Jupiter Merlin Weekly: Ukraine and a world in conflict and flux
The Jupiter Merlin team ask whether support for Ukraine is strengthening or wavering in the West, and what might the end game be for this devastating conflict?
As we have said on many occasions in these columns, even if not strictly World War Three, this is nevertheless a conflict of global proportions and with consequences, whether political and certainly economic, that have been felt in virtually every country. It has had a profound effect on investors.
While the fighting is so far still largely confined within the borders of Ukraine and the military situation has tended towards ossification and attrition (though that will almost certainly change in the Spring fighting season in an attempt by both sides to break the deadlock), the broader geopolitical environment is dynamic and rapidly changing.
Two weeks ago, Jupiter Merlin Investment Director Alastair Irvine published “Anatomy of a Crisis 2: What Next for Ukraine”, a follow-up to his essay a year ago before the invasion analysing how it was possible to be on the brink of a major war in Europe, one protagonist nation (and worse, Russia being a Permanent Member of the United Nations Security Council) about to violate the sanctity of a sovereign neighbour. As an addendum to “Anatomy of a Crisis 2”, while not intending to keep up a running commentary it is worth a look at what has altered since then and what has not.
Between the war starting and today, Biden has lost the House of Representatives to the Republicans; in a political battle of wills in Washington and with a Presidential election looming, the Republican narrative is that there must be no blank cheque for Zelensky but Biden is publicly couching support in terms of “whatever the cost”. From whichever geographic location he is making his speeches, they all have multiple target audiences.
“Carry on, Comrade Volodymyr! We’re right behind you! Quite a long way behind, actually”
There is a fundamental weakness in Biden’s position. The rhetoric is strong and laudable but the reality is the words ring hollow. In that battle against oppression, the US is not prepared actively to participate as a direct protagonist in the military conflict in Ukraine, the geographic epicentre where his two cultures of light and dark collide. Biden remains committed to delegating the physical struggle to his proxy, Zelensky. Further, it knows that even if it wanted to, America would not get a UN resolution to evict Russia from Ukraine: Russia and China would almost certainly veto it. Essentially, therefore it remains the case that America pays and the rest of us chip in, Ukraine does the fighting and dying, the political calculus of goodness is relegated to the first derivative at which point it begins to lose its conviction.
Both China and the West (and Europe in particular) are performing the dance of the seven veils around each other. China buying sanctioned surplus Russian conflict oil; Covid blame; Trump’s economic sanctions; the tensions over investment and Chinese appropriation of intellectual property rights; Chinese spy balloons over America; intentions over Taiwan and the militarisation of the Spratley Islands; oppression of minorities in China and the annexation of Hong Kong; all have contributed to a distinct cooling of relations. On the other hand, Western markets are key for China’s economic recovery, and countries such as Germany, Italy and New Zealand are keen to beat a path to Beijing’s door seeking partnership terms in China’s neo-colonial expansion through the infrastructure projects included in the One Belt One Road initiative and its maritime equivalent, the String of Pearls.
However, the conflict’s year-long duration, and more specifically the events of the past fortnight, have revealed just how irrelevant is the European Union. To be clear, not its members but the ‘entity’ of the Union itself.
Ukraine’s bid to join the EU was undoubtedly one of the principal catalysts behind Putin’s invasion, but in terms of averting the conflict or achieving its resolution, the EU has been peripheral at best. Where also members of NATO, EU national governments have focused their energies in that forum rather than through Brussels. Nowhere is that more the case than down NATO’s eastern flank, ranging from the Baltic States to the Balkans. Poland is the focal point for the EU’s difficulties: through Lech Walesa and the Solidarity Union in the Gdansk shipyards Poland was the cradle of dissent against Soviet oppression in the late 1980s; it has a robust defensiveness against the Russians and a healthy paranoia of being overrun; however, it is perennially on the EU’s naughty step and threatened with Article 7, suspension of voting rights, for violation of EU values and ignoring the supremacy of the European Court of Justice (and currently the funds due to it from the EU’s €750bn Covid Recovery Package are being withheld from Poland, despite the significant cost to the Polish economy of taking in millions of Ukrainian refugees); this week, Biden declared Poland a cornerstone ally in NATO and pledged his and NATO’s commitment to the people of Poland as the guarantor of their security under Article 5 of the treaty. Poland will understandably feel that it is in receipt of much greater love, constructive support and respect from Washington than it ever receives from Brussels. But if Poland presents a particular problem of its own for the EU, it is not as though the EU itself has an otherwise unified position (to be fair, nor does NATO). While most EU members are sending aid with varying degrees of enthusiasm or reluctance, three refuse to play at all: Austria (officially neutral) and Croatia wish to maintain pre-invasion ties with Russia (or at least see no reason to antagonise Russia), while Hungary’s Viktor Orban is openly supportive of Putin, and last autumn signed a new gas supply agreement with the Kremlin. With those exceptions, the Frontier Countries are robustly aligned with the UK and the US in confronting Putin, but not with the standpoint of France, Italy, and Germany all three of which see Putin’s/Russia’s total defeat as counterproductive. Last year, when attempting to cut the consumption of Russian gas and the EU attempting to impose a Bloc-wide 15% consumption curtailment, those countries not on the Russian gas ring (e.g. Spain, Portugal and Malta) all refused to comply. So much for unity in the European Union!
Against this backdrop, the EU and its institutions have been largely disintermediated: Charles Michel, President of the Council of Ministers has been supplanted by national leaders and in any case has no unified opinion, policy or solution to represent; Josep Borrell, the EU High Representative for Foreign Affairs has been usurped by national foreign secretaries and to the extent he has played any role at all has proven himself to be woefully inadequate to the task; as the Bloc’s civil service, the EU Commission under Ursula von der Leyen has neither authority nor role without an agreed policy to implement.
However, if it goes ahead, the reality is that the Brussels proposal is a major opportunistic political land-grab by the centre. It would confer significant influence over EU members’ defence strategies and programmes. Politically it is using the Ukrainian situation as a Trojan Horse in the eventual aim of having a single pan-EU defence force with all the knock-on consequences for the stability of NATO.
But there is a geopolitical angle to this proposal too: backed by state-aid cash, it ring-fences the EU defence industry, potentially shutting US and UK contractors out of future supply contracts to EU countries while at the same time risking non-EU participants in joint European programmes being de-prioritised behind EU participants and customers. The Brussels’ plan potentially complicates systems such as Eurofighter Typhoon used by the RAF (the Eurofighter consortium, headquartered in Germany and with assembly sites in the UK, Germany, Italy and Spain comprises BAe Systems, Airbus Defence–formerly EADS– and Leonardo of Italy), and the British Army’s Boxer IFV (the armoured personnel carrier replacement for the Warrior Armoured Fighting Vehicle; Boxer, another multinational system designed by Rheinmetall GmbH, made in Holland and Germany). Cynically/pragmatically, it is a response to Biden’s Inflation Reduction Act passed in to law last year which is equally defensive of the US automotive industry as it transitions from combustion engine vehicles to electric, significantly jeopardising Germany’s biggest export market for cars by value. There is a defence-related war on two fronts here: a proxy fighting war between NATO and the Russians, and a trade war between the Americans and the EU. Welcome to realpolitik 2023.
It matters and affects us all. But it presents opportunities as well as risks! It is our job to find those opportunities and pockets of genuine value, while as far as possible avoiding the investment landmines and torpedoes.
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