The Decisive | Season 3 Ep.5 - Elusive Alliances: Russia, Ukraine, NATO and Trump

View Full Transcript

Kristen Hallam  

Welcome to The Decisive podcast brought to you by S&P Global Market Intelligence. I'm your host, Kristen Hallam. In this episode, we're discussing the outlook for the Russia-Ukraine war as we approach the anniversary of the conflict. We'll also talk about President Donald Trump's approach to NATO, which expanded after the Ukraine war. And to do that, we have 2 special guests. Blanka Calnan, our Head of European Country Risk; and John Raines, our Head of North America Country Risk. Blanka, welcome to The Decisive and John, welcome back. It's great to have you both here.

Blanka Calnan  

Thank you for having us.

Kristen Hallam  

Blanka, let's start with you. Can we take a quick stock of where we are with the Russia-Ukraine war at the moment? And is there anything that has changed that has had an impact on the course of the war?

Blanka Calnan  

Yes, sure. There has been intensive fighting and both sides of Russia and Ukraine have suffered heavy casualties, both in personnel and in equipment, but the land battle remains a strategic stalemate. Russia has made some further advances on the wide front in Eastern Ukraine, but it lacks the spare capacity to break through Ukrainian defenses. They have also stepped up their air campaign against Ukrainian energy infrastructure and population centers. And in the last quarter of last year, we have seen some of the most intense UAV and missile attacks against Ukraine since the start of the war in February 2022. This obviously puts Ukraine under severe strain. They have done limited incursion into Russia's Kursk region, which began in August last year. They have committed some of the best formations there, but this has so far failed to give Ukraine the initiative or ease the pressure of Russian offensive operations in Eastern Ukraine. Western authorization that we saw in November for Ukraine to engage military targets inside Russia with long-range missiles that the United States and the United Kingdom have supplied will probably take some pressure off Ukrainian forces, especially in the Kursk region, but it is not our assessment that this event alone will change the course of the war decisively in Ukraine's favor.

Kristen Hallam  

All right. Thank you for that, Blanka. Now what does this mean for our outlook? What's our current 12-month outlook for the Russia-Ukraine war, Blanka?

Blanka Calnan  

We are currently in quite uncertain period. The reelection of Donald Trump as U.S. President is probably the single development with the greatest potential to change the course of the war, either as an indirect consequence of the reduction or withdrawal of U.S. political and military support or through Trump's declared intention to act as a mediator. The president has previously advocated cessation of U.S.A to Ukraine. And indeed, the U.S. was the single largest supplier of military aid to Ukraine between 2022-24. And there is still a lot of uncertainty over U.S. administration's position, and we are still waiting for more concrete policy announcements. But for now, we maintain our view that in the coming months, the conflict will remain a stalemate. And what do I mean by that? Both sides recognize that neither has the military capability or current resources to achieve a definitive victory. But at the same time, there are indications that both sides recognize that the war is becoming politically unsustainable. And this scenario entails a likely ceasefire agreement that would fix current lines of contact as a de facto boundary, but there would be daily violations by both sides. But in our assessment with no strategically significant shift in territorial control.

Kristen Hallam  

Blanka, in our recent outlook, we've also increased the likelihood of Russian victory. And I'd like you to define what that means, victory. But what were the key factors in making that assessment?

Blanka Calnan  

So let me first define what we mean by Russian victory, like I did with the stalemate. It is ending the war on terms that are more favorable to Russia than to Ukraine. And under this scenario, Russia is unlikely to achieve all of its war objectives, such as regime change in Kyiv or the annexation of whole Eastern Ukraine, all the control of the Black Sea Coast. But they would be likely to capture all of the Southern and Eastern regions under this scenario. The negotiated settlement would include a new line of contact on the front line between Russian and Ukrainian forces. And Ukraine will be probably forced to cede its aspirations to join NATO at least in the foreseeable future. And the impact would go beyond Ukraine. If Russia is emboldened by its success in Ukraine, they would be likely to direct Russian ground forces to explore the capture of Odessa and deploy troops in Moldova. And this would ostensibly to protect ethnic Russians living there and what they would call the supporting the separatist administration and Transnistria, but at the same time, blocking Moldova's aspiration to join the EU. So the consequences would go beyond -- well beyond Ukraine, and it would touch upon much wider Europe. This is not a baseline scenario. However, the uncertainty over the U.S. administration's position at least currently on the conflict was the primary reason for this change and for a slight increase of the likelihood of what we call Russian victory.

Kristen Hallam  

All right. Well, John, sounds like a good time to bring you into the conversation. What has President Trump said on the campaign trail about Russia and Ukraine?

John Raines  

Well, I think what you heard when he was on the campaign trail was that he had some type of secret plan that he would not divulge and that this would end up resulting in some type of resolution in the conflict in about 24 hours. Since he's been in the office now for 3 or 4 days, we have not heard anything. But I think the real thing on the campaign trial that we heard over and over again was that he was quite neutral in his approach to both Russia and Ukraine. For example, in one of the debates, he was asked, who do you want to win this war, Russia or Ukraine? And obviously, under the Biden administration, it was clear, the United States wanted Ukraine. He refused to answer that question. And on top of that, he refused to answer a question as to whether he had spoken to Russian President Vladimir Putin since leaving office in 2021. And then on top of that, what we heard in reference to when Ukrainian President Zelenskyy came to Washington, he continually said that Zelenskyy was the greatest salesman that the world ever knew, that he always would come to Washington with an empty hand, but then would leave with $60 billion. So listening to these comments, we really got the feeling that he wasn't necessarily anti-Ukraine, but he certainly wasn't pro-Ukraine. And on top of that, that if we were looking at fiscal outlays in the future towards Ukraine, they were going to be far more limited than what we had seen under Biden.

Kristen Hallam  

John, you mentioned a secret plan there. And I know we're only a few days into Trump's second term, and he's got a lot on his plate. But are we beginning to learn a little more about it, about that secret plan?

John Raines   00:08:15

All right. So here is what we have discovered is that the plan itself was not even that secret. It really is really based on a plan developed by General Keith Kellogg, a former general. And the outlines are pretty much like this. Kellogg has advised the creation of a new demilitarized zone that's going to be created pretty much along the current lines of control, although both sides could negotiate what the final territory would look like. Now this DMZ would be about 800 miles long, and we can compare this to other DMZs around the world. So for example, the one between South Korea and North Korea, which is one of the most fortified borders in the world, is about 150, 160 miles long. So this would be about 5 times longer and pretty difficult to defend. And defense of it would primarily fall on the British and also on the Europeans as well as, of course, the Ukrainians. The U.S. itself wouldn't provide any troops, but it would provide some weapons that could be purchased by Ukraine or the Europeans as well as the potential for loans that it could offer for Ukraine. Now Ukraine would not be allowed to join NATO, but possibly could look at some kind of defense agreements with other European powers. But then on top of that, both sides then would recognize not necessarily the lines or the territory of the others. They could still claim other territory, but they could no longer approach or try to attain that territory by way of force. And what I think Trump wanted to also say is that there are sticks and carrots involved in each of these. Of course, there's rebuilding of Ukraine. That would be the carrot offered to the Ukrainians, and that could be done through a variety of different mechanisms. For the Russians, of course, it would be some sanctions relief. But on the stick side, it's if the Ukrainians don't agree to come to the bargaining table, the U.S. really begins to actually slow down on the amount of aid that it's providing the Ukrainians. And then conversely, if for whatever reason, the Kremlin doesn't want to come to the negotiating table, it then increases the amount of aid that goes to Ukraine. But as we said before, a lot of this is involving timing. Ukraine at this point is going to be needing some funds over the next several months. So this is going to be a decision that he's going to have to come to a conclusion relatively quickly. And then on top of that, obviously, we're going to have potentially negotiations between Trump and Putin in the next few months as well. Both sides have said they're interested in talks.

Blanka Calnan  

I would just add here that these bilateral agreements on defense and security between Ukraine and other European countries, there are already indications that they already started to happen. And one of the recent examples was the 100-year-old agreement on this between United Kingdom and Ukraine.

Kristen Hallam  

Interesting. Interesting. Thanks for that additional color there, Blanka. John, Trump just called for potential new tariffs or sanctions on Russia. You recently worked on a special report with our in-house sanctions expert. What do we think Trump's approach will be vis-a-vis sanctions and tariffs against Russia?

John Raines  

I mean if you look at his statements, you would think the first option really would be tariffs. So one thing that Trump has repeatedly said is he doesn't like sanctions because the more sanctions you pursue, the more likely you're going to push other countries to try to avoid use of the dollar as the reserve currency. And remember, the U.S. dollar is really important for the United States because it really allows them to pay pretty cheaply for their trade and fiscal deficits. In the first instance, you'd like to use tariffs against Russia, again, to push them to the negotiating table. The problem is that Russia doesn't sell much to the United States. Even before the war, it was about 3.5%. Now it's under 1%. So it's hard to imagine aside from maybe a few sectors, maybe some commodities in either agriculture or mining, that might be affected. Otherwise, really not going to make much of a difference. Now we could see sanctions, although we've seen quite a bit of sanctions already by the Biden administration, but there is the possibility that you could see something that the United States could do as far as increasing sanctions on Russia's shadow oil fleet. We've already seen moves in that direction. Those could be enhanced. But again, with the sanctions already existing, it's going to be difficult to really expand them to the point that they make much of a difference unless you get significant European and other ally buy-in. So what he could do, obviously, is look at secondary sanctions and maybe even tariffs on individual countries that are trading with Russia, for example, on India, China, Turkey or the United Arab Emirates. These are countries that have purchased significant amounts of Russian energy or have really become gateways for goods to enter into Russia and are a pathway to cause some damage to the Russian economy if they can start hitting those companies that are allowing those goods to go forward.

Kristen Hallam  

So let's zero in now on NATO. As I mentioned in the intro, NATO expanded in 2023 to include Finland, Russia's neighbor. And again, in 2024 to include the traditionally neutral Sweden. John, President Trump has already announced the U.S. withdrawal from the World Health Organization and the Paris Agreement. What about NATO?

John Raines  

I mean, according to media reports, we do know that Trump in 2018 asked his advisers on multiple occasions as to how the United States could leave NATO and leave NATO as quickly as possible. He was upset that really that NATO or Europe is really a pathway where the United States provides significant security and really doesn't get that much out of it in his opinion. Plus on top of that, that many of the European countries are not really even approaching 2%, although that certainly increased over time and certainly not at the level that he's been talking about recently, which is he wants all NATO members now to be spending 5% of their GDP, even though it should be noted that the United States is currently spending about 3% itself. We have this feeling that he's not necessarily so warm to NATO. And we've heard that if Europe doesn't increase its military spending, he has actually said that maybe he would let the Russians do what they want with Europe. That's according to what he said when a European leader asked him whether the United States would respect Article 5. So a lot of these things are up in the air, and you could see that there's a lot of concern inside Washington as to whether in the second administration, he wants to get out of NATO. And with that in mind, it's not surprising that Congress passed a law recently, which really is supposed to prevent the president from doing just that. So you can only withdraw from NATO now according to this legislation, if Congress passes legislation that allows the president to do it or you get a 2/3 vote inside the Senate consenting the president to withdraw from the organization. Now this is very legally questionable because normally, the President is in control of this type of policy. But I think the key takeaway here is you don't have to necessarily leave the organization to make a difference. So you can actually be a member of NATO, and for example, if Russia were to invade another NATO member, the response of each member of NATO is up to them. It can vary from sending in the troops and combating this aggression with your own forces or it can be a strongly worded letter, which says I strongly disagree with what you've done and your activity in this particular location. And one area where I think this type of response where it's really weak or he doesn't really respect Article 5 could really come into play is really with negotiations with Europe over Ukraine because we could see a situation where if the United States is pushing Ukraine to enter into an agreement and saying Europe is on the hook for all the security commitments and the weapons and everything else and the Europeans aren't necessarily on board with all of these commitments, here's an opportunity that Trump can use to say, "Hey, listen, either you agree to what I put forward or I'm just going to leave NATO altogether. I don't think he's necessarily going to do that. I don't think that's my baseline view, but it wouldn't be totally out of the question for Donald Trump to at least consider it or at least threaten it as a possibility to get the Europeans to play ball. He can actually achieve much of what he wants just by way of threatening. And I think this could be important not only vis-a-vis an issue with trade policy and also potentially in Ukraine, but in a variety of different features and policies in which we have disagreements between the Europeans and also the U.S.

Kristen Hallam  

Blanka, what would be Europe's, or NATO's, likely response to that, to the scenarios that John described there?

Blanka Calnan  

I think that the answer lies in defense spending and almost defense and security nationalism, if you want to call it like that, in Europe. With the war in Ukraine, the defense definitely remains a top priority for the European Union or even for the Western Europe as a whole. And in 2024, NATO members have made the largest defense spending increase of the past decade. And as John has mentioned, they are already -- most of them are already meeting the 2% target. There are a couple of countries that are actually servicing a percentage of the spend per GDP and are ahead of the U.S.A. If we just look at the European NATO members, they boosted their defense budget by average of annual 18% of last year and that's outpacing the average growth rate of around 3% that we saw prior to the war. And if we look ahead for the coming months for this year, we estimate that further spending increases are very likely and notably, Poland and Greece, among others, have already budgeted that international budget. In many other countries, however, there's not a lot of fiscal space to do this. Above all, they face large public debt levels. But that said, defense spending has been increasing. And I believe that it will continue, especially due to the current geopolitical and security situation. However, getting to that 5% magical number for many of them, this will definitely take some time and it's unlikely to happen and definitely not through the course of this year.

Kristen Hallam  

Some significant increases there that you mentioned. That will be very interesting to watch. And Blanka, what are the critical factors for Russia now as the war continues?

Blanka Calnan  

Economic pressures, definitely. We are keeping an eye on sanctions and especially the European and then U.S. measures to prevent sanctions avoidance. But also, if you look more on what's happening on the ground and on the war, the morale and performance of Russian ground forces, which would include their capacity to generate train and equip new fresh formations and to sustain the will to fight on, because we have seen really quite high casualty rates, especially over the past year and only limited territorial gains in comparison.

Kristen Hallam  

And what about Ukraine? What are the critical factors for them at this stage, Blanka?

Blanka Calnan  

For Ukraine, the single critical factor is the extent to which the West, and critically the United States, will continue to meet its increasing demand, whether it is material or financial support to finance the war, including Ukrainian requests for advanced weapon systems or enabling it to engage military and infrastructure targets deep inside Russia. And to apply concentrations of its faults that would be sufficient to break through Russian defenses – basically, end what is that current stalemate.

Kristen Hallam  

Well, this has been a really insightful discussion. Blanka, any final thoughts for our listeners?

Blanka Calnan  

I'd say that 2025 is definitely going to be a pivotal year and not just for Ukraine and Russia, but also for Europe as a whole. And this is not only related to security, regulatory environment, trade troubles, uncertainty over the tariffs, what we can call elusive alliances that are forming across the globe and are impacting Europe, but also more localized domestic discontent. And all of this will shape what will be definitely interesting months ahead and keep Europe certainly a very interesting region to watch.

Kristen Hallam  

I like the references to our big themes for this year. I will drop a link to our special report on that in the description of this episode. And John, how about you, final thoughts for our listeners?

John Raines  

I think that for me, obviously, 2025 is going to be a big year as well as Trump begins to implement much of his domestic and foreign policy. But it's going to be really interesting for me to see that if it's a situation where his ceasefire plan does not reach fruition, and especially if it does not do so because the Russians aren't really willing to engage or there's a thought that they're not negotiating seriously, how does Trump really approach that? Does he really start increasing the amount of weapons that are going to Ukraine? Because not only is that kind of a bit out of character for him, but I think in some ways, it's interesting because there are major divisions within his own party that are going to oppose this. So how is he going to square that knot, especially if it's a time where he's probably not going to be able to get those votes solely from Republicans inside Congress, he's going to have to go to Democrats. It's going to be a real reversal for him. It's going to be really interesting as he maneuvers his way through these contours to try to get his plan and make sure it gets some type of approval between all the parties involved.

Kristen Hallam  

All right. Well, that brings this episode of The Decisive to a close. Thank you, Blanka and John, for sharing your insights with us today. And to our listeners at home, please do follow S&P Global Market Intelligence on our social media channels, including Facebook, LinkedIn, YouTube and Instagram. Until next time. Thank you for listening to The Decisive podcast from S&P Global.