There are times when it’s best to dive in and lay out the main points and then expand on them. So here we go.
- The Russian senior leadership has begun to realize the war is lost and cannot be turned around.
- Russia’s options are rapidly running out as battlefield defeats, domestic turmoil, and economic pressures continue to mount.
- Russia is maximizing its negotiating position for this winter where they believe a combination of economic strain on Europe, nuclear brinksmanship and illegally annexing Ukrainian territory can give it cards to negotiate a favorable outcome.
- Economic and military circumstances may not allow Russia the time and opportunity to negotiate favorable terms for its withdrawal.
Okay so let’s pick this apart and see how and why things are going this way. Today, the full military might of Ukraine is now beginning to come down on Russian forces as Ukraine’s second and third echelon of reserves complete their training and take the field. Russia has too few soldiers at this point to maintain a front that is over 1,000 km long and is being forced to retreat to prevent another breakthrough like the one seen near Kharkiv. While much has been made about these 300,000 troops that have been mobilized, it is clear to military observers that they will be too few, ill-equipped and undertrained to make any significant difference on the battlefield.
This all comes down to national and military strategy between Ukraine and Russia. Ukraine took its time, held on throughout the summer to complete its mobilization, and now Ukrainian troops are entering the war as intact formations. Russia on the other hand is panicking and has bungled their mobilization by their usual blunt methods along with scaring the Russian populace with a vague Presidential decree and a missing section 7 that makes the imagination run wild with dire possibilities.
Russia is running out of options as Ukraine asserts its will on the battlefield. Without a military victory, Russia must now rely on diplomatic and economic intimidation to salvage something out of this catastrophe before their army collapses. With recent reports of breakthroughs near Kherson and Ukrainian forces starting their liberation of Luhansk, Russia may not even be able to wait for winter to make their negotiating push. Ukraine knows this and will continue to drive deeper into Russian-held territory to both attain a military victory and further erode Putin’s political structure.
Lastly, there may be an unknowing third party entering this conflict and that is the Federal Reserve. War is just as much about economics as it is about armies and that point is now going to be driven home in the currency markets. You see, the Russia Ruble has been surprisingly strong as it’s been heavily supported by the Russian central bank, to prevent capital flight from the country. Yet, a strong Ruble has the drawback of reducing the amount of money Russia can get for its sale of oil and natural gas. Nearly all the world’s energy contracts are denominated in US dollars and therefore Russia must value its currency against the dollar in nearly all its exports. Recently, the Russian central bank lowered the interest rate from 20% to 8% to get more Rubles for each barrel of oil or cubic meter of natural gas, which may indicate that Russia’s cash reserves are running low. Russia is now allowing capital flight to occur and make the Ruble vulnerable to bring some much-needed cash to keep the Russian government afloat.
And right at this moment, the US Federal Reserve is aggressively hiking its own interest rate due to a rapid surge of inflation, ironically partially caused by Russia’s invasion of Ukraine. The lowered interest rate of the Russian central bank along with the raised interest rate by the US Federal Reserve has conspired to put enormous strain on the Russian central bank to keep the Ruble at 60 to the US dollar and not have inflation explode higher. Russia is now facing the worst of both worlds, with capital flight no doubt skyrocketing as Russians lose faith in their government AND Russia getting meager returns for its sale of natural gas and oil to the countries it is able to sell to. Russia cannot benefit from the sky-high energy prices in Europe as it is shut out of the market, while other countries know about Russia’s vulnerable position and will force Russia to sell at well below market rates. All of this can result in Russia’s economy collapsing regardless of the outcome of the war, thereby pressuring the Russian government to end this conflict as soon as possible.
How this will end is anyone’s guess as even the Kremlin at this point does not know how this will end. They know they have lost control of the situation and must now save themselves before their earlier decisions come back to destroy them.