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Geopolitics

Ukraine Conflict Positions Harden

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The Ukraine crisis looks set to become an extended, bitter conflict as positions in Russia and the West harden, according to a meeting last week of Energy Intelligence’s International Advisory Committee of senior energy and geopolitical experts. Here are five takeaways.

  • An extended conflict is increasingly likely. The crisis looks increasingly likely to drag on, reinforcing the Extended Conflict scenario that has been our base case since before the Feb. 24 invasion. Early Western hopes of Russian capitulation and/or serious consideration of face-saving exits for Russia have faded. Moscow has stabilized its financial system near-term and refocused the conflict on grinding down the Ukrainian military. Positions are hardening. Putin will find it hard to settle for any kind of “non-success,” we heard. Ukraine has surprised with the strength of its response, but some questioned its longer-term ability to resist a more focused assault. Sustained Western support raises the prospect of a devastating war of attrition and extended proxy war. Deeper crisis implications include (1) delinkage of Russia from Europe, (2) a deepening of ties between Russia and China and to a lesser extent India, (3) uncertainty over what a less stable postwar Russia could look like and (4) erosion of the international political system and institutions.

  • The US is using the crisis to weaken Russia. Western policy has cycled through four phases — deterrence, diplomacy, sanctions and assistance — albeit with overlap. Washington is now focused on isolating and weakening Russia under a strategy of containment, and strengthening the Western military alliance. The invasion crystallized and cemented US and European concerns that a strong Russia poses a territorial threat, which was not unanimously agreed prewar. With early diplomatic initiatives failed and little apparent common ground to launch new ones, there seems little hope of a near-term peaceful solution — and scant debate in the West on difficult options like the possible breakup of Ukraine.

  • Russia will find it hard to back down. The conflict is only exacerbating Moscow’s security concerns about Nato’s expansion and Ukraine’s westward drift, we heard. Sanctions may hit Russian capacity, but not its resolve given the issues at stake. Moscow has not clearly articulated its goals, but these seem to have shifted from apparent regime change to capturing as much territory as possible in eastern and southern Ukraine to create a buffer zone and establish a land bridge to Crimea. Such gains could be sold as a victory at home, although some experts flagged the threat of lingering claims to the rest of Ukraine, and extension to Moldova or elsewhere. Sanctions have increased support for Putin among many Russians, we heard, who see the West as committed to defeating Russia militarily and waging all-out economic war.

  • China wants to increase its own resilience. Beijing does not support the invasion, but opposes the West’s “bottomless” sanctions — and sees a need to increase its own resilience against a possible future “worst-case” economic assault. We heard of Chinese concerns that (1) the US is seeking to expand rather than defuse the conflict with more arms; (2) high energy prices could lead to a global economic crisis; and (3) the conflict has started a years-long period of global chaos. Beijing wants its US relationship to continue, but has become less trustful of Washington and the dollar. We also heard of risks that US policy of containing China could provoke military conflict over Taiwan through deliberate provocation or accidental escalation.

  • The dollar has been knocked, but will remain dominant. Sanctions are accelerating political momentum against the US dollar. Russia is increasing efforts to reduce its exposure to the dollar and euro, trying to shift gas, oil and other bilateral trade to alternative currencies, and toying with a ruble-gold linkage. Other countries (like China) are watching the freezing of Russian foreign reserves with concern, as a potential future vulnerability. But our experts cautioned of limits to any broad shift from the dollar while the majority of forex trade and commercial transactions remain centered on that currency. Local currency transactions may rise, but traction will be limited by their limits on hedging and managing time risks. US rule of law and financial transparency are also factors.
Energy Intelligence Updated Scenarios: The War in Ukraine
ScenarioLikelihoodDescriptionImplications
Diplomatic ResolutionMedium• Mounting economic and human costs may lead Russia to mull a cease-fire that falls short of its initial political ambitions. • While it would still face sanctions and international isolation, it would likely spare some of the costs of a drawn-out conflict or occupation.
  • This will likely prove a short-term solution, with only a few of Russia’s key grievances addressed.• Tensions with the West will remain at a post-Cold War nadir for some time.
Prolonged WarHigh• Russia’s inability to quickly achieve its lofty war goals is raising the prospects of a prolonged conflict. • Sanctions pressures and international isolation will only grow, while the domestic human and economic costs will rise.
  • The losses of men and equipment raises the likelihood of a full mobilization of conscripts and reserves, although this would require a declaration of war.• Tensions with the West will continue to deteriorate, fueling increased sanctions and efforts to undermine each other’s global strategic interests.
Expanded ConflagrationLow• Russian setbacks may lead the Kremlin to consider deploying weapons of mass destruction (WMDs) or targeting Nato countries’ operations transporting weapons to Ukraine. • The usage of WMDs or an attack on Nato assets could trigger a deadly broader war with devastating global implications.

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Topics:
Trade, Conflict, Sanctions
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