Has Putin Lost?

Kill a chicken to scare a monkey.

Popular Chinese idiom

The fog of war

Since the capture of the strategically critical city of Mariupol by the Russians in late May, the Russia-Ukraine war has been in stalemate. But not now. Over the last 10 days or so, the Ukrainians have made significant advances on two vital fronts.

In the south, the Ukrainian army has advanced almost to the gates of Kherson. It has even become conceivable that the Ukrainians might push further into Crimea – the disputed territory that Russia occupied in 2014.

In the east, the Ukrainians have fought the Russians back in the north of Kharkhiv Oblast as far as the internationally recognised frontier with Russia. They have retaken Izyum, an important railway junction where the Russians were considered well entrenched. President Zelensky made an appearance there on Wednesday.

Explosions have been heard in the Russian city of Belgorod which is 25 kilometres over the border. Towns and villages that have been under Russian occupation for six months – and where it seems war crimes have been perpetrated – now proudly fly the Ukrainian flag of blue and gold. Russian conscript soldiers who arrived in tanks are now leaving in stolen cars laden with booty.

‘Surrender cards’ are being dropped from the air on Russian forces, and several Russian units have been attempting to contact Ukrainian forces to take them up on the offer: “Your ticket to a peaceful life. Show this card to a Ukrainian soldier — it will save your life and help you get back home”, they proclaim. On the back of the cards are Telegram contact numbers “to receive detailed support”.

The Ukrainian army is growing almost daily in both competence and confidence. It has been using rapid armoured personnel carriers such as the American Humvee (manufactured by AM General, which is owned by KPS Capital Partners) and the Australian Bushmaster (manufactured by Thales Australia) to great effect. Even Toyota Land Cruisers have been converted into deadly military vehicles. Sadly though, the German government is still stalling on granting an export licence for Rheinmetall to export its Marder vehicles to Kyiv.

Ukraine is now 200 days into what might have been a war of annihilation. The Russian offensive launched on 24 February this year was intended to wipe a “fake state” off the map, to colonise its territory, deport many of its people and to seize its extensive resources. By mid-September, the Russian army had lost at least 50,000 soldiers (many of them under 21 years old). Thousands more are injured or missing. On the day of the invasion, I posted here that Vladimir Putin had made a huge strategic miscalculation; now there is increasing evidence that many Russians think so too.

In terms of morale, there are reports coming through of Russian soldiers throwing down their arms and running for their lives. That may be hyperbole; but what is clear is that the Ukrainians are fighting for their existence as a nation, their right to exist and to express their culture through its language and – most of all – not to be subject to the state which deliberately starved them into submission in the 1930s under Stalin. In contrast, Russian troops have little idea what they are fighting for, what their leaders’ war aims are or what they will gain by continuing to fight. It is hard to know if Russian troops on the ground believe the constant propaganda around the defence of the Motherland. At the inception of the war Putin tried to draw a false parallel between the Great Patriotic War (1941-45) against Nazi Germany and his attempt to destroy Ukraine. That now looks cynical.

Critical voices

Significantly, critical voices have been heard on state-controlled Russian TV for the first time since the invasion began. Last Sunday evening (11 September) Boris Nadezhdin, described as a “western-leaning” politician, who has been conspicuously silent in recent months, appeared on the state-controlled NTV channel. He told viewers that Putin had been misled by his advisors because Ukraine could not be defeated by conventional military means. Mr Nadezdhin described the conflict – known euphemistically as the “special military operation” in Russia – as a “colonial war”. He said he was in favour of peace talks. Several Russia analysts interpreted this appearance as a possible attempt by the Kremlin to prime the Russian people for a diplomatic initiative.

There has even been a petition by a group of municipal councillors in St. Petersburg calling for Putin to resign. This suggests that there may yet be a degree of transparency in the Russian polity that we thought had been extinguished. But Putin’s staunchest critics are not the liberal “pro-western” intellectuals, who, if I know Russia, are widely regarded with suspicion and disdain, but the “ultras”. There is a widespread movement of ultra-nationalist bloggers who use social media – principally Telegram − to promote views which sometimes make Putin seem like a moderate in comparison.

The ultra-nationalists have become more vociferous the more ineffectual Russia’s campaign in Ukraine has become. At the very moment that Russian troops near Kherson were routed, Putin was inaugurating a Ferris wheel in a Moscow park. This prompted a frenzy of disdain by ultra-nationalists on social media.

Meanwhile, the propaganda war continues. Russian media continue to provide a distorted view of the conflict in which the heroic Russian army is making gains against the Ukrainian “Nazis” and the West is tottering on the verge of financial ruin because of its malicious sanctions against Russia. The extreme “cost-of-living crisis” in the UK features daily on Russian news broadcasts. Alexei Navalny, the only Russian opposition figure of stature, languishes in solitary confinement in a remote prison, and seems as far from power as ever. The fear is that, if Putin were to fall, it would not be Navalny entering the Kremlin, but some antediluvian ultra-nationalist.

A glimpse of the future

On Wednesday (14 September), Ursula von der Leyen, the EU Commission president, gave the annual State of the Union address to the European Parliament in Brussels. Symbolically, Olena Zelenska (President Zelensky’s wife) sat beside her. Von der Leyen conjured a vision of Europe in the future in which Ukraine – as well as Moldova and Georgia – was an intrinsic part. She made it clear that Ukraine’s destiny lies within the European Union. That vision now seems realistic – even if Ukraine were to be excluded from NATO.

On Thursday (15 September) Putin and China’s President Xi met in the Silk Road city of Samarkand in Uzbekistan. This was the first time that Xi had left China since the beginning of the coronavirus pandemic. As for Putin, leaders who think they might be about to be overthrown generally do not travel. The two leaders wanted to advance “an alternative to the West”. In overheard remarks, Putin alluded to “China’s questions and concerns about Ukraine”. China knows that a long-drawn-out war will continue to disrupt the world economy. That is the main reason why China is refusing to supply Russia with weapons. So much for the “limitless friendship” paraded last February. The Kazakh president even kept Putin waiting for a meeting – just as Turkey’s president did last month in Tehran.

At the moment, Xi Jinping is principally concerned with the 20^th Congress of the Chinese Communist Party which will open in Beijing on 16 October. Xi hopes to be reappointed for another 10-year term as general secretary. He might even be newly elected as the chairman of the Party, the title held by Mao Zedong. If the Russians suffer further military setbacks by then, Xi might be seen to have backed the wrong horse. I suspect he wants the war to end as soon as possible.

President Joe Biden is now distracted by the impending mid-term elections in November. Any decisive shift in the course of the war in Ukraine’s favour would benefit the Democrats. He also devoutly wishes an end to this war. We may be sure that, despite the rhetoric, the lines of communication are buzzing between Washington and Beijing.

Putin’s response

According to the Institute for the Study of War, Wagner Group financier and de facto leader Yevgeny Prigozhin, a former convict, has become the face of the Russian “special military operation” in Ukraine. Appointing the head of the notorious Wagner Group to coordinate Russian aggression against Ukraine guarantees that war crimes will continue on an egregious scale. The Wagner Group, a violent mercenary brigade, has been accused of committing atrocities in sub-Saharan Africa.

Prigozhin gave a recruitment speech on 14 September in which he revealed that Russian prisoners have been participating in the war since July, when they were instrumental in seizing the Vuhlehirska power station. A Russian nationalist blogger noted that Prigozhin is introducing “Stalinist” methods which allow the Kremlin to avoid ordering a general mobilisation. A full mobilisation would ignite social tensions in Russian society and is something that Putin is evidently keen to avoid.

Russian military correspondent and ultra-nationalist blogger Maksim Fomin (alias Vladlen Tatarsky) claimed to have spoken to Prigozhin about the situation on the Ukrainian-Russian border after the withdrawal of Russian forces in the area. If such a meeting occurred, that would be evidence that the Kremlin is responding to the ultra-nationalist bloggers’ long-standing complaint that the Russian defence establishment is not up to the job.

The idea that Putin will be forced to the negotiating table to concede some new version of the Minsk accords but with some territorial concessions from Ukraine is unlikely as it would not satisfy the ultras. The West cannot meet with a man whose army has committed war crimes; and Putin would not initiate talks without the immediate cessation of sanctions. Russia knows that the Ukrainians have fought valiantly because they want freedom but also because they have been armed to the hilt by Russia’s adversaries. There are no scenarios in which western-Russian relations can be restored to anything like normality in the short term.

What investors should watch

If hostilities were to be curtailed under some kind of ceasefire then the market environment could change significantly, even if gas prices remain high and western sanctions on Russia continue to prevail. Some shares have already responded positively to the news of the Ukrainian advance. One such is the iron-ore-pellet producer Ferrexpo which operates mines in central Ukraine, most importantly at Harishni Plavni.

The latest UK inflation numbers suggest that – as I discussed last week – inflation has probably peaked in the UK. This week, despite being a period of national mourning pursuant to the death of HM The Queen, the economic gloom has lifted somewhat. A ceasefire which left Ukraine intact would at least dampen inflationary expectations and the pound would likely make some headway.

But I’m not sure I agree with the Daily Telegraph’s Con Coughlin that Putin is on course for a humiliating defeat. If the Ukrainian advance turns into a rout, with abandoned Russian tanks and a mass retreat, then Putin will be damaged. And a damaged Putin may become a vengeful one: there is the outside risk that he might ‘go nuclear’, using so-called “tactical” or close-range, battlefield nuclear weapons. There are already signs that the Russians now seek to destroy Ukraine’s infrastructure out of spite. They are bombing dams. Even if Putin were forced from power – a scenario I consider unlikely – there would be a huge degree of uncertainty about what his successor’s agenda might be. He might be even worse.

Many military strategists think that Putin cannot now win the war in Ukraine – except by an escalation of hostilities that would ultimately cost Russia more than it can pay. Ukraine has achieved a successful counteroffensive with increasing volumes of western military material and the information advantage conferred by US satellites and Turkish drones. We are nearly at a point where Russia cannot launch an effective counteroffensive because it is running out of weaponry, ammunition and trained soldiers. If the West has not won either, it has not lost. But what is now certain is that Russia is never going to consume Ukraine as a serpent devours a mouse.

If Putin had taken Kyiv back in February-March I feel sure that the Chinese Liberation Army would be strutting through Taipei by now, although I concede that one can never be certain about a counterfactual. Now, the invasion of Taiwan is a much riskier course of action for the Chinese leadership. But the contemptible complacency of the West – personified by the now despised Angela Merkel – has been disrupted for good. There might be a future two or three years ahead when we feel more secure – especially if the UK is spending £100bn plus a year on defence. But what we are heading for is a new type of sustained Cold War which, back in April, I called The Great Bifurcation.

That said, the downside risks are terrible to contemplate. But for the first time for more than six months, as the days get shorter and the shadows get longer, there are reasons to whistle – softly, of course.

PS

This Monday (19 September), our late Queen will be laid to rest. Her obsequies will be watched by billions. The House of Commons will sit on Thursday – and on Friday too when Chancellor Kwarteng will deliver his “fiscal event” aka mini-budget which might turn out to be a maxi-budget. I shall probably have something to say about that.

If any of my readers are queueing for access to Her late Majesty’s lying-in-state or will attend the sovereign’s funeral – I salute you.

Listed companies cited in this article which merit analysis:

• Thales SA (EPA:HO)
• Rheinmetall AG (ETR:RHM)
• Ferrexpo PLC (LON:FXPO)