Jupiter Merlin Weekly: Jets, diplomacy and political control
Jupiter Merlin Weekly: Jets, diplomacy and political control
The Jupiter Merlin team examine President Zelensky’s efforts to obtain jets from Ukraine’s NATO allies, an endeavour fraught with logistical and political difficulties.
Investment Manager, Jupiter Independent Funds/Merlin
Investment Manager & ESG Investment Director, Independent Funds/Merlin
President Zelensky: a man of our time
To paraphrase Hamlet, “to send, or not to send, that is the question: whether ‘tis nobler in the mind to suffer the slings and arrows of outrageous fortune, or to take arms against a sea of troubles and by opposing end them”. If in February it was a question of whether NATO should send main battle tanks to Ukraine, as we forecast would be the case following President Zelensky’s subsequent “Wings for Freedom” tour, the argument is now about sending jets, specifically US-designed F-16 combat aircraft.
Zelensky is truly remarkable. He is the outstanding national leader of his generation. With Ukraine’s back to the wall, favourable comparisons have been made with Churchill in 1940 when Britain stood alone against the Axis onslaught. But perhaps more accurately he is the Tito of the 21st Century, even if democratically elected, unlike the Marshal: resistance fighter, warlord, national figurehead, international statesman all rolled into one. Further, he is blessed with the patience of a saint when dealing with NATO. And how he needs that patience as its members prevaricate endlessly.
It is popular to cast both Boris Johnson and Liz Truss (then his Foreign Secretary) as being the root of all evil in the UK and not just among the Tories’ opponents but a large dose of the British Conservative Party too. However, it is easy to forget that among their peers in the western democracies and NATO, both were vociferous and robust defenders of Ukraine in the months ahead of Putin’s invasion. Boris in particular put significant backbone into NATO, especially after its near-death experience at the hands of President Biden when Biden unilaterally, peremptorily and disastrously withdrew all US participation from the NATO effort in Afghanistan in August 2021.
And so to this week. Zelensky arrived in London to give Rishi Sunak a big bear-hug, whispering in his ear while holding him tight, “jets, comrade! I need jets. Powerful, modern, fast jets. F-16s. Lots of them. And the missiles for them too. Many missiles. Get them for me”, followed by a long pause and then, “please, sir”.
Zelensky is truly remarkable. He is the outstanding national leader of his generation. With Ukraine’s back to the wall, favourable comparisons have been made with Churchill in 1940 when Britain stood alone against the Axis onslaught. But perhaps more accurately he is the Tito of the 21st Century, even if democratically elected, unlike the Marshal: resistance fighter, warlord, national figurehead, international statesman all rolled into one. Further, he is blessed with the patience of a saint when dealing with NATO. And how he needs that patience as its members prevaricate endlessly.
It is popular to cast both Boris Johnson and Liz Truss (then his Foreign Secretary) as being the root of all evil in the UK and not just among the Tories’ opponents but a large dose of the British Conservative Party too. However, it is easy to forget that among their peers in the western democracies and NATO, both were vociferous and robust defenders of Ukraine in the months ahead of Putin’s invasion. Boris in particular put significant backbone into NATO, especially after its near-death experience at the hands of President Biden when Biden unilaterally, peremptorily and disastrously withdrew all US participation from the NATO effort in Afghanistan in August 2021.
And so to this week. Zelensky arrived in London to give Rishi Sunak a big bear-hug, whispering in his ear while holding him tight, “jets, comrade! I need jets. Powerful, modern, fast jets. F-16s. Lots of them. And the missiles for them too. Many missiles. Get them for me”, followed by a long pause and then, “please, sir”.
Jets: an argument as old as the conflict
Superficially this is a very simple request. But under the surface it represents a fiendishly complex and multi-faceted political conundrum, which crystallises so many of the themes we have discussed regularly in these columns. How does a heterogenous military alliance of 31 member states with overlapping but not universally shared political interests square the circles of not being an aggressor, but also defeating Putin and at the same time presenting a credible deterrent against China, North Korea, Iran and the numerous non-state agencies capable of creating much mischief and potentially inflicting great harm?
Back to jets. The UK does not operate F-16s. And despite the frequent ferrying of significant quantities of advanced munitions and ordnance to Ukraine, including a handful of Challenger tanks, and undertaking a programme of training 30,000 Ukrainian conscripts, Sunak has made it clear that the UK will not be sending any of the RAF’s fast jets to bolster Zelensky. Among our thin Typhoon fleet, we have none to spare; the F-35 Lightning II is brand new and so expensive we cannot afford to complete the full purchase programme for both land-based and carrier-borne operations. Sunak pledges that we will help train Ukrainian pilots, immediately pushed back by the incoming new Chief of the Air Staff who says there is so little resilience in the system we can train theirs or ours but not both. So why therefore approach Sunak? Because Zelensky knows that among NATO leaders, the UK is the only one with real, uncompromised political influence in Washington and who is in lockstep with Zelensky’s own war aims. Whether Sunak himself has the personal influence and charisma, offering the vim and vigour which Boris was able to wield, remains to be seen but he is the best chance Zelensky has.
Countries such as the Czech Republic, Poland and Slovakia were originally planning to donate old Soviet era MiG29s more than a year ago (in return for which in those capitals the expectation was that the capability would have been replaced with new generation fighters backfilled from the US), but were forbidden from doing so by Biden worried about NATO being seen as an aggressor and risking a head-on conflict with Russia. Now Ukraine is hoping to take advantage of F-35 deliveries to Norway, Holland, Poland and Belgium freeing up their soon-to-be redundant F-16s. The stumbling block is the US. Even where F-16s have been manufactured in Europe under licence (e.g. by Fokker in Holland), the licence conditions stipulate that the US (i.e. the White House) retains control over exports, sub-leasing or even donating to third parties. All the arguments about how to maintain training programmes, support systems, logistics etc are complex indeed but are not insuperable and are a smoke screen. The strategic issue is the US being cast as an aggressor; the operational hurdle is that despite being a near 40-year-old platform, in its latest iteration the US Air Force expects F-16 to remain in American front line service into the 2030s. Essentially, in a conflict in which the US is not directly involved as a combatant, but where the conflict intensity is significantly greater than anything so far in which current, advanced systems have been employed, it sees little merit in risking its technology and exposing its potential weaknesses or having it possibly captured by the Russians (though it would not be the first time F-16s have been destroyed in combat: Turkey and Israel both lost aircraft in their various respective conflicts in Syria and Gaza).
Back to jets. The UK does not operate F-16s. And despite the frequent ferrying of significant quantities of advanced munitions and ordnance to Ukraine, including a handful of Challenger tanks, and undertaking a programme of training 30,000 Ukrainian conscripts, Sunak has made it clear that the UK will not be sending any of the RAF’s fast jets to bolster Zelensky. Among our thin Typhoon fleet, we have none to spare; the F-35 Lightning II is brand new and so expensive we cannot afford to complete the full purchase programme for both land-based and carrier-borne operations. Sunak pledges that we will help train Ukrainian pilots, immediately pushed back by the incoming new Chief of the Air Staff who says there is so little resilience in the system we can train theirs or ours but not both. So why therefore approach Sunak? Because Zelensky knows that among NATO leaders, the UK is the only one with real, uncompromised political influence in Washington and who is in lockstep with Zelensky’s own war aims. Whether Sunak himself has the personal influence and charisma, offering the vim and vigour which Boris was able to wield, remains to be seen but he is the best chance Zelensky has.
Countries such as the Czech Republic, Poland and Slovakia were originally planning to donate old Soviet era MiG29s more than a year ago (in return for which in those capitals the expectation was that the capability would have been replaced with new generation fighters backfilled from the US), but were forbidden from doing so by Biden worried about NATO being seen as an aggressor and risking a head-on conflict with Russia. Now Ukraine is hoping to take advantage of F-35 deliveries to Norway, Holland, Poland and Belgium freeing up their soon-to-be redundant F-16s. The stumbling block is the US. Even where F-16s have been manufactured in Europe under licence (e.g. by Fokker in Holland), the licence conditions stipulate that the US (i.e. the White House) retains control over exports, sub-leasing or even donating to third parties. All the arguments about how to maintain training programmes, support systems, logistics etc are complex indeed but are not insuperable and are a smoke screen. The strategic issue is the US being cast as an aggressor; the operational hurdle is that despite being a near 40-year-old platform, in its latest iteration the US Air Force expects F-16 to remain in American front line service into the 2030s. Essentially, in a conflict in which the US is not directly involved as a combatant, but where the conflict intensity is significantly greater than anything so far in which current, advanced systems have been employed, it sees little merit in risking its technology and exposing its potential weaknesses or having it possibly captured by the Russians (though it would not be the first time F-16s have been destroyed in combat: Turkey and Israel both lost aircraft in their various respective conflicts in Syria and Gaza).
As well as about strategy, jets are about political control
This argument will sound familiar to our regular readers. It is exactly what we have been discussing recently in the context of the new pan-EU defence procurement programme. At its core is political control. For the US it presents a paradox. America’s contribution to Ukraine dwarfs everyone else’s (according to a recent House of Commons Library briefing note dated 12 May 2023, the US has so far given military assistance worth $37bn since Putin’s invasion began, roughly 54% of the total but in terms of effective fire-power closer to 80 or 90%; the UK is the next biggest having spent £2.3bn in 2022 with a commitment to match that again this year). Washington would like more countries to participate more fully, yet the US is preoccupied with placing conditions over the terms of use of the kit it has either supplied to its allies or has allowed to be manufactured under licence. As we discussed a couple of weeks ago, the EU’s new procurement terms, including joint ventures with non-EU members (e.g. the Eurofighter Typhoon project which includes BAe Systems) are specifically designed to give preference to EU domiciled manufacturers, but critically to centralise political control over such projects in Brussels.
Poland crystallises the point in Europe. To a much greater degree than Moscow-aligned Hungary, Poland represents all that is problematic for Brussels when an EU member state goes off-piste and puts its national interests first and refuses to toe the line. We have discussed on many occasions how and why Warsaw is always flirting with being served with Article 7, the suspension of its voting rights (no country can be ejected from the EU; Article 7, disbarring it from voting, is effectively the most severe sanction). But on the front line of the war, dealing directly with the fall-out from the invasion and the millions of refugees, and playing host to V Corps, America’s main military formation in Europe and also being the principal conduit through which military supplies and trained conscripts are fed back in to Ukraine, its much warmer relations with Washington and London are a challenge to Brussels with whom it has a poor relationship at best. While most western EU members are still hesitant about committing more to defence spending, Poland is going full-steam ahead on expanding its military: it is doubling both its annual expenditure and doubling its establishment to the extent that in terms of numbers and combat capability it will soon be second only to France in the Bloc as the most effective military nation. Poland is already subject to the perverse sanction of having its share of the EU’s €750bn covid recovery package withheld by Brussels notwithstanding the strain on its economy arising directly from the conflict. It is hardly surprising that when it comes to future arms purchases and afraid of the EU placing it in a headlock for political purposes through the new restrictive procurement agreement, it is turning to the US as its principal source of military hardware.
Poland crystallises the point in Europe. To a much greater degree than Moscow-aligned Hungary, Poland represents all that is problematic for Brussels when an EU member state goes off-piste and puts its national interests first and refuses to toe the line. We have discussed on many occasions how and why Warsaw is always flirting with being served with Article 7, the suspension of its voting rights (no country can be ejected from the EU; Article 7, disbarring it from voting, is effectively the most severe sanction). But on the front line of the war, dealing directly with the fall-out from the invasion and the millions of refugees, and playing host to V Corps, America’s main military formation in Europe and also being the principal conduit through which military supplies and trained conscripts are fed back in to Ukraine, its much warmer relations with Washington and London are a challenge to Brussels with whom it has a poor relationship at best. While most western EU members are still hesitant about committing more to defence spending, Poland is going full-steam ahead on expanding its military: it is doubling both its annual expenditure and doubling its establishment to the extent that in terms of numbers and combat capability it will soon be second only to France in the Bloc as the most effective military nation. Poland is already subject to the perverse sanction of having its share of the EU’s €750bn covid recovery package withheld by Brussels notwithstanding the strain on its economy arising directly from the conflict. It is hardly surprising that when it comes to future arms purchases and afraid of the EU placing it in a headlock for political purposes through the new restrictive procurement agreement, it is turning to the US as its principal source of military hardware.
Military charity shops and food banks: high street problems ahead?
We have said before that Zelensky’s enemy is time. His is charity shop warfare. He repeatedly has to return to the military food bank for whatever basics are available to sustain his existential campaign, constantly appealing to the benevolence of his supporters, begging for more. But that support base is far from fixed; whether appealing to NATO leaders, or the EU Council in Iceland, or the G7 this weekend in Japan, he will be eyeing up the assembly and making judgements about who can stay the course (on the other side, so too is Putin, obviously). He knows Sunak is probably terminally short-dated, so too possibly Biden; unusually, on this occasion both national elections more-or-less coincide and a potential summary changing of the guard in Washington and London at the end of next year opens up all manner of uncertainties. Mark Rutte, the Dutch Prime Minister, and a key support in the EU, is working closely with Sunak on the F-16 strategy; but Rutte is facing his own political show-down at home, rapidly losing a war with Dutch farmers rebelling against EU-imposed CO2 emissions and cow grazing densities (with commendable energy, the farmers have set up their own party and have swept the boards in local elections in rural areas and have eyes on the Hague). Both Zelensky and Putin will also be weighing up the political landscape in Turkey in the current tightly contested election.
Further afield in China, President Xi is watching these tortured developments like a hawk. As he builds his military capability, he is also making a judgement about when is the soonest he can use it with a better-than-evens chance of being successful. The obvious venture is the recovery of Taiwan (a subject on the agenda at the Hiroshima G7 summit). US military intelligence estimates that those odds tip in his favour in 2027. Some analysts note that China only spends 1.7% of its GDP on defence, while the US is spending around 3.5%. However, China’s has been growing at an average of 7.5% annually and is double the sum invested a decade ago; but the percentage-of-GDP argument is misleading: in a command economy run by the Communist Party, China’s defence procurement has lower costs, significantly faster turnaround times and far fewer frictional decision-making impediments (as an indication Con Coughlin, the Daily Telegraph’s well-informed veteran defence correspondent, reports that it takes around 5 years for the UK to build a nuclear-powered submarine; China is building 7 every year).
Further afield in China, President Xi is watching these tortured developments like a hawk. As he builds his military capability, he is also making a judgement about when is the soonest he can use it with a better-than-evens chance of being successful. The obvious venture is the recovery of Taiwan (a subject on the agenda at the Hiroshima G7 summit). US military intelligence estimates that those odds tip in his favour in 2027. Some analysts note that China only spends 1.7% of its GDP on defence, while the US is spending around 3.5%. However, China’s has been growing at an average of 7.5% annually and is double the sum invested a decade ago; but the percentage-of-GDP argument is misleading: in a command economy run by the Communist Party, China’s defence procurement has lower costs, significantly faster turnaround times and far fewer frictional decision-making impediments (as an indication Con Coughlin, the Daily Telegraph’s well-informed veteran defence correspondent, reports that it takes around 5 years for the UK to build a nuclear-powered submarine; China is building 7 every year).
Bond yields point to the pressures
Both Putin and Xi will have noticed that Joe Biden was forced to miss key international meetings early this week when he had to stay in Washington to try and break the domestic debt ceiling deadlock. From an investment standpoint all these elements are interlinked: hard choices about geopolitical strategy; operational tactics; the financial wherewithal to support them amid a welter of competing priorities and the financial constraints of an economic system bursting at the seams with borrowings now with a high funding tariff attached; Putin’s malign influence over inflation. It is these elements which are keeping bond yields stubbornly high despite the consensus that interest rates have either peaked or are close to doing so.
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The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
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