the West is going to feel much enthusiasm to back recapture of Crimea sometime later this year (or early in 2024).
Risking a nuclear escalation (no matter how improbable) for Ukraine to get back to its pre-2014 borders, is not going to be an attractive proposition.
As such, Kyiv’s readiness to negotiate over Crimea is an additional signal to the West - to both ordinary public and the key decision-makers: that Ukraine is flexible and pragmatic.
This then earns Ukraine additional political capital to seek further military aid.
In other words: don’t hesitate to support us with all your might - don’t worry about supplying long-range missiles and advanced fighter jets. We are a responsible, pragmatic government. We are not seeking to cause a needless nuclear escalation. Where possible and if/when needed, we are willing to negotiate and demonstrate flexibility.
A major risk.
Kyiv has just legitimized the idea that Crimea can be a subject-matter of negotiations.
Up to this point, Kyiv had (rightly) insisted upon the return of all its unjustly captured territory, and Zelensky made it crystal clear that beyond counteroffensives engaged to recover the territories lost after Russia’s 2022 invasion, Ukraine would also fight on to retake Crimea.
In addition, and given this principled stance, Kyiv rightly dismissed any Western suggestions that Crimea be parked as an issue.
Well, now that Kyiv itself has crossed this rhetorical rubicon, it will be harder (and plainly inconsistent) to rebut any similar Western suggestions in the future.
Major NATO powers will in turn find more confidence in asserting that the resolution of Crimea’s status be delayed until after the war has been concluded with recovery (whether by force or agreement) of Ukraine’s territories in the east.
In other words, Ukraine had weakened its own ability to press for the return of Crimea as part of any future negotiation.
And this is significant - since Zelensky's decision to pursue such a tactic represents a notable political gamble: suggesting a shift in his assessment of the prospects for Crimea's return.
It appears that the Ukrainian President no longer views this goal as achievable in the near future, most certainly a clear departure from his previously more optimistic stance.
OPEC+ decision and dealing with Saudis.
The Saudi ‘‘allies’’ strike again.
Last week, OPEC+ announced cuts to the production of crude oil in the amount of 1.15mln barrels per day.
This is quite significant, and both the Brent crude pricing (the international benchmark) and West Texas Intermediate (WTI), the US marker, have climbed 6% and 8% respectively in comparison to last week of March - oil is now back to trading in the low $80s.
Before taking a look at possible proximate causes for Riyadh’s decision, let us first rule out the obvious non-reason: that Saudis did this for China.
There is astonishingly widespread commentary in the American media that rather boldly claims that the OPEC+ decision was a deliberate hit against America and its interests, in order to please Riyadh’s new close friends in Beijing.
Left unexplained, is how China - a country that only recently ended its lockdown and is anxiously speeding towards economic recovery - could possibly want higher oil prices to fuel its economy?
(side note: moreover, higher oil prices make it harder for Beijing to exercise leverage against Moscow, and drive down the price of Russian crude that it so hungrily consumes these days)
There is a far simpler and logically consistent explanation to the Saudi decision: pure self-interest.
Riyadh was (at least in part) trying to counter the effect of the Biden administration’s decision to significantly delay repurchasing oil to replenish the strategic stockpiles (that had been drained last year).
Once the US Energy secretary Jennifer Granholm declared that it would take ‘‘years’’ to replenish America’s strategic stockpiles, Saudis had to rush to counter the market effect of this announcement.
In addition to incentives, there was also an opportunity to strike: OPEC+ delegation met with top shale producers in Houston at CERAWeek and were privy to the intel that shale growth was going to be slower this year no matter the price - there simply were too many bottlenecks: from lack of capital investment to difficulty recruiting qualified staff for oil rigs.
Consequently, given this reality, and given the possibility of a worldwide recession at the end of 2023 and early 2024, why wouldn’t Saudis exploit opening for premium prices and outsized profits while the opportunity was still there?
Implications.
1) Domestic inflation.
Every $10 increase in the price of crude oil corresponds (roughly) to a 25 cent increase in the price of one gallon of US Gasoline.
This is not enormous - consumers will feel a pinch but last year’s prices of $5-6 per gallon are unlikely to materialize.
For a start, crude prices have increased by only $6-7 per barrel, and a lot of the actual production cuts have been priced in.
In addition, the slowdown in Q3 and Q4 of this year will likely be priced into the market prices going into this summer.
Having said this, industries relying heavily on transportation, logistics and those that rely on gasoline for energy, will be facing higher costs of production.
Consumers might end up facing higher prices reflected in these increased production costs - a supply side inflation could then further muddy the waters and create dilemmas for the FED: with banking industry under an enormous strain (small and medium banks facing exodus of depositors - with hundreds of billions withdrawn from deposits and going into money market funds that pay a significantly higher yield) they are already facing immense pressure to slow down the rate hikes.
Will the FED dismiss these minor inflationary bumps as temporary cost-push inflation?
Or will they double down to avoid any signaling to the capital and credit markets that rate hikes are about to slow down?
FED’s decision will have a major impact on whether the US actually ends up experiencing a recession in 2023.
And ultimately, the status and the state of the domestic economy will clearly affect Biden admin’s capacity to pursue major foreign policy objectives.
2) Direct implication on the repurchasing scheme.
The OPEC+ move and the jump in oil prices means that the Biden admin is facing a rapidly closing window to refill the emergency supply of oil (strategic reserves) at the desired price level.
(side note: admin could of course decide to wait out the price increase, but refusing to replenish strategic reserves - just to reduce costs - may not be all that strategic after all..)
3) The price cap on Russian oil will become harder to enforce.
To date, the West had been largely successful in ensuring that the Russian crude was traded below $60 a barrel.
But that was not a monumentally difficult task to accomplish at the time when the price of Russian Urals oil was swinging around high $40s and low $50s.
Things will be different if the price of Urals settles above $60.
Urals futures are already trading at $65, and for context, as recently as in late March its price point was below that of the price cap ($60).
So then, how will the west respond?
Strict enforcement of the price cap? (which could prove counterproductive: removing more barrels off the market, magnifying the effect of the OPEC+ cuts, and potentially, adding to the increase in oil prices).
Or will the western policymakers turn a blind eye and ease enforcement?
This would then allow Putin to replenish his rapidly diminishing reserves with outsized profits from higher oil prices.
Strategic approach would point to the former option, but it remains to be seen how the political pressure (to avoid higher prices) would impact the G7 leadership.
Of course, the Biden admin will also have to revisit its approach to influencing Saudi decision-making.
Since this is the second time in the past six months that the Saudis have decided to push for production cuts: in October of 2022, OPEC+ announced production cuts of 2mln b/d.
Back then, Biden promised that there would be consequences for this decision.
There were none.
The Saudis did not face any meaningful exercise of US leverage.
(side note: they did however also try hard to avoid a negative response from Washington: their decision to provide $400mln in humanitarian aid to Ukraine, and to place a $37 bln contract for Boeing shortly before the announced production cuts, were clearly done to soften the blow and reduce tensions with DC)
We have previously discussed this issue at length - outlining all of the potential levers available to the US.
But a good place to start would be for the Biden admin to signal support for senior Congressional democrat’s suggestion that the arms supply to the Kingdom face significant conditional restrictions.
Having said all this, it is important to note that an enormous price surge is still unlikely to materialize.
For one thing, prices reaching $100 a barrel would cause a backlash from consumers and increase the likelihood of an eventual recession (reducing longer term demand, over perhaps a very long timeframe - and thus undermine OPEC+ interests).
(side note: and the Saudis would end up annoying both the US and China - probably not an outcome that they would be interested in.)
Overall then, OPEC+ will create major headaches - but nothing that should force the G7 to deviate from its current grand strategy.
It remains to be seen however whether long-term vision statesmanship will prevail over shorter-term political imperatives.