Executive Summary

  • The Ukraine crisis should prompt significant soul-searching among western leaders.
  • The seeds of a potentially germinating major war in central Europe were sown three decades ago. Gestation has been long but need not have been inexorable.
  • Geopolitics are usually contextual to investors, seldom of significant direct relevance. However, one of those times of direct relevance is now, the consequences enduring.
  • Whatever the outcome, even if peaceful, difficult questions cannot remain unanswered, notably about defence, energy policy, supply-chain security and disruption. If climate change is a test of ESG principles, so too should be the broader ramifications of Ukraine. 

In the Merlin Macro Update of 6th December 2021, I made the comparison between the Ukrainian situation of today and the plight of Czechoslovakia in 1938. As I said, “Let us pose the question: if the Russians (and Putin and Russia’s armed forces are a very different proposition from Iraq’s in the 1990s) invaded Ukraine, apart from huffing and puffing, freezing assets, expelling some diplomats and spitting out sanctions, would anyone in the West help?”. As is becoming increasingly apparent, while some limited hard support is on offer with training teams, weapons and ammunition supplies direct from the US and the UK, and limited troops are being sent to bolster existing NATO countries on the eastern flank, unless circumstances take a dramatically different turn, the answer is no. Just like Czechoslovakia experienced when sold down the river by Britain’s Neville Chamberlain and Edouard Daladier of France in the 1938 Munich agreement (returning from which Chamberlain stepped from his aircraft at Heston aerodrome waving a scrap of paper and proclaiming “Peace in Our Time”), Ukraine too is likely to be left on its own to take its chances.

 

What we have is the culmination of a stunning geopolitical and defence policy failure on behalf of the West. It is compounded by a lack of clear leadership and the prosecution of naked national self-interest on the part of some key players being hopelessly confused with the interests of the greater good. It is a toxic brew.

How on earth……? 

As President Biden orders US citizens out of Ukraine with the cheerless promise that in the event it all kicks off he’s not coming to rescue them, and other countries close their embassies, how is it that we have arrived at this point in 2022 in which a sovereign nation in the heartland of continental Europe, one with a landmass only slightly smaller than that of Germany and Poland combined, and with a population of 44m, is at risk of being invaded by its neighbour, and allowed to do so? Especially when that neighbour, Russia, is a party to the United Nations Declaration and a permanent member of the UN Security Council? Such action would be in direct contravention of Clause 3 (“All people have the right to self-determination”) of the 1941 Atlantic Charter agreement signed between Churchill and Roosevelt on board HMS Prince of Wales in Placentia Bay, Newfoundland; within six months that Charter itself was to be superseded by the United Nations Declaration at the Arcadia “Big Four” Conference in Washington in January 1942. Alongside the US and the UK, Stalin for the Soviet Union and China’s Chiang Kai-Shek became signatories; eighty years later President Putin is Russia’s legal and moral guardian of that obligation (as is General Secretary Xi Jinping for China).

 

But much more recently and specifically, in 1994 Presidents Bill Clinton and Boris Yeltsin and Prime Minister John Major signed an agreement directly in relation to Ukraine as an extension of the overarching Strategic Arms Limitation Treaty (SALT): in return for Kiev giving up its entire nuclear arsenal (and it was the third biggest in the world at the time), Ukraine’s sovereignty and right to self-determination would be guaranteed; its borders would be inviolable, sacrosanct. However, two decades later with Ukraine’s Crimean Peninsula already annexed by Moscow in 2014 completely illegally (the equivalent of Hitler re-militarising the Rhineland) and in the absence of any significant opposition beyond the predictable sanctions, President Putin rightly inferred that neither the US nor the UK was much interested in honouring their side of the bargain with Ukraine as explicit sponsors (if not implied guarantors) of Ukrainian sovereignty.

 

There is method in Putin’s apparent madness of tackling NATO head on but fundamentally his strategy is driven by Russian national security and his own political insecurity. To understand why we are where we find ourselves today, we need to wind back the clock. 

History revisited: lifting the Iron Curtain 

In the West, two significant factors were at work in the aftermath of the collapse of the Iron Curtain. As old ties disintegrated and various degrees of instability (and in some cases armed conflict, notably with the break-up of the former state of Jugoslavia) predominated from the Caucasus to the Balkans, and from the Balkans to the Baltic, several former Soviet satellites and the EU reached out to each other. Significantly, this included the Baltic States, Poland, Hungary and Czechoslovakia. Ukraine too made overtures to the EU.

 

Simultaneously and directly connected, President Clinton identified the possibility of both advancing the interests of NATO and at the same time minimising the risk of the formation of a new Soviet-lite military pact by seducing willing former western-edge USSR states to join the Treaty. Notable were Estonia, Latvia and Lithuania, not least because for the first time apart from the 121-mile frontier between Norway and Russia east of the North Cape and well inside the Arctic Circle, NATO member states would have a direct continental border with Russia; the insulation provided by Russian-aligned buffer states would be broken. Such a stance was seen as deliberately provocative in Moscow. Clinton was warned of the potential risks.

 

But while in the 1990s and into the 2000s with different aims in mind NATO and the EU were expanding eastwards on the European mainland, America’s primary strategic focus was shifting away from Europe towards Asia, pulled by the need to counter the incipient risk posed by China and the threat to America’s Pacific hegemon and indeed the threat to its own western seaboard. It was propelled too to a degree by the growing self-assertion of newly re-unified Germany and that country, the fourth largest economy in the world, no longer wishing still to be officially under the protection of the post-War Occupying Powers with all the constraints and ignominy attached to its situation more than forty years after the conclusion of WW2. 

Wrong reading of the chicken’s entrails: writing Russia off as a threat 

Having faced a clear and quantifiable threat from the Soviet Union for nearly half a century, and with significant human and financial capital tied up in military hardware and capability in the European Theatre of Operations (ETO), the sudden absence of a defined major threat presented western democracies with an opportunity. In what became known as the Peace Dividend, defence was identified as a rich source of funding for other political and fiscal priorities: health, education, pensions etc.

 

As the US and the UK withdrew forces from the ETO and many NATO members’ defence budgets were hollowed out, including ours in the UK, the underlying premise was simple: Soviet Communism was conquered, dead; democracy had prevailed; under Gorbachev Russia was taking its first steps towards modern democratic principles from which it was inferred, wrongly, that through perestroika post-Soviet Russia would embrace ‘western values’; even Boris Yeltsin though a drunkard and unpredictable, when not in his cups broadly had the right idea about the future direction; Russia without its empire was judged a much diminished threat. This was backed up by the progress with SALT, begun under Presidents Carter and Brezhnev, significantly reducing the number of existing nuclear warheads and curtailing the development of new WMDs; further, with a broken economy and a backward industrial base, what military kit remained in Russia’s arsenal was obsolete, rusting, clapped out and not fit for purpose; as for their strategic submarines, more of a danger to their crews than the enemy. And after all, had the mighty Russians, aside from the US the world’s only other superpower since 1945, not been ignominiously whipped out of Afghanistan in the 1980s by a rag-tag and bobtail gang of plucky CIA-funded Mujahedeen armed with little more than some rusty AK47s, some ancient RPGs and apart from the odd artillery piece, their biggest weapons mounted on the back of pick-up trucks? In essence, Russia was all but written off as a serious player.

 

What western political and defence analysts underestimated, particularly as President Putin’s influence came to bear, was the Russian indignance at having lost an empire and, with it, self-respect; the insistent need to restore national pride and self-esteem and to redress the strategic imbalance with the United States, not least as China would usurp the former USSR as the rival superpower. Early in his reign, Putin began a programme of major investment in rearmament, not just in numbers of tanks, guns, missiles, aircraft and ships but in significant advances in sophistication, notably in cyber warfare capability. 

Interpreting the smoke signals from flawed or badly executed Western geopolitical strategies 

Nor can we underestimate the effect of the aftermath of the Second Gulf War and how the reactions were perceived in Moscow, Beijing and Tehran to the decade-long War on Terror geographically focused on Afghanistan. Further perceptions and interpretations were informed by the controversy over the legitimacy of the invasion of Iraq and the toppling of Saddam. Led by US Defense Secretary Donald Rumsfeld, the position was compounded by the refusal of the neo-Conservative wing of George Bush’s Republican administration to ‘do’ nation building in the aftermath of invasion (the same mistake repeated in Afghanistan too) and, particularly, America’s ill-conceived dismantling of the Baath Party which essentially destroyed all societal, government and judicial systems, but left nothing to replace it. With the inevitable descent into chaos in Iraq only adding to the sense of US disillusionment (not to mention the growing casualty list) with getting involved in ‘other people’s wars’, this later defined the public and political appetite (more accurately the lack of it) to commit fully to resolving the instability throughout the Middle East and along the southern Mediterranean shore arising from the 2012 Arab Spring, and the war in Syria.

 

That lack of commitment by the western democracies, restricted to the use of tactical air power (and the occasional short, sharp shower of cruise missiles) in the absence of boots on the ground, left a strategic vacuum. It was filled by Russia and Iran acting in concert. Indeed, the significant policy failures in Libya and Egypt, promulgated by a dangerous combination of vanity and a complete lack of understanding of what was going on and whom they were backing by David Cameron, Nicholas Sarkozy, Barak Obama and Hilary Clinton were arguably disastrous for western interests. A ten-year civil war in Libya, stoked up by Turkey and Russia, has allowed Putin’s GRU asymmetric dirty tricks wing to use Libya, among other venues, as a conduit for trafficking sub-Saharan migrants from Africa to Europe, cynically and successfully to sow dissent in receiving countries. Further, in Egypt, Obama’s deliberate pulling of the rug from under President Mubarak, and then hurriedly having to engineer a military coup when in the ensuing free elections the Egyptians inconveniently returned a new Muslim Brotherhood government (not Washington’s plan at all) and this with a cornerstone ally in a country at the highly sensitive fulcrum of Africa, the Middle East and Arabia; but the effect has poisoned the well of trust with the West for a generation. 

The nub: a declining appetite to confront reality and take responsibility 

But stepping back from the detail, the essential truths of western foreign policy and defence strategy and spirit of cooperation (or increasing lack of it) are this: three decades ago, most western nations turned out to help expel Saddam Hussein from Kuwait. The second Gulf War had much less support. President Bush’s invocation of NATO’s Article 5 call-to-arms in the wake of 9/11 saw far from unanimous agreement and with a few honourable exceptions including the UK, those who did turn up were at best de-minimis or half-hearted contributors. China has been allowed to annexe and militarise the Spratley Islands in the South China Sea without any challenge. Nobody lifted a finger when China completely illegally annexed Hong Kong. President Biden is having rings run around him by Iran in his pursuit of America’s readmission to the Iranian Nuclear Containment treaty.

 

Biden has had minimal success in building a western consensus to contain the growing threat posed by China, revealing his own political impotence to shape events on the world stage; NATO’s ignominy in its unseemly and hasty abandonment of Afghanistan last summer, his lack of grip and his abysmal leadership, shredded what little authority he had remaining.

 

It is not difficult to see how Moscow, Beijing, Tehran, Pyongyang and others have arrived at the conclusions they have, that the West is both in retreat and disunited. If ever there was a chance to take advantage of such division, it is now. Observers only have to look at the multiple delegations hastily beating a path to Putin’s door with as many different and conflicting solutions to the Ukrainian crisis for confirmation of that thesis. 

Western Intelligence and Political Strategy Analysis Failures 

It is easy but wrong to lump China and Russia together when considering them as a threat to the West. While they are becoming closer as allies (that was not always the case: for most of the 20th Century and in to the 21st, mutual distrust and antipathy were strong, especially when both were communist states), their strategic ambitions are very different. In a previous essay, I discussed in some detail Beijing’s ambition within the context of perpetuating the fortunes of the Chinese Communist Party for a New World Order and the means by which it is achieved principally through the One Belt One Road initiative, substantially the world’s biggest infrastructure project. It is pure economic neo-colonialism: if two millennia ago all roads led to Rome, now the plan is for all roads to lead to Beijing. Encompassing road, rail, maritime and air transportation, the construction of new cities, water grids, power stations, communications links including fibreoptic cables, and many more, it will span central Asia, the Levant and Mesopotamia, Arabia and crosses the Bosphorus into Europe. Integrated with it is the ‘String of Pearls’, major strategic maritime hub developments around the China Sea, the Bay of Bengal, the Persian Gulf and the Indian Ocean; Chinese interests are now extending in to the Atlantic; they are mercantile installations but can easily be militarised.

 

Russia’s strategy has no such ambition; nor is there any appetite to recreate the old Soviet empire, though in an essay in 2021, Putin claimed that since the 11th Century Ukraine has belonged to Russia and according to him, by rights, still does. Essentially structured around Fortress Russia, Putin is intent on minimising the direct effect of outside influences on the Russian homeland by fostering very strong spheres of political influence in key buffer states between himself and those whom he sees as a threat. In all cases, as has already been seen in the Caucasus with Chechnya and Georgia, as well as the Crimea and Kazakhstan, he is prepared to intervene directly with hard power, whether conventional military or asymmetric forces, to protect Russia’s interests. His battles are far from one-sided and often enduring and bloody, as in Chechnya and more recently in Ukraine’s Donbas region; politically, the results have consequences for him at home, bolstering his strongman image if successful but gifting advantage to his political enemies in the event of failure; each is a calculated political risk on the outcome. It is interesting that in Afghanistan, in the aftermath of the Taliban’s success in taking over the country in 2021, both Russia and China negotiated with the new regime in Kabul that there should be no attempt by the Taliban’s Islamic leaders to foment dissent among the Uighur Muslims in China’s neighbouring Xinxiang Province, or in the case of Russia’s satellites in neighbouring Tajikistan, Uzbekistan and Turkmenistan, among the Muslim communities in Russia’s back-yard adjacent to Afghanistan. 

Divide & Conquer: compromising Western interests 

In the same way Clinton sought to expand NATO’s influence at the expense of Russia’s, in reverse Russia and China are both adept at the same game. In the case of Russia in particular, this is of significance in undermining the principle of NATO’s Article 5, the full call-to-arms in the event of an attack on any single member state: “an attack on one is an attack on all”, the invocation of which can only be with the unanimous endorsement of all members (and critically, in the context of the current situation accession candidates can be black-balled by a single veto).

 

It is therefore no coincidence that over the years, Putin has set out to compromise vulnerable or susceptible NATO member states’ interests. The most obvious example is the political leverage, more accurately a ransom note, from Russia’s ‘weaponisation’ of strategic gas supplies to western Europe, particularly to Germany; but others would include wooing Greece, when it was all but bust in 2012, with attractive financing terms as a seductive alternative to the punitive package offered by the EU/IMF/ECB troika; selling new, sophisticated air defence systems to Turkey when possibly Russia might have learned more about the new F35 Stealth Fighter than might otherwise have been the case; and last year, during the pandemic, cosying up to Viktor Orban in Hungary, culminating in the sale of significant quantities of Sputnik vaccine kits.

 

China’s New Silk Road does much the same in making ‘beneficiary’ states beholden to Beijing; that would include Italy, one of the strategic partners identified by Beijing to help bring the project to fruition, but also other European countries beating a path to Beijing’s door seeking economic benefit while holding their noses over the nasty bits, particularly at the time before the Hong Kong debacle, China’s human rights record (in the UK under George Osborne, and his Asian Investment Bank initiative, the approach was known in the Foreign Office as Operation Kowtow). The new pan-Asian trade agreement stitched together last year by China was another part of the jigsaw, bringing Japan, Indonesia and South Korea much more into Beijing’s sphere of influence and away from that of the US. A new Chinese investment agreement with Jacinda Ardern’s New Zealand Government, also completed last year, immediately compromised the key western Five Eyes mutual military intelligence gathering and sharing arrangement between the US, the UK, Canada, Australia and New Zealand.

Democratic Alliances vs Autocracies 

It was Churchill who memorably said, “democracy is the worst form of government; except for all the others that have been tried”. Aren’t we lucky to live in open, free societies, warts and all? Policy is discussed in the open, thrashed about in national assemblies and beaten up, accepted, amended or rejected, and every few years we have the opportunity as electorates to bin the incumbents and change horses. But there are few places to hide in the policy debate. For those who would do us mischief (principally but not exclusively Russia, China, Iran, North Korea; others too, not just nation states but including a multiplicity of international terrorist organisations), they can study us at their leisure, watch events play out in full view.

 

However, whether as autocracies, theocracies or virtual dictatorships, what we learn of them is either because they want us to know it, or it is a lifting of the veil through what may be publicly gleaned or analysis of covert intelligence and informed by educated guesswork. It is obvious too that while there are often domestic political tensions, nevertheless such autocracies have a continuity and predictability of purpose, not constrained or defined by the risks of the regular electoral cycles of the western democracies.

 

It is against this backdrop that the western alliances share their common aspirations and air their grievances, displaying both their strengths and weaknesses. Today, with divisions that are all too obvious, the western governments are offering a passable attempt at making it easier for Russia and China, doing their jobs for them. Consider the following examples: 

  • America First: it was Donald Trump who adopted this as his 2016 election slogan. He certainly exploited a rich seam of domestic populist nationalism to put America’s own interests first and had already questioned America’s commitment to NATO suggesting the US should be prepared not to reinforce the Warsaw Gap in the event of a Russian incursion through the Baltic States (his view in turn was informed by what he saw as European ingratitude, especially from Germany, where national polls regularly showed that around two thirds of Germans would be against providing support to the US in the event NATO’s Article 5 were invoked if the US itself were under attack). However, the sneering, rancid reception to his election among senior European leaders who should have known better, was toxic. Notables were Jean Claude Juncker (“we’ll have to teach him where Europe is”) and Angela Merkel (“he does not share our values”). Trump’s memory was long and his disposition vindictive, so when it came to his dressing down the delinquent countries, those (the vast majority) who fail to meet the minimum 2% of GDP expenditure on defence, he felt fully justified in not holding back. It was magnificent, blunt, very public and utterly corrosive. His trade tariffs regime, introduced in 2018 to protect US jobs from competitors who had a large trade surplus with America, not only targeted China, but also affected allies including Japan, Mexico and, most prominently, Germany, another sign of internecine tensions in the western camp.
  • Nord Stream 2 pipeline, the ‘new Ribbentrop-Molotov’ agreement: little in the West has become as politically divisive as the new Russo-German sub-sea gas pipe-line from Vyborg on Russia’s Baltic coast up by the Finnish border, to its southern landfall on the north German coastline at Greifswald by the Polish border, 50km east of Rostok (for those interested in military history, Greifswald is only 10km from Peenemunde, the Nazi V-weapon development and testing ground on a desolate promontory on the isolated Baltic coast). Russia already supplies 30% of western Europe’s gas requirements and 40% of Germany’s. NS2, which effectively replaces the mainly overland NS1, gives Germany the first right of call on gas supplies which, in Germany’s transition from coal to renewables, will be its primary source of energy at least for a decade. The US and the UK strongly object in principle that Germany, a NATO member which by a wide margin has failed to meet the minimum spend on defence and which hides behind the skirts of the German constitution when it comes to providing military assistance outside Germany’s borders, is now reliant on Russian gas for its strategic energy, sourced from the very country the US in particular is paying to defend Germany against. With Ukraine potentially likely to lose up to 3.5% of its GDP from the ending of NS1 gas transit fees, in 2021 President Biden agreed a tawdry deal with Angela Merkel that Germany would pay reparations into a new Ukrainian sinking fund for social expenditure, however the sums agreed were miserly compared with what Ukraine stands to lose.
  • Breaking the US defence hegemon in NATO: the United States accounts for 72% of all NATO’s defence spending. The reality is that in terms of military capability it contributes virtually all the effective, heavy firepower. Even before Trump’s Grand Remonstrance, the EU had been publicly harbouring notions of an integrated Euro army, navy and air force as one of the essential trappings of the nation state to go alongside being able to issue its own currency, dispatch its own ambassadors to foreign capitals, present a unified foreign policy etc. Currently leading and renewing the charge are President Macron and Ursula von der Leyen, the Commission President. It is a strategy which is as mad as it is delusional. Alienating and disintermediating the US, the world’s most powerful military force and the cornerstone of western defence, plays straight into our enemies’ hands. Further, with France being the only major player in the EU in terms of defence capability it would transfer significant influence to Paris within the EU, particularly when it comes to foreign policy; on top of that, the amount of catch-up expenditure at the national level to produce a balanced, pan-EU effective military capability which replaces that of both the US and, post-Brexit, the UK would a) take years and b) be stunningly and prohibitively expensive, and c) be politically unacceptable in many EU member states, particularly if Germany with a left-wing, pacifist government were not to play the game.
  • Intra-EU Schisms: developing that theme, if the EU likes to present itself as a unified and unitary body, the reality is that among the 27 member states there is frequent wrangling and often fundamental disagreement, clearly visible to the outside world. Pertinent to this paper, the governments in Estonia, Lithuania, Latvia and Poland, i.e. all those on the ‘front line’ with Russia or its satellite, Belarus, are in fundamental disagreement about the dovish, secessionist German-Franco-Brussels alliance which publicly undermines the integrity of NATO.
  • The AUKUS hand grenade: if the western alliance was audibly creaking, the mid-2021 tripartite announcement by the US, Australia and the UK of a strategic shift towards the Indo Pacific region opened up a new and deep fissure with France. The Australian government’s decision to switch from the purchase of a new fleet of diesel-powered submarines sourced from France to a replacement arrangement whereby instead the UK and the US would supply nuclear -powered boats was a severe embarrassment to Macron as £47bn worth of defence contracts scheduled for French yards and suppliers were scrapped. As if not economically bad enough for France, the casual and careless way that Biden and Boris Johnson dealt with Macron personally caused a major diplomatic rift, still far from healed, a gift to Russia and China.

Why Ukraine is such a flashpoint? 

Time now to turn our attention specifically to Ukraine. Why is it such a flashpoint (leaving aside Putin’s belief that Russia and Ukraine are historically inseparable)? It is quite straight forward. Leading a quasi-democracy, but in reality, himself an autocrat, Putin is convinced that the pernicious osmotic effect of western-style democracy percolating its way into the Russian psyche poses a direct threat to his regime; it cannot be allowed to happen. It is why he is determined to keep a geographic buffer between him and the West whether the West be in the embodiment of the EU or NATO, to insulate Russia. Belarus, lying between Russia and Poland, fulfils his purpose magnificently with the volatile, mad, Moscow puppet Lukashenko in charge.

 

However, Putin feels threatened by adjacent Estonia, Latvia and Lithuania all being NATO members and able to host foreign hardware and forces including intermediate nuclear weapons, but even combined, they are just about small enough to be containable for now (they are EU members too but he holds no fear of Brussels, on the contrary he largely holds it in contempt).

 

But Ukraine is huge and militarily sensitive because of its coast on the Black Sea, including the Crimea with its strategically important naval base at Sebastopol; Kiev’s increasing political hostility to Moscow poses a significant threat, especially were it to become a NATO member with a long common border and, as a member, a potential host for foreign NATO conventional forces and tactical nuclear weapons. With such a big Russian circumference spanning two continents to defend even Putin can’t be everywhere at once: it’s why with his focus on Ukraine, he was so quick to send troops to Kazakhstan in January rapidly to subjugate the fuel rioters in another Moscow-aligned buffer zone, this time with China. 

Anatomy of a diplomatic stitch-up: understanding Ukraine 

In the fashion of a region subject to all the complexities of Russo-Ottoman politics going back centuries, the antecedents of the current situation are immensely complex. But it is important to understand at least the more recent history, particularly in the context of the key negotiations between Presidents Putin and Macron.

 

Without going into pre-Soviet history, the essentials are that this has been a three decade-long, slow-burning fuse which started fizzing when the Soviet Union collapsed. Various of the old Russian satellites, shunning the new Rouble Bloc directly aligned with Moscow, asserted their own independence.

 

Ukraine was one. However, while independent from Russia, nevertheless from 1991 to the turn of the Millennium, Ukrainian links with Moscow were still strong. The ‘Cassette Scandal’ of November 2000 was a turning point in the country’s geopolitical centre of gravity; Giorgiy Gongadze, a journalist viewed as subversive and hostile to the state, was abducted and pro-Russian President Leonid Kuchma was recorded on tape (hence ‘Cassette’) as ordering his disappearance. In the 2004 Presidential election, Kuchma was returned to power on a strong pro-Kremlin ticket.

 

However, in what became known as the ‘Orange Revolution’ opponents objected to the validity of the result claiming mass intimidation and widespread vote-rigging and corruption; the Ukrainian Supreme Court upheld the complaint, declared the election null and void and in the subsequent re-run, pro-EU candidate Viktor Yanukovych was declared the winner.

 

Ukraine’s future geopolitical centre of gravity would shift westwards, turning its back on Russia.

 

Over the course of the next 9 years the EU and Ukraine negotiated the tortuous path towards a ‘political association’ between Kiev and Brussels and integrated with it, a new free-trade agreement. However, Yanukovych (himself a native Russian) remained acutely sensitive to the realpolitik with Russia, substantially Ukraine’s biggest trading partner and the source of most of Ukraine’s energy. Putin, seeing the threat and playing alternately good cop/bad cop, offered $15bn of fiscal ‘bail out’ aid for Ukraine (while the EU had only offered €650m in response to Kiev’s appeal for $20bn), but at the same time threatened to tighten the economic screws should Ukrainian-EU talks progress. Yanukovych took Putin’s bait and accepted the funding. This immediately suggested to the Ukrainian pro-EU lobby that a U-turn on EU integration was imminent. The result was the 2013 ‘Euromaidan Revolution’ in which Yanukovych’s government was toppled; critically, it also directly led to the two Kremlin-aligned Ukrainian Oblasts (Donetsk and Luhansk, effectively semi-autonomous states, together the Donbas region) declaring full independence from Kiev, opening the way to a virtual civil war ever since with the separatists being backed by Kremlin funding and assisted by Putin’s asymmetric military force, the GRU, as well as conventional troops. It also presented the opportunity for Russia to appropriate Crimea.

 

In 2014, it was the ‘Normandy Group’ of countries (France, Germany, Russia and Ukraine) which came together to try and resolve the situation, culminating in the two highly controversial ‘Minsk’ Accords. 

Anatomy of a stitch-up: Appeasement and the Curse of Minsk 

It is Minsk II, signed in 2015 and which to date has achieved no good whatever in implementing an agreed ceasefire, that is now uncomfortably in the spotlight once more through the recent Macron-Putin talks. In a remarkably similar way that in 1938 the Munich negotiations between Hitler, Chamberlain and Daladier carving up Czechoslovakia were conducted with lip service to the Czech government, so Minsk II was agreed between Putin, Chancellor Angela Merkel and President Francois Hollande with the Kiev government able to influence very little of the outcome if anything at all.

 

The critical elements were 1) Russia’s refusal to negotiate the return of Crimea; 2) while the two break-away Donbas Oblasts would be nominally ‘re-integrated’ with Ukraine and de-militarised, they would be given their own constitutions, budgets and elections and the right to make agreements with foreign states: in essence Donetsk and Luhansk would be autonomous states tied to the Kremlin; 3) Russia insisted on Ukraine declaring itself officially a Neutral country: in doing so, it would automatically be ruling itself out of NATO membership.

 

Minsk II has two fundamental, existential flaws from a Ukrainian perspective. First, in effectively balkanising the country, it increases Putin’s direct leverage over Ukraine’s internal affairs and undermines Kiev’s authority; second, Russia’s insistence on Ukrainian neutrality as a condition of withdrawing forces from Donbas undermines the whole principle of Ukrainian sovereignty, riding a coach and horses through the 1994 Budapest Memorandum which guaranteed Ukrainian sovereignty in return for surrendering its nuclear weapons. Quite how this ‘deal’ was negotiated without howls of international protest, particularly from the US and the UK, is an enduring mystery.

And so to today: “What’s mine is mine; what’s yours is negotiable” 

If Vladimir Putin, is a pariah, he’s a very popular one. Everyone wants to talk to him. Urgently. Biden, Boris, Macron, Germany’s new Chancellor Scholz, all beating a path to his door, or in Biden’s case by Zoom. And their various ministers are also negotiating with their opposite numbers in Putin’s administration. Leaving aside Putin’s demand that Ukraine should never be a member of NATO, he is making the same demand of Georgia; further, he is demanding that all foreign NATO troops (“trigger troops” in his language) are removed from former Soviet states which became full NATO members after 1997. Those states are: the Czech Republic, Hungary, Poland, Bulgaria, Estonia, Latvia, Lithuania, Rumania, Slovakia, Albania, Croatia, Montenegro and North Macedonia. Much the most sensitive because of the size of the foreign presence and commitment are the Baltic States and Poland. If Ukraine were to be absorbed into Russia, then Rumania, Hungary and Poland would find themselves immediately adjacent to Russia, as the Baltic States already are. Such a demand is both anathema to NATO and a red line to Biden and Boris. But there the unanimity in the message to Putin largely stops. 

With friends like these, who needs enemies? 

Of course, everyone is preoccupied with avoiding World War Three; but nobody is that much interested in Ukraine anymore to the extent of intervening directly. Whatever happens, as a sovereign nation it is virtually dead and buried already. But as the leaders of the western world beat an over-hasty path to the Kremlin, is there one iota of joined up thinking? Apparently not. The closest would be the US and the UK who, at least on this subject, are indivisible. But Germany and France are a menace; just not to the Russians. 

Germany: hopelessly compromised 

Germany’s Olaf Scholz, leading a new and largely pacifist government and with an energy policy dependent in the foreseeable future upon Russian-supplied gas has said, the best he will commit to is that Nord Stream 2 will be abandoned but only if Ukraine is invaded (although in an interesting twist, Biden seems to have implied that he’s going to blow it up, just to make sure). In Kiev they must be so pathetically grateful for whatever crumbs they can get they won’t know whether to cry or laugh hysterically: “we’ve been invaded and run over, but it’s all good because Nord Stream 2 is abandoned. Huzzah!”. But it’s worse: hiding behind its constitution, Germany refuses to lend any military support to Ukraine and also forbids anyone else doing so which might involve German-supplied arms and munitions (Estonia planned to do just that). On the diplomatic front, Scholz has also driven a wedge through the western home team efforts: the central plank of Biden’s non-military strategy is “devastating” economic sanctions against Russia. However, Scholz has so far vetoed the notion that Russia be expelled from SWIFT, the international financial trade clearing system from which were they excluded, conducting significant volumes of international trade would be almost impossible. Thus, with a single tug Scholz has pulled the rug from under Biden and Boris, in particular making Biden look weak, stupid and incapable of forming a united front in the face of a real threat. No wonder one commentator was moved to say last month, “Germany is all but a vassal state of Moscow”. Most recently Scholz has committed to Putin that Ukraine’s NATO membership will not happen, implying Germany will veto it. But Scholz has salved his conscience: he is sending 5000 helmets to bolster Ukrainian morale and 350 troops to Lithuania. 

France: identity crisis and non-team player 

And Emmanuel Macron? However well intentioned, his talks are just as unhelpful. As he seeks to find common ground for ‘peace in Europe’ (how redolent of 1938 does that sound when his predecessor, Eduard Daladier, said as much in the context of Czechoslovakia), Putin has backed him into the ropes telling Macron to deliver the Minsk II agreement negotiated by Hollande and Merkel. And to show he wasn’t mincing his words, Putin made it clear that in the event France interferes with bullets, expect a nuclear response against Paris in return. Big talk or big bluff? Frankly, you don’t want to find out.

 

But on whose authority is Macron negotiating and in what capacity is he acting? NATO’s? The 2015 Minsk II agreement was purely between the Normandy Group of countries (Germany, France, Russia and Ukraine, not that Ukraine counted for much), absolutely nothing to do with the rest of NATO and certainly not the US and the UK. The EU, then, because France holds the revolving presidency until June? Estonia, Latvia, Lithuania, Hungary and Poland have no kind words to say about Macron’s plans: if Minsk II is implemented, those countries, particularly the Baltic States, are quite possibly next on Putin’s target list. And anyway, the EU wants to split from NATO, or at least Macron and Ursula von der Leyen do (she herself was once upon a time a perfectly forgettable German defence minister), so no, he can’t be negotiating on behalf of the EU. Or is it that Macron is just shamelessly parading himself on the international stage ahead of the April Presidential election? Whichever, none is helpful in the allied camp. 

And next?

Whatever does happen, whether invasion or effective partition, Ukraine unilaterally withdrawing its NATO membership application in perpetuity or having it vetoed, it will represent a victory for Putin’s threat of force, and a moral defeat for the West. Only a full climb-down by Putin and a guarantee of the Ukrainian status quo could in any way be construed even as a partial victory for NATO.

 

But this should be seen a no one-off event. The geopolitical scene is innately dynamic; powerful forces are at work and the tectonic plates are in constant motion. There will be knock-on effects. In Europe, as a new Cold War dips a few more degrees centigrade below freezing, significant unease will be felt among the remaining states on NATO’s eastern flank. NATO itself must be wondering whether it is now too big and unwieldy actually to be of any relevance in the context of its constitution demanding unanimity when any major decisions need taking. The United Nations has been rendered useless and mute for the entire duration of the Ukrainian saga to date; given four of the principal protagonists (America, the UK, France and Russia) are Permanent Members of the UN Security Council, surely the UN must be left asking itself many searching questions about its purpose.

 

As for future potential conflicts, China will be watching keenly in the context of its publicly stated aim of recovering Taiwan (which it refuses to recognise) and Macao (held under treaty similar to the former arrangement with Hong Kong); Argentina, encouraged by China, is once more sabre-rattling over the Falkland Islands; with China’s New Silk Road initiative is another potential flash-point, notably the highly sensitive mountain region spanning the Himalayas, the Karakoram and Hindu Kush ranges and with three mutually antipathetic nuclear states involved (China, India, Pakistan). Looking further ahead and afield, as the ice caps melt and new opportunities for global navigation, mining and agriculture become available, thanks to its location Greenland (owned by Denmark) is tipped to become a contested landmass. As the search broadens for rare-earth minerals to feed the unstoppable climate-change train, the ocean floor is ripe for exploitation, especially down fault lines of significant volcanic activity, again a potential source of anxiety if not conflict. 

Investment Relevance: short term ramifications but some hard long-term choices 

This has been a long analysis of a conflict with a long-burning fuse. As the fuse runs out and we risk going from flash to bang, the investment ramifications become more obvious and immediate. The oil price is volatile; gold is strong as investors seek safety. There are other considerations for commodities: Ukraine is the 5th biggest exporter of wheat, selling 17m tonnes (70%) of its annual 24m tonne annual production on the world markets; Ukraine is also the 6th largest global producer of iron ore, and in the top 10 for manganese ore; it holds the largest titanium reserves in Europe, as well as some of the largest remaining coal reserves in the world. A prolonged conflict would see volatility in global commodity prices.

 

But even if the situation calms and cool heads prevail, while other factors such as central bank policies to curb inflation will exert their own forces, nevertheless Ukraine should be a wake-up call that geopolitically the world is a less stable place, and that instability should be reflected in term and risk premia, as well as currencies and commodity prices. I said above that Ukraine should not be seen as a one-off. However long it takes to manifest itself, the seeds of the next crisis, wherever it might be, are already lying dormant, awaiting the right conditions to germinate.

 

Shareholders and investors are not and should not be passive bystanders here. ESG is immensely popular, the dominant investment factor of the modern era. Ukraine should crystallise a real test for ESG principles; investors should be asking hard questions of policy makers and of the relevant companies involved. With Putin demonstrating he can hold an entire continent to ransom with gas supplies, it raises fundamental doubts about national energy policies and self-sufficiency. The argument is not simply about Russian gas. Here in the UK we might be far less susceptible to the threat from Russian gas supplies being withheld, but France, supposedly our ally, has more than once threatened to withhold electricity exports to the UK in its ongoing disputes with us about Brexit.
As already brought to the fore by the pandemic, the vulnerability of supply-chains and self-reliance should again be highlighted. As the cold war with China deepens, just like energy has already been weaponised by Russia, so too could supply chains be used in a similar fashion by Beijing with significant economic effects.

 

As is only too obvious, economic sanctions including freezing assets, and tariffs are regularly used weapons in any government’s armoury. But it is easy always to think of us (i.e. the West) imposing sanctions on someone else. As Australia is experiencing with China, they work the other way around too. With the rapid increase in global investing, whenever investing in a geography whose national interests may not be aligned with one’s own (which itself should be prompting searching questions), ask the most basic one: if this turns sour, can I get my money out?

 

Whatever happens in Ukraine, even if the outcome is peaceful, these are important questions which cannot be dodged. It can all happen again; the key is to try and prevent it happening in the first place. 

Postscript: UK culpability 

Defence Secretary Ben Wallace said in reference to the West’s handling of Ukraine, “it all has the whiff of Munich about it”. And so it does, as we have written and spoken about in the context of appeasement on many occasions. But Wallace is a fine one to be casting stones when so near to glass houses.

 

Going all the way back to John Knott’s defence cuts which triggered the Argentine invasion of the Falklands in 1982, successive UK governments have form on defence, particularly Conservative ones. Despite a war in the South Atlantic, two Gulf Wars and a prolonged conflict in Afghanistan, our defence capability has been consistently whittled away or undermined. Through Tom King’s Peace Dividend policies in the 1990s, through Gordon Brown deciding that Defence was so unimportant it only merited a job-share title with the Scottish Office, it was Chancellor of the Exchequer George Osborne who inflicted the biggest single blow in the notorious 2010 Security and Defence Review (SDR). It was that paper which pre-determined that Russia was a write-off, all future defence expenditure would specifically exclude provision for large-scale static and armoured forces or conventional battlefield and naval scenarios in western Europe; small scale, cheap, flexible expeditionary warfare was the new paradigm (and just to make sure, he rapidly sold our two remaining aircraft carriers for scrap, and their Harriers to the US for parts, and somebody made sure that TV cameras were in full view of Airborne Early Warning Nimrods having their wings chopped off).

 

The 2010 SDR prefaced a significant hollowing-out of military, naval and air forces, but bolstered intelligence gathering and Special Forces. Subsequent strategic reviews (‘strategic’? Each has an average duration of less than three years) added to the stretching of resources. At the end of 2019, Boris announced £16bn of funding to develop our cyberwarfare capability. However, instead of recognising that cyber is an additional threat, not a replacement, conventional forces took the hit again to help pay for it. It was notable in the 2021 autumn budget when virtually every other spending department saw real terms increase in resources, even including the additional £16bn defence was subject to a 1.9% real terms reduction.

 

Boris’s 2021 new post-Brexit foreign policy review was a coherent piece of work, clearly showing the strategic direction of travel, particularly with new partners in the Indo Pacific region. However, the accompanying defence element published shortly after was distinctly half-baked. This one had the dead hand of the Treasury and the COP26 warriors all over it. Dominated by a £17bn black hole in the MoD accounts and needing legally to comply with net-zero emissions, much of the Army’s existing mechanised capability was destined for the scrap-heap and the new focus would be on supposedly better kit with greater ‘lethality’, only much less of it and far fewer people. The essential price for cyber and decarbonisation is fewer personnel and fewer tanks, guns and aircraft, just when China, Russia, North Korea and Iran are going in the opposite direction.

 

Wallace pronounced Russia as our most “significant threat”. Within a few days however, he announced further reductions in our airborne early warning and submarine spotting capability, reducing the Royal Navy’s frigate and destroyer force by two ships (10%), culling the number of air defence fighters and cutting the number of tanks facing Russia. The Army’s establishment would be reduced by a further 10,000 to 72,000, a number which would fit in Wembley Stadium with room to spare.

 

It’s all very well having increased ‘lethality’ (someone invented that word), but if you’re already short of assets, you become reluctant to commit them for fear of losing them. If you had 200 aircraft, pilotless or otherwise, and you quickly lose 20, you’ve lost 10% of your force; if you started with 100 and you lose 20, you’ve lost a fifth. It actually happens: in the Falklands Admiral Woodward’s principal preoccupation was protecting his two carriers and, after four frigates and destroyers had been sunk with several more damaged, he had to think twice about tactics which put any remaining naval units in harm’s way; on land, 3 Commando Brigade in its entirety tabbed and yomped 70 miles across East Falkland from San Carlos to Port Stanley largely because there was no heavy air lift capability after Atlantic Conveyor was sunk with all its stored Chinook helicopters. In Afghanistan, Air Chief Marshal Sir Jock Stirrup, then Chief of Defence Staff, saw the entire military operational envelope defined by the fact that he could not afford to lose a single Chinook, so anywhere a Chinook was at risk, the soldiers didn’t go; you know you’re running a strategy surviving on fumes when one Chinook helicopter which, fully loaded, carries less than one company of infantry, is described as “an indispensable strategic asset” (a genuine strategic asset is a nuclear-armed submarine capable of laying waste significant areas of an enemy’s landscape and infrastructure, not to mention its people; it is not a modest logistics helicopter). Our enemies are no fools; they can read the smoke signals and tell who’s bluffing whom.

 

In the UK, our military professionalism and leadership are second to none. We wield influence among our allies through our nuclear deterrent; our Special Forces are the recognised world leaders in their business. However, our allies, notably the Americans, are worried that in terms of conventional forces we’ll simply not be able to turn up to any given emergency with anything approaching sufficient effective numbers and the requisite fire power to make an appreciable difference. They have been warning us as much for years.

 

It’s all too easy to shrug it off and say, “’tis what it is” which is virtually how the Defence Secretary Ben Wallace replied under questioning last year when announcing further cuts.

 

But it most certainly should not be what it is. In Spring 2021, the Defence Select Committee published a review of the Army’s armoured capability (and this was before the integrated foreign and defence review and its cuts). It was excoriating. It noted that, even before Wallace’s announcement of nominal cuts, the existing British armoured division was no match for its Russian equivalent (and Russia has divisions, not just one as we do but will no longer have) numerically or in terms of fire-power. It concluded that in any one-on-one conflict the outcome would be “unlikely to be decided in favour of the British”; that’s PC speak for being defeated. And as the Army loses its 40-year old Warrior Armoured Fighting Vehicles (including nearly £1bn of sunk costs in an upgrade just nearing completion, now scrapped), to be replaced by 8X8 wheeled Boxer Armoured Personnel Carriers, it noted ruefully that the replacement vehicle, over twenty years of wrangling, had already been rejected twice, again with ‘sunk’ costs of half a billion pounds (the ‘new’ replacement for the 40-year old Warrior is a vehicle whose own design was first drafted 23 years ago in 1999). The committee analysed the whole sorry saga of the British Army’s approach to armoured warfare and concluded that not only the constraints applied by the Treasury, allied to fantastical accounting systems, but as significantly, shifting political aims across three governments and five prime ministers and countless secretaries of state for defence, muddled thinking and lack of strategic coherence in the MoD and on the Army Board, all combined to create a toxic mire of dysfunctional decision-making and delivery.

 

The same can be said to a greater or lesser extent for all the major military procurement or upgrade projects going back years: Challenger, Typhoon, Lightning, Nimrod, two aircraft carriers, Ajax, leaving aside buying kit that at the critical time doesn’t do what it’s supposed to at the first time of asking: SEACAT, Sea Wolf, Blue Fox, Rapier, Blowpipe, SA80, the Darings, it’s a long list.

 

The scandal of UK defence strategy is not so much the amount of money spent; it is how little we get in return for it. Our armed forces, potentially about to have to go into the front line again in Eastern Europe, deserve better than that.

 

[For those wanting to understand those momentous days of more than 80 years ago, and the strong parallels with now, Tim Bouverie’s “Appeasing Hitler” (Bodley Head, 2019) is an excellent and insightful analysis, required reading given the extent to which history is in danger of repeating itself, albeit with a slightly different cast of protagonists and now set against the backdrop of nuclear arsenals.] 

The value of active minds – independent thinking

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