Military matters take centre stage this week – considerable damage to Russia’s air force
Military matters demonstrated that war in Europe can still surprise us all. Ukraine, too often seen as on the ropes by President Trump and critics of Kiev’s war-fighting performance, demonstrated a remarkable ability to fight back into the heart of Russia. In early June, Ukrainian drones hidden inside a series of lorries scattered around Russia, but within easy reach of Russia’s strategic bomber fleet, launched targeted strikes against those strategic bombers, attacking bases near Murmansk and Belaya.
These aircraft are routinely used to attack Kiev and other cities in Ukraine and could, if decided by Moscow, attack European cities with long-range missiles in any potential future conflict. Many of the bombers, like the Tu95s and Tu22s, are no longer in production and the attacks mark a permanent reduction in Russia’s airpower – others will be repaired where possible or cannibalised for spare parts. Nevertheless, intelligence assessments suggest that there has been a 10% reduction in Moscow’s strategic bomber fleet – one more cost to Russia of its invasion of Ukraine.
An audacious attack
It was an audacious attack, as well as a successful one, and highlights how the conduct of war is changing in the 21st century. With negotiations about the war approaching, the attacks also sent a signal to Moscow – so far unheeded – that Ukraine is not about to give in to Russia’s military campaign.
Calls for higher defence spending across NATO
There are increasing calls for higher defence spending, and it does look as if President Trump’s demand that NATO members spend 5% of their GDP on defence and defence infrastructure will actually lead to a step-change in troop numbers, weapons, and supporting infrastructure. Core defence costs look set to reach 3.5%, with an additional 1.5% for infrastructure and consumables. Future war has been described as potentially being a combination of slow-moving trench warfare and swarms of drones. Having been on the Waterloo battlefield last week with its 50,000 casualties in what was at the time a relatively short battle, Europe cannot want to see a repeat on this type of warfare.
One challenge faced by Europe, when we compare it with Ukraine’s combination of drones and unconventional warfare, is that weapons for a modern army are extremely expensive and so are produced in relatively small quantities to keep within budgets. We shoot down cheap drones with incredibly expensive missiles. That policy is likely to change in the future since the nature of the high-intensity warfare that we see in Ukraine is probably unsustainable, particularly given the seeming Russian disregard for casualties. While the Russian economy may now be refocused on robust, serviceable weapons, western countries have yet to switch to a wartime economy such as Russia is currently developing. Over time, Europe will need to step up its ability to arm, supply and defend itself – this is actually happening, but slowly. This is particularly the case if President Trump decides that the US contributing to the defence of Europe is no longer core to America’s interests globally.
There are conflicting views among the European allies about how to go forward and, as always, some concern on the part of NATO members about the cost of defending Europe when budgets are already stressed. President Trump has had a salutary effect on the discussion of force levels, something which was long overdue on the part of the European allies that had effectively freeloaded on the willingness of Americans and their politicians to contribute to the defence of Europe.
Germany optimistic that the US will remain in NATO
German Chancellor Friedrich Merz has said that he expects Germany to be dependent on the United States for a long time, was hopeful of a good relationship going forward. He also believes that the US would remain a member of NATO. At the same time, Spain was arguing that it was not capable of spending 5% of its GDP on defence, a position that would have looked less unified and less effective for NATO than the alliance would have wanted going into meetings with President Trump.
Little Progress Towards Peace
Tensions in the Middle East remain high, with Iran reorganising the air defences around its nuclear facilities and Ayatollah Ali Khameini, Iran’s supreme leader, refusing to accept any part of the US proposal for the future. With Israel and the United States both potentially focused on stopping Iran’s nuclear programme from moving to a phase where it could produce weapon grade plutonium rather than just civil fuel for reactors, achieving a breakout of nuclear enrichment would be a dangerous path for Tehran and might force either the US or Israel to take action against the nuclear facilities. The US already has six B52s, the likely choice of aircraft, in the shelters at Diego Garcia. The enrichment facilities are both well-defended and well-hidden, so disabling them all would be a tall order and could leave the Middle East more unstable than usual.
Kiev is preparing for a series of further attacks from Russia as hopes for peace fade. Russia will no doubt be seeking to strike Ukraine further after the latter’s successful attack on Russia’s fleet of, in many cases irreplaceable, strategic bombers. With President Trump unaccountably still appearing to be on Russia’s side in the conflict (although not so much Secretary of State Marco Rubio, it seems), many observers see few signs of the war subsiding.
Trump gets his “big beautiful bill” passed, now there’s just the deficit to worry about
Domestically, Trump managed to pass his “big, beautiful bill” through Congress, which has led to increased concerns about the US deficit. There are ongoing concerns that the bill, if fully implemented, would increase the size of the US national debt by $2.4 trillion with the tax take actually falling. The “bond vigilantes” may well be stirring in Washington and New York and the FT described the bill as “big, but not beautiful”.
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.
