Weekly Overview Cables - Ukraine War, lame duck session opportunities, and imposing the price cap on Russian oil.

Ukraine war updates

• Ukraine’s counteroffensive & outlook.

• There has been a marked slowdown in military operations.

• This is understandable, as heavy rains and mud add difficulty to troops’ ability to maneuver with sufficient speed.

• The wheeled logistics units will face particular difficulty in mobility - meaning that most of the wheeled logistics units will have to utilize fewer roads free from mud.

• And this is an opportunity for Ukraine to use pinpoint HIMARS strikes to target these (increasingly fewer) roads linking Russian troops to supplies: pinning occupying troops and starving them from essential supplies over the cold winter.

• This will surely cause major morale loss, combat ineffectiveness, and casualties amongst the Russian soldiers (many of whom are ‘‘mobiks” / recently mobilized).

• The slowdown in the wider eastern front (at least until the ground is properly frozen) could also allow Ukraine to redirect its efforts to operations in Crimea.

• The infrastructure and roads leading to and connecting the peninsula are in an overall better shape than the battered and muddy Donbas frontlines: factors that turn Crimea into an attractive next target.

• Indeed, the Ukrainian Deputy Defense Minister Volodymyr Havrylov admitted that a move on Crimea in early December was in fact “possible”.

• Now, this could be a disinformation campaign to keep Russians’ efforts spread thin - but one certainly sees the logic of such a move from at least an operational perspective.

• (side note: whether the Zelensky admin faces the pressure from the Biden admin to not move on Crimea and not trigger Russia, is whole another matter).

• Early signals of intra-regime competition for hard power in Russia.

• We have frequently discussed how Putin’s falling stock (given the failures in Ukraine) will cause the elites and Siloviki (security apparatus) in Russia to hedge their bets for a possible post-Putin period.

• To date however, such possible maneuvers were limited to rhetorical posturing only.

• Blame games had intensified and some of the most serious regime leaders (like the Defense minister Sergei Shoygu) were openly criticized in the public media.

• And now, we have early concrete signals of preparatory moves/shaping operations to diffuse power in the Kremlin circles.

• Many Siloviki elites are concerned with a rapid rise of Putin ally Prigozhin and his Wagner mercenaries.

• And according to the Ukraine’s military intelligence unit, an alternative private military corporation is in the process of formation - all this to counter Prigozhin (and given that PMCs are illegal in Russia, Putin’s (even if tacit) approval was also most likely secured - and there is a logic to this from his perspective too: easier to govern a fractured elite instead of staving off one dominant player).

• In order to achieve this (and help with recruitment), a pro-Kremlin businessman (and allegedly a well-known gangster) Armen Sarkisyan was appointed as the new administrator for prisons in Russian-occupied territories in Ukraine.

• It is reported that Sarkisyan intends to use the role as a recruitment platform in order to create a new “private military corporation” (PMC) that would then rival Prigozhin’s Wagner.

• Separately, the Chechen leader (and an unhinged psychopath) Ramzan Kadyrov met Putin to tout the success of Chechen Rosgvardia units in Ukraine.

• There are speculations in the military blog sphere of Russia, that Kadyrov is pressing Putin to fund new Chechen-only units to fight in Ukraine - this would of course further empower Kadyrov personally.

• Unfortunately for the Kremlin elite, Putin may not be in a position to refuse this grant of extra power and autonomy for the Chechen autocrat.

• Senate presses Biden on Armed Drones to Ukraine.

• Statesmanship when it is needed: sixteen US Senators have urged the Biden admin to supply Ukraine with armed drones.

• Indeed, these cables have previously raised the issue of the Gray Eagle (MQ-1C) drones - there is no good reason to refuse the supply of these to Ukraine - especially within the current context of Russians arming themselves with Iranian drones and short-range ballistic missiles.

• And here is direct appeal from the (admirably) bipartisan group of Senators:

• “The MQ-1C could erode Russia’s long-range fires advantage. Most importantly, armed UAS could find and attack Russian warships in the Black Sea, breaking its coercive blockade and alleviate dual pressures on the Ukrainian economy and global food prices”.

• And if the Biden admin was waiting for bipartisan support and was hesitant to expend its political capital on this issue too soon, well now they have it: don’t delay this further and supply Ukraine with Gray Eagles, and all of the other offensive weapons that Kyiv needs to force Russians into retreat.

The Biden admin must strengthen its domestic hand to ensure long-term support for Ukraine.

• If the US is to succeed in providing long-term support to Ukraine (free from unreasonable pauses/hiccups/internal fighting), the current administration must take preemptive action to secure its political flank before the new Congress comes back in January

• And given that: a) Democrats enjoy a majority in both houses until January, and b) five GOP senators are now retiring from the upper chamber (who are now more likely to put the national interests above those of party politics, and refuse to participate in the Senate filibuster), there is room and opportunity for last minute wins in this lame duck session.

• Specifically, the Biden admin must aim to accomplish the following two objectives:

• 1) Pass through the $38bn Ukraine aid package - this one is self-explanatory.

• and;

• 2) Raise the debt ceiling until the end of 2024.

• It is clear that the incoming GOP House majority will most likely try to use the debt-ceiling as leverage to extract concessions from the White House.

• This could be something as direct as a demand that the Biden admin pressures Ukraine into early negotiations.

• It could also be used for a wide range of other (even unrelated) issues.

• Regardless, this is going to cost the Biden admin major political bandwidth and (if there is another last minute crisis) much-needed political capital.

• Ultimately, the GOP’s threat to refuse increasing the debt-ceiling is a meaningless toothless bluff.

• After all, the GOP is not going to cause a sovereign default, crash the economy, destroy America’s global credibility as a creditor of last resort, and cause another recession.

• But the mere threat and delay in this vote, will suck up a lot of energy and time from the White House.

• The Biden admin must thus rush to pass an extension to the debt ceiling, before yet another exceptionally avoidable political theatre is allowed to take place.

• The list could have been longer - but realistically, there are doubts that the Biden admin will not even try to accomplish these two minimal objectives - but try they must.

• America’s credibility and staying power will depend on the President’s capacity and will to carry out his foreign policy commitments - all steps must be taken to ensure that this ability does not come into danger from those willing to use anything and everything as form of political leverage - no matter how much damage this could cause to America’s global standing.

Urgent Western response is needed to counter Russia’s infrastructure strikes.

• Russia has found its niche - targeting the core civilian infrastructure.

• (side note: and as previously discussed in these cables, if Russia opted to avoid an outright invasion, and instead stuck to the strategy of the Black Sea blockade in tandem with air/missile strikes against core Ukrainian military and civilian infrastructure from the very outset, well, things could have looked a lot different: fewer (and less intense) sanctions, NATO military support, and most likely, substantial political concessions in Donbas - possibly even amounting to a de facto independence for the region).

• On Wednesday, Russia launched 70 missiles against infrastructure targets - this resulted in leaving about 80% of the country in the dark and without water.

• And given that this led to severe instability of electricity supply, all 15 of Ukraine’s nuclear reactors were taken offline as a preventative measure.

• The devastating impact of this tactic is quite self-explanatory.

• (side note: there is also an indirect devastating effect on wider Europe from the rise of electricity prices for this winter. Thanks to Putin’s weaponization of energy, and with electricity prices near their current levels, “around 147,000 more people (4.8% more than average) would die in a typical winter than if those costs returned to the average from 2015-19”. For context, that is a higher death toll than the direct casualties thus-far sustained in the Ukraine war.)

• Nevertheless, the leadership of the country remains resolute.

• President Zelensky framed the war as one of ‘‘strength and resilience” and vowed to not deviate from the ultimate objective of full liberation of Ukraine:

• “We must return all lands . . . If you can’t get your land back entirely, the war is simply frozen. It’s a question of time before it resumes”.

• Now, the success and precision of the strikes leads to not so unreasonable speculation that Russia is being helped from the inside.

• Of course, no one is suggesting that the Russian leadership would not have been able to pinpoint the precise location of crucial infrastructure without extra help - all of these are available via satellites.

• But there could have been some assistance with timing of the strikes - Ukraine is already in possession of NASAMS - in addition to other air defense systems like the soviet S300s and the German IRIS-Ts.

• Add to this, the fact that Russians are running out of precision-guided munitions (PGMs), (and depending on the specific missiles, the remaining stock is counted in dozens - not even hundreds), one quickly sees an incentive to not miss the very first time - and know exactly when to strike.

• Now, it takes one bad apple at a crucial location within the chain of command to pass on this intel - perhaps there is a specific window of opportunity when maintenance/change of personnel overseeing these air defense systems, allows for a few minutes of relatively obstacle-free strikes.

• Regardless of how exactly Russians managed to pull off this particular wave of missile strikes so successfully, two things must happen: 1) Ukraine must tighten its internal security - one will not be surprised to hear about the new counter-intel investigations, and 2) Kyiv must be supplied with adequate air defense systems.

• These are needed both for its troops and for its core infrastructure.

• Why is Ukraine still not supplied with Patriot batteries (which would receive much-needed experience on intercepting Iranian missiles - further benefiting the US) ?

• Why is it that Germany is willing to supply Poland but not Ukraine with Patriots?

• Indeed, it was very satisfying to see the Polish Defense Minister Mariusz Błaszczak urging Berlin to pass these on to Ukraine.

• (side note: further solidifying Poland’s reputation as a rising military power within the EU - the balance of power will continue to shift east - especially once Ukraine becomes a full-on EU member)

• And to be fair, Germany did say that it was discussing with allies Poland's request that German Patriot air defence units be sent to Ukraine.

• And given that NATO's secretary-general General Jens Stoltenberg provided tacit support for this move, this transfer becomes ever more likely.

• But such obvious moves must not take so long, and create so much hesitation.

• It is one thing for the US to hesitate about providing fighter jets and long-range missiles (although, even there, the reasoning is extremely erroneous and Ukraine must certainly receive all of the offensive weapons that it needs), but air defense systems?

• What is Germany worried about here? That its Patriot batteries would save Ukrainian lives? Crucial infrastructure?

• How is this qualitatively any different from providing their own IRIS-T air defense systems?

• Given that so many NATO members are still hesitant and indecisive, the US must double down and demonstrate leadership.

• Ukraine must be supplied with all of the air defense systems that it needs.

• In fact, it must become the most well-defended airspace in the entire Europe - it is the first line of defense for the rest of Europe anyways.

• (side note: and the more hesitant amongst the European politicians, who might worry about this looking like an escalation in the eyes of their domestic electorates, should appeal to baser self-interest of their citizens, and frame the supply of air defense systems as preventative measures against further humanitarian catastrophe and another wave of refugee inflows)

• And Russia must face the ultimate disincentive: the more it continues to strike Ukrainian infrastructure the better protected its air space will get - the harder will it become for Russia to accomplish anything at all - wasting all of the remaining missiles already in short supply.

Imposing a price cap on Russian oil: don’t let the perfect be the enemy of the good.

• As the Dec 5 date for the introduction of G7 price cap on Russian crude oil is fast approaching, the EU is scrambling to get its regulations and pricing policy into alignment with the G7 plans.

• The initial (and the default) plan was to get the EU’s own price cap in the range of $65 to $70 per barrel — the figure proposed by the G7.

• But as with everything to do with the EU’s foreign policy, getting a consensus around the precise pricing policy is becoming extremely difficult.

• Now, this requirement for unanimity was initially designed deliberately as a feature not a bug.

• But it has clearly outlived its purpose, and clearly slows the EU’s ability to respond to a crisis in a timely fashion.

• Moreover, some spoilers like Hungary can keep the entire bloc hostage.

• Orban’s government continues to oppose a price cap altogether, and will most likely use this intransigence as a negotiation lever to force the Commission President Van Der Leyen agree to disburse the frozen (due to the rule of law/corruption issues in Hungary) €5.8 billion that Budapest was to get under the pandemic recovery fund (and further €7.5 billion of EU’s budgetary disbursements are also under threat).

• And then there is Poland - which unlike most EU states, insists on a much lower price cap of $30 per barrel.

• This is of course an ideal scenario - allowing for just enough profit margin to incentivize continuous sale of Russian oil under this very price - but still causing a major dent into Russian oil revenue.

• But this ideal figure need not be introduced immediately.

• The key is to get the price cap out there, secure enough buy-in from a range of players in the market, and then gradually reduce the price cap to the level that is truly devastating to Russia.

• Insisting on the best case outcomes now, risks putting the whole project at risk - causing major delays in the actual implementation.

• And a blunder at such a crucial introductory stage comes with additional risks - unacceptable damage to the credibility of the price cap proposers: markets must see a clear and concrete signal that the price cap is 1) operational, 2) has backing from a wide range of market players, and 3) will be observed and implemented with no hiccups.

• Once this crucial stage is implemented, the rest of the infrastructure will fall into place.

• The good news is that the UK is on board with its Lloyd’s of London insurance market blocking any insurance to oil tankers that carry oil not sold under the introduced price cap.

• And we have previously discussed the importance of Iran-style secondary sanctions on insurers, banks, and intermediaries that refuse to observe the price cap.

• This will not only have a direct effect, but would also serve as an excuse for Russia-friendly states like India to abide with Western sanctions - expressing a faux reluctance to implement these, and only being forced to do so in order to protect its own institutions.

• Of course, Russia could also offer its own insurance and even take full control over the transport of its crude.

• But: a) its own insurance is unlikely to be appealing/reliable for buyers (given the range of financial sanctions imposed on Russia), and b) even buyers who agree to accept Russia’s insurance, will most certainly insist on a higher price: the higher risk involved would be priced into the contracts - in other words the Russian crude will be sold at either extremely uncompetitive high prices, or the Kremlin will agree to subsidize the extra priced-in risk - a de facto implementation of the Western price cap.

• (side note: and if Russia decided to transport its own crude with its own ships, they would come under a significant risk of Ukrainian special forces sabotage. Given how dirty Russia is playing in Ukraine with infrastructure/civilian targeting, Kyiv may well decide to return the favor. Just a few of such sabotage operations would rule out the efficacy of Russia’s own insurance, and would force the Kremlin to transfer its oil exclusively on its own/via its own tankers- and these would lead to further slowdowns and delays: once again causing significant hit to the Kremlin’s coffers from the slowdown in sales)

• And even those “Global South” countries refusing to implement the price cap will still use the new realities to drive a bargain and secure better pricing for themselves.

• In other words, Russia will feel the pinch of the price cap, the question is only around the extent of these dented revenues.

• Now, the Russian economy is already taking a major hit, even before the planned price cap.

• Here are some devastating charts provided by the Economist Intelligence Unit (EIU).

  

• If the current trend holds, (and no reason to expect that it would not) the Russian economy would be on track to a negative 4-6% real GDP growth - in other words, a major recession.

• And this is before the price cap comes into effect (and before most of the long-term effects of semiconductor export controls begin to hit hard).

• With the price cap in full swing, (and especially as its approaches the lower range of $30-$40 per barrel) one should certainly expect the real GDP to drop below -6%: that would be a catastrophe for a country stuck (by choice) in a war of attrition, facing an army equipped and supported by the US/NATO.

• And to reach this outcome fast, a price cap (even at a currently suboptimal point) must be put in place as soon as possible - free from the unnecessary delays caused by a desire for perfection.