No plan ever survives contact with the enemy. Right, Vlad?

burning-vehicles-ukraine-invasion_300

Putin’s adventures in Ukraine may not be doing as well as he expected.

Putin planned for a 3-4 day blitzkrieg, to push the Ukrainian army into desertion. He wanted a quick regime change.

Instead, he find an effective resistance and a motivated defense; he lacks air superiority; his panzers have stopped; his logistic chain is insufficient. Meanwhile the world over is pilling economic sanctions much larger than he anticipated, and he is unable to ‘sell his war’ to the Russian population.

On day 5 of the offensive, the Ukrainians seem to be the best prepared.

 

 

 

The first casualty of war is truth.

We’ve known for several years that international social medias have been leveraged by foreign intelligence sources, namely Russia. You’d be naïve to think that major news media are not influenced either, by one side or the other.

As a result, good citizens need to diversify their sources of information, at the very least, and to include sources well informed to the facts but independent from the parties in conflict. That’s easier said than done – the closest sources write in Russian. So let’s mention a group of Ukrainian journalists, who refused their editor’s influence and who started their own independent media last November. Their organization, the Kiev Independent refuses political influences. It is also free from large private capital and employee-owned (and they welcome donations…)

Several of the points below were actually initiated by this source, and have been verified elsewhere.

 

The economic situation

Conventional economic sanctions have been fast and came from many different countries:

International_sanctions

LavrovBut they went further already. Putin and the foreign minister (Lavrov) also saw their private assets frozen. Freezing a leader’s personal assets is a very rare international move in general. But Russia is also a nuclear power and a permanent member at the security council. Russia officially describes the move as a “demonstration of the complete impotence of the [West’s] foreign policy.”

Swift_and_RubbleMore importantly, the five European players who initially opposed Russia’s removal from SWIFT (Germany, Hungary, Italy, Austria and Cyprus) have now changed their minds. Preparations for Russia’s removal are underway, starting with the leading financial institutions. This is significant. The pressure to the Russian economy will be felt immediately and deeply.

Unfortunately, it has drawbacks:

  •  The Russian debt cannot be serviced anymore (governmental or corporate). Expect a few unpleasant P&Ls at asset managers and financial institutions.
  • Wall Street, and in particular JP Morgan and Citi, have expressed their opposition to the move. They indicate the risk of inflation, the risk of Russia getting closer to China, the development of a SWIFT alternative… That all sound relatively lame arguments.
  • Europe would see an energy crisis.
  • It would ruin the lives of Russian individuals, not the government.

The US and the UK have enacted sanctions against five Russian banks, representing half the country’s assets.

  • VTB_CapitalSberbank, VTB and the three next largest banks have seen their assets frozen.
  • VTB also lost its valuable membership to the London Metal Exchange, needed for Russia’s metallurgic exposure hedge.
  • Any Western bank now has 30 days to close any outstanding transaction with them.
  • Bloomberg believes that JP Morgan and Citi are the most exposed… What a surprise.

Bank_of_RussiaThe US is now considering sanctions on the Russian central bank, notably freezing $640 bn of assets. Would any corporation do business with a a bank or a Russian corporation that has no Central Bank recourse? Probably not. Freezing a central bank has happened a few times in the past. It is likely to lead to bank runs (like this), sharp sell-offs, and potentially the collapse of the Russian financial system. PS: it would also prevent Russia from implementing financial and economic policies.

 

The world’s indignation, except for China

The world over seems to oppose Russia’s action, even the Talibans. But the big question remains what China will do.

  • Xi_Jinping_Putin_bilateral_talksPutin waited for the Olympic Games to finish to launch its invasion, as expected. But it also had a very friendly meeting with Xi at the beginning of the Games, where they put forward a “new era of trust and friendship”, in order to to “deepen back-to-back strategic coordination and uphold international fairness and justice side by side” !
  • China is actually in a bind. It would like to take advantage of the West’s weakness to invade Taiwan, as its increased its belligerent rhetoric to do so recently.
  • But it cannot be seen as supporting Russia, as it would receive a serious economic blowback.
  • Also China has long claimed that no country should interfere in its internal affairs, so why would it interfere in Russia’s business? It can neither recognize Russia’s sovereignty (or right to declare sovereignty) in Donbass, nor criticize Russia’s actions.

And so far, China has remain essentially muted.

taiwan_invasionIMO, if the destruction of Russia’s economy will give Xi food for thoughts of what could happen to China if it were to invade Taiwan. So the West has yet another reason to make the Ukrainian war a very expensive adventure to Putin.

 

The military situation

Russia does not have air superiority

Russian_Ka-52_Alligator_HelicoptersAir space dominance is probably the most critical issue in a military operation. Attack helicopters and fighter planes can stop tanks, convoys of armored vehicles or equipment. They can pillory ground forces and degrade the opposing air, radar and defense systems. They cut logistic lines. Bombers can penetrate deep into the enemy’s territory and target critical infrastructure from communications, to installations, to depots.

Russia had brought anti-air missiles, and I expected Russia would quickly catch air superiority.  It is not the case! Actually,

Russian_Army_Advances_2022_02_26

Ground movements are stopped

Despite Kyiv being close to Belarus border (100 miles away), and announcement of some sporadic street fights in the suburbs, Russia’s rapid advance by its mechanized cavalry has generally been stopped. Actually, all the Ukrainian major cities are still under Ukrainian control. Putin’s generals have not delivered the one-day-success that he expected. Some say that he is shocked by the level of Ukrainian resistance.

  • So Russia is now sending paratroopers for man-on-man and sabotage operations, which forces Ukrainian towns to implement and extend a curfew (intruders usually take advantage of the night).
  • Ukraine would have retaken the Kyiv airport.
  • Ukrainian_Civilian_building_hit_by_a_missileIt looks also that Russian are encircling Kyiv before a possible concerted entry – the war’s goal being regime change.
  • The war has brought its load of horrors and Kodak instants.

 

Russia’s losses are already pilling up:

  • Russian_Losses_20220226100 tanks and 500+ armored vehicles. A typical battle tank costs $5-10 million, but Russian tanks are cheaper to make ($3-5 m). A military infantry vehicle like the BMP-3 typically costs $1.5m. Those vehicle losses represent more than $1b gone in smoke, in just 2 days of Ukrainian resistance.
  • For comparison, a Javelin costs $175,000, an advanced anti-tank weapon $50,000 and a stinger costs $130,000.
  • Russia would have lost 14 jets (several are old Su-25), as well as 11 helicopters, worth probably another $500 millions ? [Prices depend on the types of aircraft, which are not reported.]
  • 450 dead on day one, 3,500 dead in three days, as well as 200 prisoners so far.
  • By comparison, Russia lost 15,000 soldiers in the entire 10-year Afghanistan war.
  • [As of Monday morning, the numbers are 191 tanks, 816 armored vehicles, 29 planes, 29 helicopters, 74 artillery pieces and 5,300 dead]

 

Logistics

Amateurs talk strategy. Professionals talk logistics.

  • After some reluctance due to international treaties, Turkey eventually blocked the Bosporus and Dardanelles straights to Russian ships.
  • Russian_military_train_convoyAll railways to Russia have been destroyed by Ukrainian forces.
  • Which means that all logistic will have to be executed by road, and without air dominance. It is very feasible, just a bit more erratic and more expensive.
  • Russian_tank_out_of_gasFor information, a tank typically consumes 400 liters (100 gallons) of gasoline every 100 km (~60 miles). And yes, they eventually do run out of gas, making them easy targets (and good luck pushing them to the next gas station!). That’s why you transport tanks on trucks, and why tanks are followed by gas trucks all the time.
  • Some convoys have already been destroyed.
  • Apparently, rockets are already missing, and Russians are using them sparingly. They have stocks for 3-4 days only, just enough for a blitzkrieg and to push Ukrainian soldiers into panic and desertion. Their manufacture depends on raw materials coming from Slovenia, Finland and Germany, which are now cut off.
  • Thermobaric_bombRussia has been seen deploying heavy flamethrowers  and thermobaric weapons, an ominous sign.
  • It is bringing massive amphibious assault forces to the Southern shores, but Ukrainians would have laid mines already.

 

 

The first refugees

Civil populations are started to flee the country.

  • The UN indicates that 120,000 civilians have left the country for Poland, Romania and Hungary. They have crowded trains, jammed highways or walked. Some also arrive by boat.

Refugees_Ukraine

Visa-requirements-for-Ukrainians

  • Europe is welcoming civilians, in contrast to the Iraq, Syrian and Afghanistan wars (Ukrainians are blond with blue eyes, Christian and European, if you didn’t know). Hungary will take 500,000, despite a hardline position in the past. Poland, which refused to take any of the Syrian pushed by Belarus at their border, will welcome a million. Poland surely doesn’t have the infrastructure to house and feed so many people, so it may relocate them to other European countries. Ireland waived visa requirements for Ukrainians. Closed-air-space-over-UkraineAustria and the US indicated that they would welcome refugees, but airlines are cut and walking from Kyiv to New York isn’t easy… and Ukrainians prefer to remain in Europe. The US is sending experts to Poland to assess the situation.
  • Ukrainian refugees are not welcomed in Russia, for some reason…
  • The UN is congratulating Europe, and ask members for monetary pledges.
  • Putin surely intended that a wave of refugees would have embarrassed and divided Europe. He was flatly wrong.
  • Russians_protest_Ukraine_WarInstead, he has thousands of protestors in many cities, including many high-profile testimonies (journalists, oligarchs, scientists, famous individuals, Nobel winners…). His war is not popular at home, to say the least.

Civilians_in_ArmsBut Ukraine has asked every man, from 18 to 60 to remain, as it prepares conscription and it activates its reserves. The government now distributes weapons to civilians.

 

 

It is only day 4… of what could be a long, arduous, decade-long Afghanistan-style quagmire for the Russians (the CIA and weapons maker would have hated that, right?). And that’s what the Ukrainian leadership had been planning for – Russia may win the war, but it cannot win the peace.

And with the cost of the war estimated at $20bn per day (!) by the MI6, Russia will soon run out of cash and weapons.

 

 

References

 

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Written by Gontran de Quillacq

Gontran de Quillacq is an expert witness and a legal consultant. He is a recognized authority in options, trading, derivatives, structured products, portfolio management, hedge funds, mathematical finance, quantitative investment, strategy research and financial markets in general.

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