Tensions rising but intentions unclear
Within Europe there are mixed messages from recent developments. Russia’s espionage and cyber activities have prompted the former head of MI5 Eliza Manningham-Buller to suggest that NATO is already at war with Russia, although an undeclared one. If that is the case then very little of Europe’s political attention has been directed towards it. The talk is of migrants, strained budgets and the golf.
Russia continues to ratchet up those tensions – a challenging near-term outlook
In recent days we have been seeing increased Russian air activity in the form of regular drone incursions into NATO territory as well as fighter aircraft flying across, in particular, NATO’s eastern border, both of which have caused airport closures in northern Europe and been described as “reckless” by NATO officials. These are low intensity but worrying events for Europe – particularly because they are asymmetrical. NATO has to scramble expensive F35s and Typhoons to take down the much more numerous – and cheaper – Russian drones that are being deployed. While these are undoubtedly effective they are also a sledgehammer being used to crack a nut and expend both expensive airframe hours and stocks of ammunition to destroy cheap and replaceable Russian drones (estimates suggests that the drones cost $10,000 but are being destroyed by missiles costing $1 mn each) – that cannot go on forever with Europe’s straitened budgets.
Over time the answer to this challenge may be the much-discussed “drone wall” aimed at preventing Russia flying drones into NATO airspace with a network of sensors likely to be the first element to be developed, followed by the means to actually interdict the drones. In the meantime, however, Russia will likely continue to challenge the NATO alliance with its drones and occasional air incursions, proving itself to be the same troublesome neighbour as it was before the collapse of the Soviet Union at the end of the 1980s. I think we can trace this back to Putin’s statement that “the collapse of the USSR was the greatest geopolitical catastrophe of the century” which encapsulates his view quite clearly. We just didn’t believe he was serious – yet it turns out that Mr Putin was deadly serious as seen in his efforts since his election in 2000 to reconstitute, in part if not in whole, the political entity that once was ruled from Moscow.
In the service of that objective Mr Putin has, over time, taken what some describe as “reckless gambles”. He has often turned out to be right that his gamble would pay off. A string of wins in smaller challenges may prove to be persuasive enough in his mind to warrant a further extension of his efforts – posing a difficult challenge for Europe in how it responds to them and how it prevents their escalation without provoking a Russian response.
A slightly better medium-term outlook
Politically, things took a turn for the better in the region this week when Moldova voted convincingly for the continuing development of its relationship with the EU despite Russian efforts to derail that relationship. Moldova’s Maia Sandu led her party to a clear victory at the elections despite warnings of “massive Russian interference” – the BBC reported the existence of a network of individuals to buy votes for the Russian side in Moldova, reports which the Russian side deny. Russia, for its part, has demanded protests against the result while also earlier claiming victory despite no results having been announced. Sandwiched between Russia and Ukraine and with a large Russian-speaking population in the Transnistria enclave, Moldova’s position is a delicate one but its swing towards Europe is all the more important as a result of its proximity to contested territory.
SCO meets in Tianjin led by China – the longer-term challenge
Stepping back further from the day-to-day, the leaders of Russia, India, Turkey and Iran were in China at the end of last month for the Shanghai Cooperation Summit. Clearly part of China’s plans to establish itself as an ally to (almost) everybody in Eurasia, one major power was conspicuous by its absence – the US. Looking back at the Kissinger and John Foster Dulles days when the US hoped to play China and Russia off against each other, that has changed entirely. Added to that are the presence of NATO allies like Turkey and major non-aligned nations like India at China’s talkfest. China is unquestionably ahead of the game and has a much stronger footprint in the region than does the US at the moment (in fact the China-led grouping includes Iran, hardly President Trump’s biggest fan, and Russia where it now seems clear to even Donald Trump that Vladimir Putin has been playing the American president for some time. This is largely the result of President Trump’s public acknowledgement of the challenge that the US faces from China but the reality is in my view that Russia appears far stronger than it should or perhaps even merits.
The question of the frozen funds held in Belgium
A word on this. The Ukraine war started in February 2022 and has now been going on for more than three and a half years. In all that time there have been meetings, conferences and learned articles (not to mention extensive hand-wringing) about how to seize the €300 bn of frozen Russian funds in Euroclear. These cannot be remitted to Russia as a consequence of the international sanctions imposed on Russia because of the invasion of Ukraine. These assets generate interest income yet in all their discussions neither the Europeans nor the Americans have been able to bring themselves to seize these assets – or the interest on them – for the rebuilding of Ukraine while they ponder the legality of using the blocked Russian funds.
The latest reported development is that German chancellor Friedrich Merz now supports a “reparations” loan plan for €140 bn linked to frozen Russian Central Bank assets, which could be used to offer zero interest loans to Ukraine.
Vladimir Putin has a reputation for taking gambles that some describe as “reckless”. Whatever his actions are called by outside observers, these have clearly proved effective in advancing Russia’s interests over the course of the Ukraine-Russia war. At the time of writing, despite the reported developments, Europe and America are still discussing how to achieve the goal of funding the reconstruction of Ukraine. Vladimir Putin’s gamble continues to pay off.
This article has been approved by Tideway Investment Partners LLP; however, the views and opinions expressed in the article are not necessarily the views and opinions of Tideway.
The content of this document is for information purposes only and should not be construed as financial advice. We always recommend that you seek professional regulated financial advice before investing.
About the Author
Stephen O’Sullivan was an ‘anchor’ client at the founding of Tideway and has been a client of James Baxter since 1999.
Stephen studied economics at university and then joined the oil industry – working for BP in their refining and marketing business as an oil trader and then with Total in the corporate planning team for their upstream business. In 1989 he joined Coopers & Lybrand’s strategy practice for oil and gas and, with the end of the Cold War, he worked extensively as a consultant across the oil and gas industry in Eastern Europe, Russia and the other post-Soviet states as well as China, the Middle East and Southern Africa.
In 1995 he joined a start-up investment bank, MC Securities, specialising in Eastern Europe and Russia where he was the Head of Research and the Head of Oil & Gas Research. His team was ranked the #1 oil & gas research team across EMEA and the #1 overall research team for Emerging Europe and Russia for the next three years. They sold the bank to JP Morgan in 1998 and Stephen relocated to Moscow to become Head of Research and a partner in UFG, the leading independent investment bank in Russia. His team were ranked the number one oil & gas research team and the number one Russia country team for nine years in a row.
After the sale of UFG to Deutsche Bank in 2005, Stephen became Head of EMEA and Latin American research for DB where the team was ranked #1 across all industry sectors, in both strategy and in economics, in country research for Russia and South Africa and across the entire EMEA region in 2006 and 2007. In 2007 he left Moscow and moved to Hong Kong as Head of Asian Research for Australia’s Macquarie Bank. In 2009 he joined Barclays Capital in Hong Kong to lead the buildout of the bank’s Asia ex-Japan research business.
Since 2013 he has been an investor in a range of businesses in technology, real estate, retail and materials while living in Hong Kong. His major interests include China’s gas sector reform, China’s nuclear renaissance and the country’s global impact on energy markets. While based in Hong Kong he has also been a Senior Visiting Research Fellow at the Oxford Institute for Energy Studies, the world’s #1 ranked energy think-tank where he published several major studies of the Chinese energy sector. He is a contributing author to several international think tanks on global energy issues and has advised international law firms on the oil and gas sector globally.
