Primary Vision Insights – March 2nd 2022

There has been a pause of buying Russian commodities for fear of sanctions and the inability of companies to get lines of credit. There is a chance we can see the sanctions become “official” so far they are just in talks, but banks don’t want to get caught holding the bag. The German Finance minister is now open to cutting Russia off from SWIFT, which is a big change in posture from yesterday. Italy (another hold out) is now saying they would take Russia off SWIFT. NATO is now moving forward with providing additional weapons and air-defense systems to Ukraine. Finland and Sweden have also announced a change in posture on their willingness to join NATO following everything that has taken place in Russia. This promoted a quick reaction from Putin who promised “Devastating” recourse for them joining NATO. Finland is a big one due to their history with Russia and effective fighting force against them. “NATO has activated defense plans and “are deploying elements of the NATO Response Force on land, at sea and in the air”, including thousands more troops and over 100 jets put on high alert in 30 locations.” I provided two cases n how this would go on Feb, 2^nd and attached it below again… more to come.

On the sanctions front, it is important to consider how much crude Russia produces and exports. Russia is producing about 10.2M barrels a day of crude and the rest in condensate. Some of this is consumed locally and the rest is exported via pipeline and tanker.

Russia was expected to export about 4.176M barrels a day in March, which will be difficult to achieve given the issues around sanctions and lines of credit. This is why we have seen Urals go “no bid” and spreads going as wide as $12 below dated Brent with still NO buyers.

Some of it will eventually clear into India and China (even though China has paused buying briefly), which will cause a large part of their crude left in tanks or on the water. This will accelerate some of the clearing from West Africa and the Middle East as more is pulled into Europe and the U.S. The lack of Russian flow will also help support U.S. crude exports and help us average about 2.8M barrels a day of exports. Crude oil on the water has spiked again with more being sent to China and other parts of the world.

Crude Oil on the Water

Crude Oil in Transit

This has pulled more crude out of floating storage and sent it in motion, which is reflected in the drop in WAF floating storage and total crude in floating storage:

West African Crude Oil Floating Storage

This has also resulted in crude being moved much faster in the new loading schedules:

Angola’s crude oil is finding buyers quickly, with more than half of planned cargoes for April sold after barely a week of trading. Republic of Congo plans to boost combined exports of Djeno and N’Kossa crude to 278k b/d in April, the highest level since November 2020. I expect to see the same movements in Nigeria as well as quantities shift around the world driven by Russia.

Middle East Crude Oil Floating Storage

Natural gas is also a massive export from Russia with a large part of it making up the baseload of supply throughout Europe. Pipelines remain intact, but if the military pivots to a guerrilla type warfare- they could take out pump stations to render them useless. It would increase stress on Russia by taking away a main artery of their economy, but would also impact the European continent by driving up prices.

Here is just one estimate of economic damage that would happen with even a 10% hit on the gas supply side.

Here is how much Russian natural gas flows into the EU.

The U.S. could help brunt some of the impact, but it would be at a higher cost versus piped natural gas. We would be able to send a large part of our LNG to Europe with more being available as we move into Spring.

But, not only does the world rely on piped natural gas from Russia, but they are also a large exporter of LNG. This is becoming a bigger issue as well as banks in Asia have refused to issue letters of credit for the cargoes. This would remove between 2.5-3 MTPA from the market as well, which also feeds Europe’s natural gas demands.

These interlocking issues is a big reason why many European countries are closely linked to Russian energy production.

This is also just speaking from an energy perspective and doesn’t even begin to scratch the surface on nickel, rare earth’s, palladium, and grains/fertz.

China has opened up to taking Russian wheat imports, which had been previously limited. This is a bigger issue because Ukraine produces about 13% of the world’s wheat and corn, so the loss of that volume leaves the world with even bigger shortages.

“Rich, fertile soils have helped Ukraine become the second-largest grain shipper and the Black Sea region to be known as the world’s breadbasket. Corn is concentrated in fields in the center and north, wheat and barley in the south and sunflowers in the east, U.S. government data show. They are trucked, railed and barged to ports for sale to Asia, Africa and the European Union.

Ports are dotted along the Sea of Azov — which is connected to the Black Sea by a strait that runs between Russia and Crimea, which Russia annexed in 2014 — and on the Black Sea coast further west. The southwestern ports of Odesa, Pivdennyi, Mykolayiv and Chornomorsk handle almost 80% of Ukraine’s grain exports, according to researcher UkrAgroConsult.”

“Roughly 60% of Ukraine’s ferrous metals that are exported by sea go through Black Sea ports of Odesa, Pivdennyi, Mykolayiv and Chornomorsk, according to the country’s port authority. About a fifth is exported from Mariupol.”

The U.S. remains unwilling to sanction Russian crude, which is purely because it would drive prices higher on an inflationary front. Europe and Japan are currently in discussion on LNG cargoes after March in order to address the Russian situation and shortages. Taiwan has also now joined sanctions against Russia and will stop the export of electronics and chips to the country. This is a HUGE blow to Russia because they are a huge part of their advanced systems in both civilian and military industries.

It is still unclear if OPEC will increase supplies to offset the loss of Russian crudes. They could probably increase a bit in the Middle East, but it is unlikely they will cover the full 4-5M that would be lost due to sanctions. This would leave the market short in the meantime- with some of the near-term pain blunted by maintenance season and a natural “shoulder season” drop in demand. The West African nations still have spare room under the current quotas to increase, and we could see the GCC increase a bit. They still have some room on floating storage, but that would dwindle quickly- especially given the massive price divergence between Brent and Oman/Dubai.

Russian Invasion

Russia officially began the invasion of Ukraine with a multiprong attack across multiple fronts. The Ukrainians gave up distance (land) in order to buy time and fall back to fortified positions that were “easier” to defend. The below gives a breakdown of how Russia has pushed into the country from Belarus, near Kharkiv (in the East), through the DNR/LNR, through Crimea, and an amphibious landing in Odessa. The battles have been fluid with strategic locations changing hands several times as the Ukraine military attempts counter attacks. A big victory was the recapture of the Hostomel airport that was initially held by Russian paratroopers. As night falls after the first day of battle, the fighting has slowed in some corridors, but in others- Ukrainians are mounting counter attacks in cities that were declared “controlled” by Russia- IE Sumy. The Ukrainian military destroyed the bridge on the Oskil river in order to slow the progress of troops towards Kharkiv. Ukrainian President Zelensky orders general mobilization, which will bring all able bodies up to the military.

Russia continues to push towards Kiev and are seeing some success on the eastern front to the east of Kiev. They have suffered defeats right outside Kherson and have been repelled with reports they are being driven back into Russian territory. Ukraine also carried out its first strike into Russian territory with a ballistic missile strike on an airbase. Some of the battles around Kiev have moved into urban warfare in order to mitigate some of the Russian mechanized advantages. Putin has now said he is willing to meet with Ukraine in Minsk to speak on a potential ceasefire. So far, it appears to be a non-starter as two key conditions remain a demilitarized country and the removal of the government. As we have highlighted countless times, Ukraine is not the same country in 2014, and they lived under the USSR once before and don’t plan on going quietly into the goodnight. Poland has been welcoming all refugees that are coming into their country, and the NATO border continues to be strengthened with more tanks and aircraft. NATO/ U.S. has the capacity to take back the skies from Russia and turn the whole country into a no-fly zone. This would be a strong move to show support for Ukraine, test Russia’s resolve, and send a message to the rest of the world of what we are capable of. These two responsibilities—robustly defending European peace and prudently avoiding military escalation with Russia—will not necessarily be compatible. The United States and its allies could find themselves deeply unprepared for the task of having to create a new European security order as a result of Russia’s military actions in Ukraine.

Night fall will provide some opportunity for the Ukrainian military to strength positions and close holes in defensive positions, while Russia secures supply lines and backfill the ground they gained. Utilizing a blitz approach provides speed and surprise, but it can also quickly stretch your supply lines and leave your rear unprotected. We will likely see more sorties flown tonight to soften areas while the military shores up supply lines.

Here was a case from the 2/4/22 insights- I also talk about it here on Dec 9^th: https://www.youtube.com/watch?v=ldkffFQ2ZlQ

Why would Putin/ Russia attack?

Putin has been trying to re-establish the USSR and Russia’s prominence on the world stage. He blames the Ukraine for driving the death nail into the USSR/Russia following their independence. Putin has lost most/ if not all influence within the Ukraine government, and he is looking to bring them back into the ranks. This could very easily be a “pride” play and a way to effectively distract from the economic woes at home. If he does move, it will have to happen within February because as we get into March the ground will start to thaw, and no longer be able to support the weight of the heavy machinery, tanks, armored vehicles, etc. Russia would be picking up a lot of manufacturing, agriculture, and fertilizer exposure. It would also link some key pipelines and embolden Belarus. The problem is- the local populace would launch a counter military movement that would rival the French underground. Ukrainians would make life very difficult for the Russians and given the weakness in their economy- it would prove very costly.

There have been some reports that the Russian equipment was in poor shape entering Ukraine and some of the captured or destroyed vehicles actually stopped working. We covered in 2/4/22 insights that the quality of their military equipment was always a concern. There were a lot of reasons why I didn’t think Russian invasion would happen:

What is the end goal? Are they going to take over Ukraine- replace the government and just leave? The Ukrainian people have gotten rid of TWO Russian friendly governments, and they would be quick to do it again. So I struggle to see the end game because it appears Putin has more to lose than gain.
It would be a bigger problem if the invasion FAILED because Russia has painted Ukraine as a weak and rag tag group of individuals. We have highlighted countless times that Ukraine ’22 is vastly different than ’14.
If Putin succeeds, he will have to leave behind an extensive occupying force that essentially leaves his Eastern Flank and most parts of his country exposed.

There are rumors that a Ukrainian pilot became an Ace (shot down 5+ enemy aircraft), which would be a huge win in today’s world. IT is unconfirmed but is just an example of the resolve of the military and people.

The actual path of attack followed closely to what we had talked about in Dec and continues to unfold in a very similar way. There still remains a lot of fighting at points of conflict with several successful counter attacks. Tonight will be an important point as to what the sorties hit and how quickly Russia can move missiles to forward positions to provide cover.

The U.S. and Western Europe announced sanctions that were essentially useless because Putin factored in any and all sanctions before he put one solider in position on Ukraine’s border. If this was his goal from the start, he absolutely assumed their would be sanctions, and I was SHOCKED to learn that we Putin wasn’t already sanctioned and Biden refused to answer why and when he would sanction him. Russia has been reducing their reliance on the dollar and western banks for years.

The United States and Europe will be in a state of permanent economic war with Russia. The West will seek to enforce sweeping sanctions, which Russia is likely to parry with cyber-measures and energy blackmailing, given the economic asymmetries. China might well stand on Russia’s side in this economic tit for tat. Meanwhile, domestic politics in European countries will resemble a twenty-first-century great game, in which Russia will be studying Europe for any breakdown in the commitment to NATO and to the transatlantic relationship. Through methods fair and foul, Russia will take whatever opportunity comes its way to influence public opinion and elections in European countries. Russia will be an anarchic presence—sometimes real, sometimes imagined—in every instance of European political instability. Russia has been divesting itself of USD reserves and increasing ownership of other currencies and gold reserves. We have covered this in the past with the gold holdings and falling Russian US Treasuries in the past, which helps insulate them from sanctions.

But- corporates have to rely on items outside of just government sanctions. They need lines of credit and other general business-oriented networks to execute trades and purchase everything from wheat to crude. Will a bank take a risk on giving a line of credit for Valero to buy Urals (just an example)? We have seen a pause in purchasing from Europe, U.S., and even China of Russian commodities due to concerns on sanctions. China can use this time to get steeper discounts in prices by saying they won’t buy for a short period of time. Putin just finished speaking where he called on the Ukraine army to overthrow a “gang of drug addicts and neo-Nazis.” The comments are just amazing at this point coming from Putin who is getting frustrated with military not achieving near term goals. Xi and Putin spoke about a potential meeting, but comments like these will make it difficult to even come to the table to discuss the current situation.

We FINALLY have talk of Europe freezing Putin’s assets and increasing sanctions- which would at least be a small movement forward on the economic front. It still won’t be enough to deter Putin, but it is showing some sort of resolve progressing forward. This also comes as countries send additional military aid from Javelins to ammunition. The U.S. and NATO have continued to move assets into the Baltics to strengthen forces across aircraft, mechanized, and personnel. It remains unlikely that we cross into Ukraine, but it is a show of force that could move quickly across the boarder. It would be better to do it now during the “fog of war” while Russia is focusing solely on their initiatives to take Kiev. We could use the confusion and surprise to our advantage to gain an upper hand quickly and provide a decisive blow by taking back air superiority and hitting tank columns.

In the meantime, Ukraine rejected a meeting with Russia because they demanded it be in Warsaw and not in Minsk. Putin also laid out his demands:

Putin articulated his ultimatums for Kyiv:

Recognize Crimea as Russian
Rejection of NATO accession
No weapons supplies from the West
LNR and DNR gain territory that the regions had pre 2014

There will be more to follow as now Russia.

How we got to this point? I do breakdown of the history of Russia- Ukraine in a previous write-up.

We have had some sizeable shifts in the rhetoric and assets surrounding Russia-Ukraine. I think it is first important to appreciate that Putin solidified the status quo since 2014, but he just made it “official” by recognizing the LNR (Luhansk People’s Republic) and DNR (Donetsk People’s Republic). These were already separatist regions that broke away in 2014 during Russia’s annexing of Crimea. Putin just made official the region is recognized and will likely become a part of Russia over the next few months. The LNR and DNR have sent letters to Putin requesting help from the Russian military to repel the Ukrainian military. This will likely be another staged escalation point so that Putin has “just cause” to send in additional heavy equipment. There are many Ukrainians that are preparing to go back to war as reservists are being called back up and this is the prevailing view: “The most remarkable thing is that there is not a shred of self-pity in any of them. Not a single one. One veteran told me: “This is a battle for the Motherland; my house is literally in danger.” Russia/Putin knows there is huge resolve to never go back under Russian control- so the bigger focus is- what comes next?

A common view from 2014 was that Putin would create a land bridge to link Crimea to mainland Russia instead of relying on the Sea of Azov or the Crimea bridge from Russia across the Kerch Strait. Russia has always wanted to maintain a buffer between their border and NATO, which was achieved by having puppet or very friendly governments to Russia.

Maintain buffer states against NATO
Grow their status as a world power
Prove they can muster and mount a response to protect their economic interests
Have a permanent military presence in Belarus
Force a deal with NATO/ Europe regarding energy trade (IE Nordstream 2)

President Trump launched a barrage of patriot missiles in Syria to demonstrate the weakness of the S-400 defense, and the fact that at any point in time we could move in and take control. I have outlined in the past that the S-400s don’t communicate with each other unlike their US counterpart THAAD. In order to create a shield, you have to overlap S-400s to create a unified front. When Russia was moving assets into position within Syria, they had to use tugboats to get some of their naval ships into place because they kept breaking down. This called into question their ability to muster, and if the military was so antiquated that they wouldn’t be able to mount an invasion force- let alone a defense/response to an attack. Russia is also facing a demographic problem as their population has been shrinking questioning their military prowess.

Russia has solidified itself as a regional power, but Putin has been pushing to increase their perception to be a world power. They furthered their agenda through OPEC+, and continued to grow their energy dominance in the West. Putin has openly hated the USSR Satellite nations and blames them for the failure of the Russian state. He has been very open on his desire to bring them back within the Russian influence, and right the wrongs over the last century that saw Russia “Embarrassed”. The Treaty of Brest-Litovsk has been a point of contention that saw Russian territory shifted away from them. Many of these states were brought back under USSR control but were quick to seek independence in the fall of the Iron Curtain. Anyone who was “surprised” by his speech regarding Ukraine should go back to watch his other comments against satellite nations… his views were par for the course. And on the otherside- the satellite nations HATE Russia and Putin just as much (if not more) as he hates them.

While Putin carries these beliefs, he is a very strategic thinker and would rather sow discord and uncertainty to achieve his goals (true KGB) vs trying to use blunt force. Ukraine expelled the government that supported Russia and insert a popular government that intended to join NATO and more broadly the EU. This created a lot of concern for Putin, and over the course of several months was able to take over Crimea and create separatist movements in “soft” regions of their control. The regions of Crimea, DNR, and LNR are already majority Russian speakers- while the rest of the country is against the Russian regime and their views. To be clear, just because a group of people speak Russian or may trace their lineage to Russia- it doesn’t mean they want to turn around and be a part of it. There are some benefits of controlling the different ports, and I will go through what those are in a few segments.

Ukraine is a very different country vs 2014 that is more organized and well supplied with sophisticated military equipment. The media acts as though the Russian military can easily walk into Ukraine and change the government, but there is a lot in the way of that underlying initiative. The Ukraine populace (outside of the regions we discussed earlier) are VERY anti-Russian and will fight tooth and nail to deter a Russian government and Russian occupation. Ukraine officially called up reservists to bolster their lines and try to show force to limit the chance of a broader invasion. The U.S. has also put in place more measures and equipment closer to the front lines in order to show force and solidarity with the Ukrainian people. U.S. also moving infantry battalion task force to Baltics. U.S. sending 32 anti-tank helicopters to Baltics, Poland. Ukraine has called up reserves from 18-60 with a large portion of them having military experience. The goal is to always match aggression to ensure defense happens from a point of strength and not trying to react to an invading force.

There have been headlines highlighting that the Russian military is moving into the LNR/DNR, and I can assure you- they have been there the whole time. Putin is a master of espionage, and he would have instructed the military to strip any insignias and even dress as civilians. They are now openly wearing uniforms and moving heavier equipment into the region, which will be matched on the other side of the line of conflict. There have already been multiple incidents along the conflict line, and we expect more to happen as Russia tests their resolve. There was a view that Russia could create a land bridge to Crimea, and take control of ports and sea access from Ukraine. This would be devastating for the economy as a large number of products utilize the Sea of Azov and the Black Sea. The largest ports are Mariupol, Odessa, and Mykolaiv with 90% of grain exported into the sea: Ukraine accounts for 12% of the world’s corn and 13% of the world’s corn.

The below map gives you an idea of the locations of the other ports. A land bridge would go from the DNR to Moldova and link Russia to Moldova and create a blockade. This would be a devastating blow to the Ukraine economy, and could be a part of a long term plan to tighten the noose on Ukraine. The connection to Moldova will be much harder given the lack of Russian influence in some of these other provinces.

The below is a potential invasion map that would focus on the southern part of Ukraine. Russia has already limited Ukraine’s access to the Sea of Azov by the building of the Crimea Bridge and the presence of the Russian Navy. The fact that the Ukraine is in a different position vs previous years- Putin has had to extend the military and force them to spread thin across the border. The Ukraine Parliament approved a state of emergency to address the rising pressure from Russian military activity. By Ukraine leaving assets in the North and West- Russia can hope to limit casualties in an attempt to cut off water access to the country.

These are all possibilities, but the underlying fact remains the resolve of Ukraine is very different vs pre-2014. The resolve of Ukraine is high, and the government has allowed civilians to openly carry weapons. While small, it just highlights that the populace is willing to fight and make any Russian moves very difficult. If Russia were to move in to take Kyiv- they would have to leave behind a large occupational force to enforce the puppet government because many would continue their fight. This wouldn’t be a short-term endeavor for Russia, and it is unclear if the Russian soldiers and populace would support such a long-drawn-out process. Russia also has a big demographic problem that would only worsen any extended stay in Ukraine, which would also strengthen the resolve of NATO nations.

It also creates a broader problem for their allies. In 2016, the United States declared that India was a “Major Defense Partner,” which gave India access to military and dual-use U.S. technologies. Over the next four years, the two countries signed three defense agreements. And along with Australia and Japan, India and the United States formed and began collaborating through the Quadrilateral Security Dialogue (Quad). Their partnership is driven by many factors, but one of the most important is India’s past and resurgent rival: China. The United States is locked in a contest with Beijing over global leadership and sees New Delhi as a powerful counterweight. India, for its part, is caught in border disputes with China and views working with the United States as necessary to check China’s growing encroachments in the region. By contrast, Russia has attempted to bury memories of the Sino-Soviet split, and it has drawn closer to China through initiatives such as the Shanghai Cooperation Organization.

India needs both Russia and the U.S. to guard against Chinese expansion, which has kept India on the sidelines when “condemning” Russian actions. They have fallen short of coming out aggressively against Russia, and I think they will maintain their stance with little reason to aggravate Russia. In the background, they could push for Putin to use caution and to avoid an escalated conflict. But, India needs the backing of South Korea, Japan, Australia, the U.S., and Russia in different capacities. The U.S. is one of their larges trade partners as well as Russia that provides energy and raw materials to the country. The relationship between Russia and China is also a problem given how much China relies on both countries.

On the one hand, China and Russia have some significant convergent interests:Neither is a fan of the US alliance system, and both would love to see NATO end up with egg on its face over Ukraine.

Beijing and Moscow have become increasingly ideologically aligned in opposition to the US-led global order and the West more broadly.
China’s rising imports of Russian oil and natural gas mean that Moscow is increasingly important to Beijing’s energy security.
And China certainly wouldn’t mind if the US was again distracted from its long-promised but poorly executed pivot to Asia.

On the other hand, Beijing has several good reasons to tread lightly:Explicit support for Russia over Ukraine would further damage Beijing’s strained ties with the EU at a time when Chinese leaders are trying to mend fences with Brussels.

An invasion could lead to significant global market disruptions. Ukraine is a major food exporter, and China is a major buyer of Ukrainian barley and corn – key components of livestock feed.
In recent years, Russia has backed a bevy of separatist groups in Ukraine, a dynamic that makes Beijing – shall we say – a wee bit uncomfortable.

China is going to sit on the sidelines as well and not support or condemn the movements in Ukraine. They have annexed enough regions, and would be concerned to see a “separatist” movement begin in the western part of the country (Xinjiang). As much as they hate it, China still needs the U.S., and while they have energy deals with Russia- they also don’t want to do anything above and beyond to create more strife with the U.S. President Xi would also like to avoid issues as he tries to solidify support for his push to stay in power come November of this year.

While Russia still relies on pipelines that move through the Ukraine, Ukraine has been able to shift their trade westward. Russia has been actively moving lower, which is also a problem because prior to 2014- they received a large part of their military equipment from the country. Russia will have to keep finding new avenues for economic growth and support if sanctions keep mounting, which will force them to rely more on China.

A war between these two nations would impact many base metals and other key ingredients for everyday life. The global economy already faces spiraling inflation and broad supply chain bottlenecks/shortfalls, and a conflict would only create more problems. This hits everything from food to nickel and everything in between. We have already seen huge spikes in prices, and it is unlikely we see any type of reduction in prices while the Ukraine-Russian military stare across the border at each other. If Russia “officially” invades- there will be global sanctions placed on Russian assets including natural gas and crude.

Sanctions will create a big problem for the global markets, but also hit the Russian economy. The CDS spread has shot back up to levels we saw when the OPEC price war/ Crimea kicked off at the end of ’14 into ’15.

The situation remains fluid, and we will provide updates along the way.

Our report from 2/4/2022

Russia-Ukraine Deep Dive and My Base Case Scenario

Russia-Ukraine has a deep history that is filled with a significant amount of distrust and broad blame for the collapse of the USSR. “For three decades, Ukraine has been “a space where the interests of the great powers clashed and yet no conflicts were resolved,” Serhii Plokhy and M. E. Sarotte wrote in 2020. “As long as Ukraine’s status is unsettled and insecure, the consequences will continue to reverberate beyond its borders.” Ukraine was pivotal part of the USSR with over 85% of their nuclear and ballistic missiles being built and assembled in the country. As the USSR collapsed, Russia tried to setup a “union” with the satellite nations, but needed Ukraine to remain a part of Russia to make the plan a reality. Without the Ukraine economy, Russia faced a big drop in economic activity and the ability to keep the fragile union in place. “To most American policymakers, Ukraine has represented a brave young country—one that, despite the burden of history, successfully launched itself on a path of democratic development as part of a new world order after the fall of the Berlin Wall. To the Kremlin, meanwhile, it has remained an indispensable part of a long-standing sphere of influence, one that operates largely according to old rules of power. The difference between these two views goes a long way toward explaining why post–Cold War hopes have given way to the strife and uncertainty of the world today. “Yeltsin, who by then had edged out Gorbachev as the preeminent leader in Moscow, belatedly realized how much he had misjudged Ukrainian desires to break free from the collapsing Soviet empire. After the failed coup, he had been trying to keep Ukraine in the union by threatening Kyiv with the annexation of Crimea and the Donbas. The December vote proved, however, that Yeltsin’s threats had backfired; they had instead stiffened resistance in Kyiv and alarmed the rest of the Soviet republics (and Washington, as well).”

The U.S didn’t want an independent Ukraine either- President Bush gave a speech ahead of the vote describing the different between Independence and Freedom. The backbone of the speech was explaining that you can have freedom WITHOUT independence. The U.S. also wanted Ukraine to remain a part of Russia because we believed it would destabilize the region further as well as create the third largest nuclear power. The Ukraine swiftly voted YES for independence and become the third largest nuclear power in the world. “On independence, Ukraine immediately became a direct threat to the West: it was “born nuclear.” The new state had inherited approximately 1,900 nuclear warheads and 2,500 tactical nuclear weapons. To be sure, Ukraine had physical rather than operational control over the nuclear arms on its territory, since the power to launch them was still in Moscow’s hands. But that did not matter much in the long run, given its extensive uranium deposits, impressive technological skills, and production capacities, particularly of missiles; every single Soviet ballistic missile delivered to Cuba in 1962, for example, had been made in Ukraine.” Yeltsin, who by then had edged out Gorbachev as the preeminent leader in Moscow, belatedly realized how much he had misjudged Ukrainian desires to break free from the collapsing Soviet empire. After the failed coup, he had been trying to keep Ukraine in the union by threatening Kyiv with the annexation of Crimea and the Donbas. The December vote proved, however, that Yeltsin’s threats had backfired; they had instead stiffened resistance in Kyiv and alarmed the rest of the Soviet republics (and Washington, as well).”

In May 1992, Moscow and Kyiv clashed over the fate of the Soviet Union’s Black Sea Fleet, which was based in Sevastopol. A dispute over the division of the fleet and control of the port would drag on for the next five years. As tensions flared, the Ukrainian parliament began making new demands in exchange for giving up the formerly Soviet missiles: financial compensation, formal recognition of Ukraine’s borders, and security guarantees. In order to close this chapter, the US brokered the signing of the Budapest Memorandum to move the missiles back into Russia while giving “soft” security over the border. This created a new challenge for the U.S and Russia on how to get the weapons out of Ukraine and back into the hands of Russia. We feared that they would fall into the wrong hands. But recently declassified documents show that the triumph was incomplete—something that Ukraine recognized at the time but could do little about. As a Ukrainian diplomat confessed to his U.S. counterparts just before signing the Budapest Memorandum, his country had “no illusions that the Russians would live up to the agreements they signed.” Kyiv knew that the old imperial center would not let Ukraine escape so easily. Instead, the government of Ukraine was simply hoping “to get agreements that will make it possible for [Kyiv] to appeal for assistance in international fora when the Russians violate” them. Having helped denuclearize Ukraine, Washington thought it could largely stop worrying about the country, believing its independence to be an accomplished fact. The reality was that Moscow never truly accepted that independence, in part because it viewed Ukraine not only as a key element of its former empire but also as the historical and ethnic heart of modern Russia, inseparable from the body of the country as a whole.

The Budapest Memorandum could not paper over that disconnect forever. Had the memorandum provided the guarantees of their country’s territorial integrity that the Ukrainians sought instead of mere assurances, Russia would have met with much greater obstacles to violating Ukraine’s borders, including in Crimea and the Donbas. (Another policy alternative would have been to strengthen the Partnership for Peace, of which Ukraine was a member, instead of marginalizing the partnership and promoting NATO’s expansion to a small number of countries.) Before long, the consequences of going without such supports would become clear- as we are founding out now.

After the signing of the Budapest Memorandum, the concerns over the region faded. Russia went into a deep recession and culminated in them losing about 98% of their market value. As the years progressed, President Clinton got involved in Bosnia. The U.S. went on a bombing campaign to target strategic assets, but we were considering the deployment of troops and ground assets to the region. As we were deliberating, Russia sent in a column of tanks and troops and warned the US to stay out of the region. This was their “reemergence” on to the world stage. This strained relations, but the US backed off and let Russia handle the situation.

The situation between Russia-US deteriorated further when: In March 2004, NATO accepted into its ranks the three Baltic states—Estonia, Latvia, and Lithuania—which were once part of the Soviet Union, and four other states. The accession of the Baltics signaled that NATO enlargement would not halt at the former border of the Soviet Union. The EU followed suit in May 2004, extending its border eastward to include a number of former Soviet republics and allies, including the Baltic states, the Czech Republic, Hungary, Poland, Slovakia, and Slovenia. Since Putin, a leader of an empire denying its own decline, still considered Soviet borders significant, he viewed such moves as a massive affront. This movement enraged Putin as NATO moved closer to their underlying border. In response, Russia moved into Georgia in 2008, and “officially” reestablished themselves as an entity to pay attention too.

Fast forward to Syria where Russia came in to backstop the Assad government and turned the tide of the war in favor of Assad. This gave them a much bigger footprint and sphere of influence within the Middle East as they get more involved in global geopolitics and look to protect their economic interest. As the Sochi Winter Olympics neared, the Russian military was moving new assets into the region claiming “security” around the Olympics. But Russia/Putin was losing a lot of influence in Ukraine after his “guy” was voted out of office. Within Crimea, unmarked soldiers started patrolling the streets and things started to become a bit hairy when the Olympics ended, and the military kept a significant amount of assets in the region. Within a month, they had moved straight into Crimea and “Claimed” it as their own. This gave them significant control of waterways but resulted in broad sanctions from the international community- especially around Nordstream 2. Crimea has always been mostly Russian, so the international argument was- “well- they already speak Russian there and they have a Russian lineage.” Russia still faced sanctions, but Ukraine-Russia still maintained some economic cooperation regarding agriculture, industrial, and the sale of oil/gas through pipelines.

In 2014, Ukraine was disorganized and struggling to establish a sound government. In 2022, the country is way more organized and unified, which doesn’t make it easy for Russia to just “walk-in” like they did in Crimea. NATO and allies have sent equipment, advisors, and some troops to Ukraine to aid in their underlying support. Ukraine sits surrounded on all three sides by Russian military assets, and there are two distinct ways how this ends.

Base case: Putin is looking to protect economic/geopolitical interests by establishing the ability to muster a strong military response.

Putin wants NATO to stop admitting new countries into its ranks- especially the ones bordering Russia.
1. Specific NATO (US) equipment can never reside in bordering nations- IE THAAD
2. Sanctions have to be lifted against the Russian sale of natural gas/crude into the European markets- IE approve Nordstream2
3. Demonstrate to China that Russia can move military assets quickly across long distances
4. Provide a way to distract from a struggling economy and other local economic issues that continue to compound within Russia.

The 4^th point is very important. Back in 2017- Russia invited Chinese advisors to come watch the war games in the eastern part of Russia. It included all three branches of the military and 54k troops that were responding to an invading force. For those confused, only China could possibly invade that part of Russia. This followed closely to the declaration of China’s 9-dash line that claims large parts of Russian territory as their own- including oil/gas assets and key ports for the navy and trade. After Chinese soldiers attacked Indian soldiers in Ladakh, Russia was the first country to side with India (after only 1 hour after the attack). Russia also sped up the delivery of S-400s, aircraft, and other equipment/training to the Indian military. As you read this, the Indian military is currently training within Russia on how to use the equipment. China has also been building new assets and nuclear missile silos within striking distance of Russia, which keeps things very tense between the two.

Putin needs the US to help counter Chinese expansion and military growth- so it is unlikely that anything progresses past one clash. There is too much equipment and personnel at the border to not have one brief battle that results in deaths on both sides. This will be the “flash point” of the conflict, and olive branches will be sent on both sides resulting in de-escalation where everyone “gains” something.

Why would Putin/ Russia attack?

Everything is a possibility- but it has to be measured. Russia has moved blood and medical equipment to the front lines, which is normally a precursor to an invasion. But, all of their movements have been well telegraphed and eliminates any type of surprise attack. I struggle to see how Putin would win at the end of the day invading.

Putin/Russia also has a huge advantage because the U.S. and Europe rely on them for oil, refined products, and natural gas. Putin (being a true bond villain) is playing his hand aggressively as the U.S. has increased their imports of diesel and urals. The U.S. is drawing more diesel from Russia this month than it has in at least three years as cold weather envelops the Northeast. About 1.55 million barrels of diesel is en route from Russia to the U.S. for February arrival, a record in data going back three years, according to oil-data provider Vortexa. So far that represents 22% of the nation’s diesel imports in February.

Russia has also been building their gold and foreign exchange reserves to help buffer against sanctions and increase the demand for the ruble. They have also reduced their foreign debt holdings to limit the severity from Western sanctions- especially on banking/USD access.

At $634 billion, central bank reserves are close to a record, thanks to policies that saved much of the oil windfall in a rainy-day fund. The budget ran a surplus of 0.4% of GDP last year and government debt at 18% of GDP is among the lowest of major economies. Moscow has reduced dependence on the dollar for trade and transactions and is building up its own alternatives to U.S.-dominated payment systems. Thanks in part to those defenses, economists say that the likely sanctions would knock the ruble as much as 20% lower against the dollar, fuel already-high inflation and thus require more interest-rate increases by the Bank of Russia, as well as possibly intervention to support financial markets and sanctioned banks.

These moves will insulate some of the damage of new sanctions, but it will still cause a broad drop in the ruble. Russia and China have agreed to extend their trade relationships across crude and natural gas, but would China accept transactions in Ruble? That would become the biggest unknown- if they do- it would buffer a lot of the expected drop (with a lot of it already baked in). If they didn’t, it would cause a huge problem for Russia but also China. China relies extensively on their natural gas and ESPO/ Sokol grades, so it is likely that China would play ball and accept transactions in Yuan/ Ruble.