Weekly Overview Cables - Ukraine War, Russia's alternative chip supply chain, Kremlin's unaltered territorial demands, and the incipient Riyadh-Beijing partnership.
Ukraine war updates.
Ukraine’s counteroffensive & outlook.
Fighting over Bakhmut continues, and Ukraine is still pushing forward (albeit at a slower pace) with a counteroffensive around the Kharkiv-Luhansk Oblast region.
As Russia continues to pummel Ukrainian infrastructure, the US is finally stepping up its game on provision of advanced air defense systems: there are credible reports that Washington is finalizing plans to send the Patriot air defense systems to Ukraine.
As always, doing the right thing with a significant delay.
These cables have been calling for Patriot deployments since the very outset of the war.
If the US was to provide Patriots back then, and if rest of the NATO allies followed suit, (like Germany with its IRIS-T), then Putin’s ability to degrade Ukraine’s core infrastructure ahead of the cold winter would have been much more limited.
And this could perhaps affect his overall calculus on the viability of the long-term war of attrition: since a significant lever for causing economic havoc, creating new refugee crisis (and imposing inordinate costs on Europe), and forcing Kyiv to decide between defending the air space above its infrastructure vs its forward troops, would have been much more limited in effect
(side note: and the West is still stingy with its aid: pledging a meagre $1.05bn to help Ukraine this winter. That is 200x less than just one Western country’s (Germany) domestic energy subsidy to deal with inflation - great signal to send to the Kremlin)
Separately, the US committed to increasing the volume of trained Ukrainian soldiers.
Yet another policy that these cables have called for back in March of this year.
And increasing the rate to date, by adding extra 500 Ukrainian troops starting in January (adding to the 15,000 in total since April), is unfortunately a pathetically low number - one that is clearly not reflective of America’s might.
The supply chain that ensures Russian weapons have access to Western chips.
A very thorough joint report by Reuters and the Royal United Services Institute (RUSI- a prestigious defense think-tank in the UK) has uncovered the extent of alternative routes that secures Russian access to vital Western chips - like those hitherto supplied by Intel, TI, and AMD.
That Russia would always find loopholes was a given, but the sheer scale of the operation is eye-opening:
“At least $2.6 billion of computer and other electronic components flowed into Russia in the seven months to Oct. 31, Russian customs records show. At least $777 million of these products were made by Western firms whose chips have been found in Russian weapons systems: America’s Intel Corp, Advanced Micro Devices Inc (AMD), Texas Instruments Inc and Analog Devices Inc., and Germany’s Infineon AG.”
The machinations are not too sophisticated either: companies in a range of locations - from Turkey to Hong Kong, are set up and incorporated to import Western Chips from legitimate resellers based in the West/EU (who abide by all western sanctions when supplying these newly-incorporated second resellers).
In addition to direct effect of weakening the impact of Western sanctions and ensuring steady supply of crucial chips to the Russian military, these machinations provide Russian businessmen a new alternative way to benefit from the war - when ordinary Russians are feeling the bite of recession and increase in cost of living:
“Russian customs records show that Pixel Devices’ main client in Russia is a company in St. Petersburg called OOO KompLiga. Its website, states that the firm can supply a wide range of IT products and parts. According to the customs records, since April 1, KompLiga has imported at least $181 million worth of electronics, almost exclusively from Pixel Devices.”
It is important that Russia’s financial elite continues to feel the economic pain, and fails to secure alternative means of enrichment - this would only reduce the pressure on the Putin regime - removing another powerful disincentive for the continuous prosecution of this war.
Luckily, (and reflecting the lack of sophistication involved in creation of these sanction-evading supply chains) the solution is not complex either: the US Commerce department must (together with the EU) identify and sanction all of these reseller companies.
Full blocking/financial sanctions imposed directly, and secondary sanctions imposed on any company/individual engaged in a business relationship with these sanction-evading facades should be enough to cripple them.
Of course, there will always be a few that escape unscathed - but this is a game of volume: what we care about most, is how many chips Russia manages to secure - not if it doesn’t get any whatsoever (an impossible/unenforceable goal).
Getting rid of 90% of these reseller companies is both doable and probable.
The fundamental facts favor the West: it is simply much easier to find and sanction these companies, than it is for the sanction-busters to incorporate, set up the logistics, and find/establish relationships with the Western suppliers.
Oftentimes, effective solutions to tighten the screws of sanctions are simple and easy to implement (in contrast, for example, to oil price caps).
This is going to be a game of “Whac-A-Mole” - one that the West is well positioned to dominate.
And once enough/critical mass of these sanction-busting companies have been ‘‘whacked’’, the number of new entrants will plummet: starting a reseller company doomed to failure is not going to appeal to many - for it will simply not pass the most basic business cost/benefit analysis.
But for this to happen, the West must act now: Washington and Brussels must urgently create new task forces to focus on this particular menace.
Russia’s negotiation stance: recognition of annexed territories is a must.
This must be enough to shut down any near-term debates in the West on how Ukraine must show ‘‘goodwill’’ and agree to talks with the Kremlin.
In response to Zelensky’s legitimate demands that Russia should withdraw its troops as a precondition to genuine negotiations, the Kremlin spokesperson Dmitriy Peskov responded with sheer dismissiveness and contempt, stating that Ukraine had to accept the new territorial ‘‘realities’’ on the ground:
"And these realities indicate that new subjects have appeared in the Russian Federation. They appeared as a result of referendums that took place in these territories. Without taking these new realities into account, no kind of progress is possible. [emphasis added]"
In other words, not even a hint of a genuine political settlement but for Ukraine’s recognition of the newly annexed four regions as part of Russia.
This is an announcement of a very long war - that is if the Western military aid continues to arrive at the current scale.
Russia is doing Kyiv’s work for it here: providing the necessary legitimate excuse to not engage in doomed negotiations.
Here is the unsavory reality: no genuine peace negotiations are possible, or are even on the horizon, until Russia revises its maximalist war aims, and accepts that it cannot get away with annexation.
For this to happen, the calculus must change: Russia must continue to experience further defeats on the battlefield, or face severe economic pain - or (ideally) both.
Only this could change the Kremlin’s calculus- forcing them to negotiate with genuine interest to end the war.
At this very moment however, the Kremlin believes that it can retain and stick to its maximalist war aims.
(side note: and then there is the Commander-in-Chief of Ukraine, who sees it as plausible that Russia would attempt to retake Kyiv, let alone settle for a prolonged war of attrition)
And this belief will not change as long as the West drags its feet, refuses to scale its aid to Ukraine, and rules out the provision of long-range offensive weapons like fighter jets, Gray Eagle drones, ATACMS missiles, and modern Western tanks like Abrams/Leopard.
In fact, Ukraine’s Chief Commander, General Valerii Zaluzhnyi made it even simpler for the West:
“I need 300 tanks, 600-700 IFVs, 500 Howitzers.”
All crucial levers to alter Putin’s calculus are squarely in the hands of Washington and Brussels - they must exercise these with strong intent and resolve if this conflict is to end and not turn into a grinding long war of attrition.
Saudi Arabia hedges its bets with China.
A lot of media hype was devoted to Xi Jinping’s Saudi trip.
Usually when analysts warn of “monumental” regional geopolitical shifts, they (to put it mildly) exaggerate.
But on this occasion, the concerns are largely legitimate.
Although it is extremely premature to conclude that Saudis are breaking away from the US to side with China (such a definitive break will not happen for the foreseeable future - due to pure Saudi self-interest. More on that later below), it is certainly true that the Kingdom is indeed hedging its bets - and on this occasion, with significant action, and not just pure rhetoric.
Indeed, Xi’s Saudi visit has echoes of his trip to Pakistan in 2015 - China–Pakistan Economic Corridor (CPEC), further infrastructure debt, works to expand and upgrade the Gwadar port (to secure China’s alternative access to oil via proximity to the Strait of Hormuz), and major weapons sales to Pakistan, have all taken place after this trip.
And Xi’s meeting with Saudi MBS comes at a time of great tensions between the US and the Kingdom.
As of today, the primary issues of contention between Washington and Riyadh are: 1) the disagreement around the stance on the Russia/Ukraine war, 2) OPEC production levels, 3) the war in Yemen, 4) America’s refusal to supply further advanced weapons, 5) America’s policy on Iran.
In contrast, none of these is a major issue between Riyadh and Beijing.
One can expect potential issues around the price of oil, and Beijing’s chummy relations with Iran - but to date, these have not materialized, and remain mere hypotheticals (at least in the medium term).
Against this background, Xi had a number of legitimate policy goals he sought to achieve on this trip.
For brevity, we will focus on areas most important for Beijing:
1) Create a deeper wedge between the US and Saudi Arabia - by getting MBS to sign off on policies/moves that are bound to cause further alienation in Washington.
2) Deepen China’s relationship with the Kingdom, and take first steps in creating a new wealthy ally in charge of a strategic reserve of oil - this will come in handy when the US-led western coalition of allies escalate their sanctions on China.
3) Create a precedent that it is ok to continue purchasing Chinese tech hardware (Huawei), and create a new benchmark - a new normal - for other Gulf states to find similar moves as acceptable.
4) Create a precedent that it is ok for America’s close allies (even those that depend on Washington’s security umbrella) to partner up with China (and even engage in policies that weaken US-led world order - more on that later below) at no/little cost.
5) Create a counterweight to its policy on Iran. As of today, it is all carrots with Iran - China needs a pressure point/a bargaining chip that it can deploy for leverage. A compelling answer to the question: what if Iran displeases Beijing, what then? Mere removal of carrots (investment funding, purchase of oil) is not enough. China needs to show that it can prop up Iran’s chief regional adversary (not counting Israel) if it needs to: and Iran would most definitely want to avoid a scenario where Saudis have the simultaneous backing of both US and China.
And a lot was achieved on this trip.
Specifically;
1) During their meeting, Xi and MBS signed a ‘‘comprehensive strategic partnership agreement”.
2) A memorandum on the use of Huawei to help Saudi cities build high-tech infrastructure and provide cloud computing services was also agreed.
3) Xi called for the use of Chinese Yuan for oil trade - as an alternative to USD. If accomplished, this would be a major strategic win for China: Saudis are currently the number one supplier of oil to China (18% of all oil imports): and sourcing this oil under even more favorable terms (using their own currency) doesn’t only add a layer of strategic security - it also increases Beijing’s leverage vis-à-vis Russia - they can insist on a similar deal (and at probably a lower price too).
In other words, MBS agreed for Saudi Arabia to be viewed as a ‘‘strategic partner’’ of China, welcomed Huawei with open arms into Saudi Arabia’s core infrastructure (in addition to signing 34 deals in a range of different sectors) - a company shunned by the US and Washington’s core allies (for legitimate national security grounds), and entertained use of Yuans for oil trade.
These are grievous injuries to Saudi relations with the US.
Now, it is important to not exaggerate the actual influence that China will hold going forward.
Beijing will not become an alternative source of actual military security.
Just a few weeks ago, the US scrambled its Air Force to demonstrate willingness to defend the Kingdom when Riyadh raised alarms that Iran was about to execute an attack against it.
Would China ever do this?
No - and Riyadh understands this really well - the ultimate leverage rests with the US.
(side note: and China does certainly benefit from the US-backed security order in the Middle East. It free-rides on America’s role as a guarantor of regional security. It is the firepower provided by the US Navy that ensures that Chinese oil shipments utilizing the maritime shipping lanes in the Gulf and Indian Ocean, arrive safely in China).
It is just that Washington has for some reason convinced itself that it cannot possibly deploy this leverage.
So the fears around Saudi-Chinese strategic partnership are overblown (even if legitimate).
China’s relations with Saudi Arabia will be no more truly strategic than its partnership with Russia is limitless.
In addition, it is unlikely that MBS would agree to an oil trade in Yuans.
He will surely realize that such a trade will be asymmetric in the distribution of benefits.
Sure, he could establish new financing channels and create a precedent for future oil sales into sanctioned countries with Chinese Yuans (where the banks/intermediaries will not deal with the USD, and so, evading America’s secondary sanctions on financial institutions will be that much easier).
But why agree to do so now?
Saudis would be accepting a more volatile currency - where the government flip flops between COVID zero shutdowns and u-turns on a very short notice, where the public finances are in dire condition (at least in comparison to the US), and where the housing finance sector is a ticking time bomb.
And if these were not enough, Beijing can impose capital controls at a whim (affecting the value of currency).
Trading in Yuans would grant asymmetric benefits to China, and would come with very little (if any) practical utility or macroeconomic value to Saudis.
It would however be a slap to Washington.
And this brings us to the essential issue at hand: regardless of how fast or to what extent Saudis are moving towards China now, they are behaving in a way that (if left unchallenged) will create dangerous precedents, and incentivize similar ‘‘geopolitical portfolio diversification’’ -type conduct in the wider region.
Now that would be dangerous.
That is how China would slowly spread its influence - until it is ready and in position to contest the region with higher levels of assertiveness and transparency.
Left unaddressed, this will most certainly have an undesirable effect on the regional stakeholders.
If Saudis get away with it, why wouldn’t Turkey do a similar deal with Huawei and welcome inflows of investment?
Why wouldn’t Israel engage in a closer tech partnership with Beijing?
Why wouldn’t the Gulf states follow in Saudi steps and move closer to China?
The US cannot allow for any of this to happen - a decisive response is therefore in order.
And a proper preventative response starts with the US policy on Saudi Arabia.
A closer partnership with China must cost dearly to Saudis - so that other countries in the region see an overwhelmingly unfavorable calculus in doing business with Beijing: that the costs of moving closer towards Beijing are significantly higher than any potential benefits.
Exercising leverage.
First, what not to do: blanket retaliation policies with little nuance or targeting involved.
A good example of this is the Yemen War Powers Resolution proposed by Senator Sanders.
The ultimate aim was to reduce America’s military support for the Saudis in the latter’s war with Yemen.
But in Yemen specifically, the US was already not providing any forward posture/offensive capacities.
And tying even lesser military aid to the war in Yemen had two undesirable implications: 1) It penalized the Saudis for largely sticking to truce in Yemen, and 2) Incentivized Iran-backed Houthis to launch new attacks - seeing how the US is getting exhausted from propping up Saudis.
In addition, the new resolution had redefined ‘‘hostilities” to now include provisions against intel-sharing and logistics & maintenance help.
Both should continue: we want Saudis to share intel with us too, and we want them to continue remaining dependent on US assistance for logistics and maintenance - that is a powerful lever that should not be given up so easily.
These cables have argued against provisioning of offensive military hardware - the tools that enable further campaigns.
But removing all US assistance - even those related to maintenance and logistics - leaves little reason for Saudis to not pursue further diversification of their sources of new weapons.
(side note: it was therefore not surprising that the resolution failed to gain any backing from even the Democrats themselves - and was dead upon arrival)
Imposing targeted costs.
1) All future military support to Saudi Arabia should be contingent on interoperability with the US hardware.
In other words: you chose either the US or China - there is no playing both sides.
It is crucial to recognize that this particular lever has an expiration date: it must be exercised now: before Saudis (and other Gulf States) purchase so much Chinese (and even Russian) hardware, that America’s conditions on military aid/sales become virtually meaningless.
The choice between the US and China must be stark and consequential.
Washington could and should use the plans around the Middle East Defense Shield project to advance this conditionality - if you want to become a part of this defense umbrella/alliance, you must commit to not even looking in the direction of Chinese military gear.
Ultimately, if forced to choose today, the Saudis will go with the US: it simply cannot rely on maintaining a credible deterrent against its chief adversary Iran with Chinese weapons.
When it comes to Saudi Arabia and Iran, China is playing both sides.
This creates an irreconcilable strategic problem if Saudis were to rely solely on China: what if they close the tap on their weapons/ammunition/maintenance services right when Saudis need this most?
They simply cannot take this gamble.
(side note: in parallel and to ensure the success of this policy, the US must work closely with France - making sure that they don’t step in provide “no string attached” alternative military gear - right at the time when the US applies its own leverage)
2) Make them choose between western and Chinese investment.
The US should impose secondary sanctions on Huawei - all banks/financial services companies, investment funds and large corporations should be forced to pay dearly for their involvement in any projects with Huawei’s presence.
MBS needs Western investors to fulfill his vision for 2030.
If he wants western money for his new high-tech ‘‘The Line” city in Neom, well then he must be ready to give up on working with Huawei.
If his cities are propped up with Huawei’s core infrastructure, they should not receive western investment.
These are of course measures that the US must take in addition to more long-term plays that were previously discussed in these cables.
But above all, acting without delay, and before China accumulates further regional leverage and spreads its roots deeper in the Middle East is crucial to maintain the US dominance and power - denying Beijing any space and opportunity to spread its influence.