Tensions grow over Ukraine
As armed conflict seems more probable, here's what to expect from the geopolitical situation
An update to the current situation
Tensions over Ukraine continue to grow since the publication of the last article. While initial diplomacy seemed promising, the summits quickly failed to resolve the situation and left conflict even more probable. Irreconcilable differences between the West and Russia over geopolitical influence have left militaries, governments, and markets on edge.
UK and US Intelligence agencies revealed that Russia has plans in place to implement regime change in Ukraine and install a new pro-Russia president after Viktor Yushchenko was overthrown in the popular 2014 protests. This follows on the heel of crippling cyberattacks on Ukrainian infrastructure that brought down government websites, utilities, businesses, and a host of other critical systems for a few hours.
The US today sent a formal diplomatic response to Russian demands for NATO to give up all new members after the dissolution of the Soviet Union and reject Ukraine’s bid for membership. While the contents are unknown, it is expected to reiterate NATO’s long-stated policy of open membership.
Market Impacts
European energy markets were already facing turmoil heading into 2022 with oil and gas prices at historic highs. European countries depend heavily on Russian oil and gas for their energy needs, with Germany getting over half its energy from Russia. Any conflict would further send energy markets into turmoil, potentially leading to oil prices well over $100 per barrel. While European energy independence has been steadily rising with many safety provisions and pro-competition measures implemented over the past 5 years, it would still face a massive crisis. The Economist expects Europe to pay over $1 trillion for energy in 2022, double the $500 billion it paid in 2019. JP Morgan war-gamed the crisis and predicted that Brent oil prices could reach well over $150 this quarter over the US-Russia tensions. Recent bouts of volatility in global stock markets have been attributed to these geopolitical risks as well.
Militaries on High-Alert
With Russian troops surrounding Ukraine from the North, South, and East, NATO has placed troops on high alert. Russian war games, along with recent intelligence findings, led President Biden to place over 8500 US troops on alert, ready to deploy to Eastern European nations such as Latvia, Estonia, and Lithuania. While troops will not be deployed to Ukraine, as many as 50,000 to 100,000 US troops could be deployed on the Eastern frontiers of NATO if conflict breaks out.
The US, UK, and other NATO countries have begun airlifting defensive equipment to Ukraine but Germany remains uncommitted. It has prevented equipment transfers to Ukraine, worried that any escalation would spark even higher energy costs for the most vulnerable nation in NATO in terms of energy dependence on Russia. Despite these concerns, however, it remains united with NATO countries in the required response to any Russian military aggression.
Sanctions and Economic Responses
While President Biden recently cast doubt on the NATO response to a limited Russian incursion, officials have made increasingly clear that the scope of sanctions for any incursion would deeply damage the Russian economy. It is expected that sanctions would include bans on exports of any items with US technology to Russia, including any items made with US designs or semiconductors. Similar bans from Europe would cut imports of almost every major consumer and industrial equipment into Russia, reversing years of economic modernization. Financial sanctions, including freezes on assets of Russian oligarchs and a potential cut-off from the SWIFT banking system, would strike a blow to its ability to conduct international transactions.
Russia has sanction-proofed its economy since 2014, however. A conservative fiscal policy has kept government debt to just 20% of GDP (compared to over 133% for the United States). It has foreign currency reserves of around $600 billion dollars, enough to survive months of sanctions and low Gazprom revenues. Still, if the West follows through on its threats, the sanctions regime could cripple the Russian economy.
Putin’s political calculation
Vladimir Putin is not one to make rash geopolitical moves. He has strategically engineered conflicts over the past two decades which only strengthened his position and sowed disunity in the West. His 2008 invasion of Georgia put back NATO-Ukraine relations for over a decade. The 2014 annexation of Crimea by his “little green men” reinforced his belief that the West does not have the spirit and resolve to take action against Russian aggression. It seems unlikely that Putin would initiate a full-scale invasion of Ukraine, knowing that such a move would forever alienate the Ukrainian population against Russia. It seems more likely that Russia recognizes the People’s Republic of Luhansk and Donetsk, a puppet state declared by insurgents in Eastern Ukraine, and sends military support to remove Ukrainian troops from the region.
Whatever finally happens, the situation is a test of Western unity and resolve. Vladimir Putin could succeed in his long-held goal of rolling back NATO expansion and showing the United States the same boot from Europe it experienced in the 1990s after the fall of the Soviet Union.
While the US and Russia remain embroiled in these tensions, Xi Jinping is carefully watching and it is very possible that the outcome of this conflict determines Taiwan’s future. If the West fails to unite and protect its ally Ukraine, China could see it as the final validation of its plan to militarily take over Taiwan despite similar US assurances for its safety.
Nice
Amazing read