Weekly Overview Cables - Ukraine War, counteroffensive, oil price caps on Moscow, and EU considers visa bans on Russia.

Ukraine War Updates.

• Donbas battlefield & outlook.

• Ukraine is now engaged in a counteroffensive - starting last Monday, Kyiv declared an offensive along the southern Axis, targeting the region of Kherson and the nearby districts.

• Importance of a successful Ukrainian offensive on Kherson was something discussed in these cables back in early May (viability of success being a key factor of decreasing the likelihood of Ukraine war fatigue in the West): predicting that such an assault is likely to take place in early fall.

• Thus far, there are no major developments on the battlefield, or wild swings in the correlation of forces.

• (side note: and this allows Russian propaganda channels to frame the counteroffensive as a high-casualty failed suicide mission)

• Having said that, there are few things to note:

• 1) Ukrainian officials have successfully reframed the counteroffensive as continuous infliction of military losses on key Russian units and assets, vs rapid recovery of the lost territory.

• Ukraine’s Presidential adviser Oleksiy Arestovych framed the operation as “systemic grinding of Putin’s army”, and that the goal was to “uncover their [Russian army’s] operational logistical supply system and destroy it with artillery and Himars”

• Confidently adding that there was ‘‘no rush’’ to accomplish these objectives.

• 2) Ukrainian officials have furthermore tempered overall expectations.

• Adding yet another legitimate and appealing (at least to the Western public) frame of high-casualty avoidance.

• 3) Bayraktar TB-2 drones are back in full use.

• Military power needs the right context to express itself.

• Certain tactical maneuvers and high-tech/high-leverage weapons can switch from ‘‘game-changing’’ to ‘‘useless’’ given the contextual changes.

• This was the case with Bayraktar drones - the weapons that have given the Ukrainian army an edge in early days, were largely ineffective in the later stage of the war in Donbas (running into highly-saturated Russian air defense systems).

• This is now changing.

• The OSINT (open-source intel) community on social media is back to sharing videos of effective Bayraktar strikes.

• What changed?

• Most likely, the answer has to do with the provision of American anti-radar (AHM-88 HARM) missiles that were used successfully to degrade Russian air-defense systems.

• This then allowed TB2 drones to once again demonstrate its high-leverage precision strike capabilities.

• Ukraine is playing it right.

• Ukraine is correct in both: a) lowering expectations, and b) slowing the pace of the counteroffensive operations.

• There are likely a mix of military/strategic, and political reasons for why Kyiv is taking a more careful approach to this counteroffensive.

• Firstly, because taking the city without degrading the Russian forces (and crucially) successful destruction Russia’s numerous artillery units, will be a pyrrhic victory at best: since Russia could then shell the city, inflict a grievous economic and humanitarian toll, and pin Ukrainian forces along the Kherson axis.

• Secondly, the correlation of forces is still not overwhelmingly favorable to Kyiv - Ukraine still does not have a 3:1 attacker advantage (a minimum) required for any serious chance of success.

• As a result, the risks are asymmetric: Russia needs to only hold on and cause Ukraine’s failure, but Kyiv’s failure will carry two major risks: force depletion and inability to launch another attack any time soon, and major political risks of failure - losing Western support ahead of cold winter.

• Thirdly, a more gradual drip drip win can strengthen Ukraine’s hand in demanding more military support and armament from all parties - but especially from the European nations that have been lagging behind in the recent months.

• If Ukraine can demonstrate sufficient progress, it can make a more persuasive pitch for heavy weaponry aid from the European allies (let alone appeal for further advanced weapons from the US: like ATACMS for HIMARS and advanced drones).

• Therefore, it is in Ukraine’s interest to succeed (relatively) slowly yet surely and prevent a sudden stop in progress/failure of the counteroffensive.

Price Caps on Russian energy sales and the Kremlin’s response.

• The G7 Finance ministers have finally started to demonstrate some momentum on imposing price caps on Russian oil:

• “The price cap is specifically designed to reduce Russian revenues and Russia’s ability to fund its war of aggression whilst limiting the impact of Russia’s war on global energy prices”.

• Although the precise level for the cap is (still) yet to be decided, the mechanism of enforcement will be precisely the method advocated by these cables back in June of this year:

• “We will curtail Putin’s capacity to fund his war from oil exports by banning services, such as insurance and the provision of finance, to vessels carrying Russian oil above an agreed price cap [emphasis added].”

• Theoretically, the Russian government could decide to provide (and concoct a fast-track appropriate legislation) an official state insurance (since no private sector insurer in Russia is large enough/credible enough) to vessels agreeing to violate this price cap.

• But such a solution will: a) be unlikely to develop fast enough in time to soften the bite of sanctions, and b) most carriers will either refuse or can be forced to to refuse in fear of violating secondary sanctions by dealing directly with the Russian government (or Russian banks providing the necessary financing).

• In addition, G7 countries could deny these carriers the comfort of Western courts to adjudicate any insurance disputes - a necessary security in the absence of which, no major (and well-governed) carrier would ever contract with the Russian state for insurance.

• Overall then, once implemented, this policy is very likely to bite.

• Russia could of course keep selling oil to its “allies” that are happy to look over the risks - but even they will be incentivized to demand a price cut (since they will have all the leverage in this new reality).

• And certain transactions will be much easier to carry out than others: think transporting Russian crude to Iran (for them to absorb Russian crude and resell their own oil via the Persian gulf) over a shorter (and less risky) trip in the Caspian sea, vs shipping containers to India (lengthier and riskier journey, with higher insurance costs).

• In addition to price caps on oil, and as announced by the President of the European Commission Ursula von der Leyen, the EU is now also likely to at least consider price caps on Russian gas.

• At this point, (and given the reality of extreme shortages going into winter) it is unlikely to happen at any time soon.

• But such a confident stance is indicative of some brewing good news: perhaps the EU is now privately confident that it can secure itself the requisite volume of gas (from sources like Algeria, Norway, Azerbaijan, Qatar etc) to mitigate, or even prevent a shortage-related emergency this winter.

• In the meantime, Moscow’s response was a mixture of tough talk and further gas disruptions (blaming it on technical issues related to the Nord Stream 1 pipeline) to demonstrate its leverage.

• Most importantly, Russia announced that it will not sell its oil to countries that participate in enforcement of this price cap.

• (side note: and the Kremlin is now tightening its grip over the private sector oil producers. There was news of an 8th energy executive (Lukoil Chairman) dying in suspicious circumstances this year. Yet another private sector oil chief dying in an extremely dubious incident (falling to death from a hospital window). A coincidence? Anything else is a conjecture, and nonetheless, we shall engage in reasonable speculation and assert that the Kremlin is cleaning the field and securing its bases. In any case, there is one thing we can claim with absolutely certainty: that statistically, being an energy executive in Russia is far more dangerous than being a tank commander in Donbas. The ratio of casualties to the overall total number is simply way higher..)

• From Moscow’s perspective this makes sense (at least in the short-to-medium term) for three major reasons:

• 1) Politically, it cannot afford to accept this sanction, play along, and set a new precedent: that the West can unite and impose biting sanctions and the Kremlin will simply take it.

• This would not only damage Putin’s prestige and global gravitas, but would also boost the confidence of Western allies to push for more: success breeds confidence, which leads to further attempts to succeed.

• This is not an acceptable cycle for Putin.

• 2) Accepting a price cap would remove incentive for allies like India and China to pay the full (or at least higher than the price cap) price: why should they keep paying a higher price when Russia is willing to sell it for a lower price point?

• (side note: as discussed above, none of these countries are likely to pay the full price in any case - they will use their leverage to demand for price cuts. But if Russia agrees to supply oil at Western price cap rates, it would simply not be able to demand even a comparatively higher price point from India or China - let alone the full price).

• 3) Announcing this refusal preemptively, is an attempt to win time and delay the imposition of price caps.

• The G7 will now have to time the price caps so that the sudden increase in price of oil (due to the drop in Russian supplies to the participating countries) would not cause further (and major) cost-push inflation.

• With midterms approaching in the US, and the new British PM taking over the reins at the time when the inflation is yet to reach its peak in early 2023, Moscow is playing for time and incentivizing a delay in the imposition of these price caps.

• 4) Compensate for reduced supply with higher prices.

• Once the price cap enters into effect, and Russia implements its refusal to supply its oil to the participating countries, the price of crude oil will spike, and will likely remain (relatively) high for at least several months.

• This will allow the Kremlin to compensate for the loss of revenue from reduced supplies - by selling its oil at a higher price point.

• However, this is a short-term measure at best.

• Over the medium to long-term, these sanctions will start to bite, and then the pressing question will be around Russia’s long-term fiscal stamina.

• The loss of revenue will coincide with the effects of export restrictions and other sanctions.

• How long before the Russian citizens become fed up with the war?

• Especially if the Western support helps Ukraine to recover a significant portion of its battlefield losses?

Sanctioning Putin’s regime must not be conflated with targeting all Russians.

• This past week, we have witnessed some spirited debates around the possibility of an EU-wide ban against all Russian tourists.

• The arguments in favor are certainly not meritless.

• Why should Russians enjoy comfortable summer vacations in the sunny coasts of France and cool Alpine towns of Austria, when millions of ordinary Ukrainians suffer from displacement and threat of unforeseen random missile strikes?

• The war is being waged on Ukrainian soil only (save for few targeted attacks of ammo depots in Western Russia), and ordinary Russian citizens are already safely and comfortably watching the ongoing war on their TVs.

• As if that was not enough, why should they also be able to freely travel around EU states? A group of states that they demonize, and (at least partly) blame for this war?

• It is therefore understandable that passions run high, and why senior Ukrainian leaders keep pressing for this measure.

• But the argument is not limited to that of retribution only, and there is certainly a further pragmatic policy argument: that the ordinary Russians must increasingly see and feel the cost of their tacit support for the rotten Putin regime.

• The contention that ordinary Russians witnessing their bleaker future unfold under Putin’s regime, may become increasingly politically active and slowly wake up and start taking political action, is not wholly unreasonable, yet still very unlikely to produce any real-life effects.

• For a start, only a small proportion of relatively well-off middle to upper-middle class Russians can afford to travel to Europe: exactly the contingent that is already likely to leave Russia in droves and harbor ill-will towards the regime.

• Punishing them may be counterproductive for two major reasons:

• 1) Not only should we encourage the brain drain of the most talented and capable Russians (many of whom are using tourist visas to escape) but also;

• 2) As this war drags on, and the long-term effects of export restrictions and sanctions begin to bite, the contrast in living conditions and prosperity will become sharper still: and this contrast is the very picture that the West must push for more (not less) Russians to witness first-hand.

• Indeed, it is ironic how the Soviet leaders used to prevent these very scenarios with their iron curtain, and now the EU leaders were considering doing the Kremlin’s job for it.

• It is also important to remember that, even if the West was to achieve any limited policy goals of irritating the small portion of the middle class, and turning them against the regime, any potential gains would have been most likely (more than) offset by the Kremlin’s propaganda that would paint the EU as the enemy of all Russians.

• Yet another rally ‘round the flag effect would surely follow.

• For all these reasons, it was a good outcome that the EU rejected the blanket ban, and instead cancelled the visa agreement: raising costs and adding bureaucratic frictions to make it harder for Russians to secure visas.

• A Better way to sanction visas.

• A more targeted approach targeting specific groups of Russians from entering the EU would pay higher policy dividends.

• Russian oligarchs and rich regime sympathizers (like key propaganda/media figures) are already facing sanctions, and many of them already get their fancy yachts and other assets confiscated - and rightly so.

• But there are also undoubtedly thousands of very rich Russians having a blast in the EU: these are not necessarily oligarchs, but represent perhaps the top 0.1-3% of the income distribution.

• We are talking about multi-millionaires and even lesser millionaires.

• A means-tested sanction, targeting this comfortable lesser elite would be far more effective: it would signal to the ordinary Russians that even though they are still welcome, those indirectly close to the ruling regime or enjoying too much comfort under Putin, will not be accepted.

• This would then blunt the regime’s propaganda that “Europe is out to get all Russians”.

• No - only those living lavishly under this bloody regime.

• A visa ban can also be an effective tool to dissuade ordinary Russians from working in Russia’s law-enforcement agencies or signing up for military service.

• A targeted ban that would bar any Russian currently/or in future serving in the Russian army, or intel/law-enforcement agencies, from entering the EU (say, for the next 20 years) could become a powerful incentive for Russians to avoid aiding the regime.

• Many of the sign ups come from poorer regions of Russia - lured by the promise of high-pay.

• A significant proportion of this very group may at some point aspire to emigrate to the EU - seeking a more prosperous future (using travel visas as a starting point for their emigration).

• The bitter reality that this could no longer be possible if they were to join the army/police etc, may create doubts in many of these individuals - adding further friction and difficulty for the Kremlin that is already experiencing major difficulties in recruitment.

• It is therefore possible to achieve a number of major policy goals, without alienating all Russians and helping the regime with its propaganda material.

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