By Andrew Korybko, Substack, 1/3/24

Russian Energy Minister Alexander Novak shared an update on the proposed Russian gas pipeline to China through Kazakhstan, which was analyzed here in November, shortly before the start of the year. He confirmed that “This process, so to speak, is underway. Estimates, the feasibility study and negotiations are now underway.” This statement shouldn’t be misinterpreted as assuming that the project is a done deal like RT implied in its report, however, since it’s more of a message to the US at this point.

The previously mentioned analysis cited last summer’s about the continued Sino-Russo pricing dispute over the Power of Siberia II (POS2) pipeline, which boils down to China demanding bargain-basement prices (reportedly equivalent to Russia’s domestic ones) while Russia obviously wants something better. This impasse hasn’t yet been resolved, and while some like Asia Times’ Yong Jian consider the trans-Kazakh proposal to be an agreed-upon rerouting of POS2, that’s arguably a premature conclusion.

Pricing disputes still exist and the “process” that Novak described has only begun. It’s far from finalized and might still take a while to be completed, if ever, as suggested by the POS2 and Pakistan Stream Gas Pipeline precedents. The first, which was earlier known as the “Altai Pipeline” before the decision to reroute it via Mongolia, has been discussed for a full decade already with no deal in sight. The same goes for the second, which was first agreed upon in 2015, but no progress has been made since then either.

Amidst the latest talk of the Russia-Kazakhstan-China (“RuKazChi”) gas pipeline, Russia’s last direct gas pipeline to Europe was just shut down after Ukraine’s decision to let their five-year transit agreement lapse. Russia can still indirectly export gas to Europe via TurkStream, and Europe can always compensate for this long-foreseen loss of 5% of its gas import total via more Russian LNG, but the writing is on the wall that the EU will continue diversifying from Russia under American pressure.

In that event, Russia’s lost budgetary revenue from energy exports to Europe can only realistically be replaced by China, but Russia is still reluctant to agree to the bargain-basement prices that China is reportedly demanding. Its decisionmakers’ thought processes can only be speculated upon given the opacity and sensitivity of these talks, but this might reasonably be due to the expectation that the US’ more muscular containment of China could coerce Beijing into agreeing to better prices with time.

Another possibility, which isn’t mutually exclusive at this point at least, is that they might also be holding out hope that some of their European exports could one day be resumed seeing as how the infrastructure still exists but their partners made a US-pressured political decision to cut off imports. The best-case scenario from their perspective would therefore be that China agrees to prices closer to the market rate while the EU resumes some of their Russian gas imports after the special operation ends.

The reality though is that Russia is unlikely to have its cake and eat it too, and there’s no guarantee that either of its two main gas partners – the EU and China – will behave as expected even at a later date. The EU won’t resume any pipeline imports unless it receives approval from the US while China is known to operate on a much longer timeframe than most so it might hold off on clinching a deal indefinitely until Russia finally accepts its bargain-basement price demands. This places Russia in a very bad position.

Unless something changes, Russia might very well be coerced by the unfortunate circumstances in which it finds itself into agreeing to China’s reported proposal to sell it gas at domestic prices, which could turbocharge China’s superpower rise while placing Russia in a greater position of dependence. That might be preferred by Russian decisionmakers over sitting on these reserves indefinitely without receiving any financial benefit from them as sanctions start to create fiscal and monetary challenges.

From the US’ perspective, it’s worse for Russia to turbocharge China’s superpower rise and enter into a relationship of greater dependence with it that could be exploited by China to procure other resources at equally cheap rates than to allow the partial resumption of Russian exports to Europe. At the same time, such resumptions couldn’t be approved until after the Ukrainian Conflict ends, and this would be politically impossible in any case unless the US could spin the outcome as a victory of sorts over Russia.

Likewise, Russia couldn’t agree to this arrangement unless it too was able to spin the outcome as a victory, especially if the informal terms include a commitment not to build any new pipelines to China in exchange for the abovementioned proposed resumption overcompensating for that lost revenue. Therein lies the need for creative diplomacy of the kind suggested here last month and here the other day, the insight of which will now be blended, summarized, and built upon for the reader’s convenience.

The gist is that the US and Russia could agree to a series of mutual compromises culminating in the partial restoration of an energy bridge between Russia and the West for the purpose of depriving China of its envisaged decades-long access to ultra-cheap Russian resources for fueling its superpower rise. No one should assume that everything proposed below will enter into force, but these suggestions could help move their talks along. From the US’ side, its possible compromises could take the form of:

* Ukraine finally holding elections as part of a US-backed “phased leadership transition” against Zelensky, who’s the top obstacle to a lasting peace, and then legitimizing the following two agreements;

* Ukraine restoring its constitutional neutrality in order to exclude itself from ever joining NATO and thus resolving the core security concern that provoked Russia’s special operation;

* Ukraine demilitarizing and denazifying everything east of the Dnieper in what had for centuries been Russia’s traditional “sphere of influence” (everything west had traditionally been under Polish influence);

* The US terminating its bilateral security agreement with Ukraine in order to assure Russia that any cessation of hostilities wouldn’t be a ruse for rearming Ukraine and reigniting the conflict at a later date;

* The US agreeing that no Western peacekeepers will deploy along the DMZ between Russia and Ukraine east of the Dnieper (all parties might agree to an entirely non-Western peacekeeping mission though);

* The US also agreeing that Article 5 won’t apply to any Western country whose uniformed troops in Ukraine, which would be unilaterally deployed there in this scenario, come under attack by Russia;

* The US approving the EU’s partial resumption of Russian gas pipeline imports in order to buoy the bloc’s struggling economy via an influx of low-cost fuel (but higher-priced than what China demands);

* The US and EU returning some of Russia’s seized assets as “compensation” for the West retaining control over the European portion of its pipelines;

* The US lifting its sanctions on the Russian-EU energy trade, including Russia’s use of SWIFT, and expanding this to include more countries and spheres as a reward for keeping the peace with Ukraine;

* The US waiving sanctions on Russia’s Arctic LNG 2 project for itself, the EU, India, and Japan so that they can replace lost Chinese investment and ensure that they receive this gas instead of China;

* The US replicating the preceding policy on a case-by-case basis to squeeze out and ultimately replace all Chinese investment in Russian energy projects to preclude the possibility of more future exports to it;

* and the US building upon the trust that it hopes to regain with Russia through these compromises to resume frozen strategic arms control talks on a priority basis before the expiry of the New START in 2026.

From Russia’s side, its own compromises could take the form of:

* Agreeing to only the partial demilitarization and denazification of Ukraine west of the Dnieper (ideally with the first influenced by the Istanbul Agreement while the second might remain superficial);

* Limiting its control of Ukrainian-claimed lands to only Crimea and those four regions that voted to join Russia in September 2022’s referenda;

* Tacitly accepting that it won’t be able to assert control over the parts of Kherson and Zaporozhye Regions west of the Dnieper but nevertheless continuing to officially maintain such claims;

* Agreeing to limited military restrictions on its side of the DMZ as a trust-building measure for furthering the rest of the complicated negotiation process and then complying with these terms;

* Informally agreeing to prioritize the development of its Arctic and Pacific fleets over its Baltic and Black Sea ones in a tacit cession of influence to NATO that soberly reflects the current military realities;

* Formally acknowledging the loss of control over the EU and Ukrainian portions of its pipeline infrastructure (ideally in exchange for “compensation”, including the return of some of its seized assets);

* Tacitly accepting that the rest of its seized assets are lost, but possibly agreeing that they can be invested in rebuilding Ukraine and/or Syria or donated to the UN, perhaps to fund a new African project;

* Informally agreeing not to build new pipelines to China or expand energy exports to it so long as sanctions-waived energy investments from and exports to others overcompensate for that lost revenue;

* Unofficially preferring sanctions-waived investment from others (America, Europe, India, Japan, South Korea) in its resource-rich Arctic and Far East regions as opposed to that from China;

* Doing the same with regard to preferring tech imports from them (and Taiwan too, which was Russia’s main source of high-precision machine tools a year ago);

* Tacitly accepting that these sanctions waivers can be rescinded in an instant if Russia reneges on the Ukrainian or Chinese terms of this proposed grand deal;

* and negotiating with the US in good faith on strategic arms control, which could ultimately include restoring limits on intermediate-range missiles in Europe that lead to warehousing the mighty Oreshniks.

For as politically difficult as these compromises might be for each side, the US could spin them as having stopped Russia from controlling all of Ukraine and thus preventing it from planting its boots on the Polish border, while Russia could spin them as having stopped Ukraine from joining NATO and thus preventing that bloc from planting their boots on its exposed western border. Moreover, Russia would relieve pressure upon it in Europe, while the US Navy would control the bulk of China’s energy imports.

The key to this is the US offering Russia a decent deal in Ukraine with lucrative sanctions-waived energy and tech opportunities that would incentivize Russia into informally agreeing to deprive China of decades-long access to ultra-cheap resources for fueling its superpower rise at the US’ expense. This grand deal is Trump’s to lose, and the world will know that he fumbled it if Russia makes progress on new pipelines to China, which could accompany or be followed by him “escalating to de-escalate”.

By Ben Aris, Intellinews, 1/2/24

I agree with Aris’ analysis of the economics. On the political side, I think he leaves out considerable context. He also assumes that some of the accusations against Putin made by the west are proven true, when they’re not, such as Navalny’s death necessarily being a murder and Putin ordering the poisoning of Alexander Litvinenko. I don’t know if he thinks he has to say these things for his economic analysis to be taken seriously by people in the west or if he really just unquestioningly believes all of the accusations leveled against Putin, even when closer scrutiny reveals a less than clear picture. – Natylie

Russian President Vladimir Putin has been in power now for 25 years. The BBC’s Russia editor Steve Rosenberg wrote a retrospective as his first ever story was to write up Yeltsin’s resignation on December 31, 1999, passing the presidency to Putin. [https://www.bbc.com/news/articles/cd0ek943v7ko]

“I will never forget New Year’s Eve 1999,” Rosenberg began. “I was working as a producer in the BBC’s Moscow bureau. Suddenly there was breaking news: Russia’s President Boris Yeltsin had stepped down. His decision to resign took everyone by surprise, including the British press corps in Moscow. When the news broke there was no correspondent in the office. That meant I had to step in to write and broadcast my first BBC dispatch.”

I remember that night just as well. The announcement caught everyone off guard, as it came in the late afternoon and everyone was already out of the office, getting ready for the parties that were about to start that evening. And if you have spent any time in Russia, you will know that New Year’s Eve is THE big party of the year.

(Because Russia festivals still work on the Gregorian Calendar December 25 Christmas is a total non-event, as the Orthodox Christmas is on January 7 and even that is a meek second fiddle to Easter, the main Christian festival in the East.)

The Moscow press corps scrambled, running back to the office to bang out a write up of the most momentous story since Yeltsin signed off on the dissolution of the Soviet Union, also in December on the 26th almost a decade earlier.

But it turned out to be easier than you might think. As Yeltsin was so sick – he disappeared entirely from the second round in the crucial 1996 presidential elections to have a multiple by-pass open heart surgery – pretty much everyone had an obituary on file as Yeltsin was expected to die any day. So, all we had to do was a search and replace of the word “died” for “resigned” and pretty much everything else could stay unchanged.

Rosenberg goes on to list the Putin legacy, which naturally enough focuses on the war in Ukraine.

· Since Vladimir Putin’s decision to launch his so-called “special military operation” Russia has sustained heavy losses on the battlefield

· Russian towns and cities come under regular drone attack

· Ukrainian soldiers have occupied a part of Russia’s Kursk region

· International sanctions are heaping pressure on Russia’s economy

· What’s more, the country’s demographic situation is dire

· Domestic repression has picked up apace

But as one of the longest serving foreign correspondents in Russia, Rosenburg adds some nuance: “One thing I can say with certainty: over twenty-five years I’ve seen different Putins.”

This is exactly my experience. Putin and the Russia story is complicated. As a journalist that mainly focuses on business, as early as the end of his first year I wrote there are two Putins: the political one and the economic one. And they are very different.

The political one kills people with poisoned tea, represses free speech and crushes democratic opposition. The economic one has overseen the most remarkable economic revival, restored Russia as a great economic power, made some deep and very effective reforms to things like the tax system and to deal with Russia’s demographic crisis (although he hasn’t solved that problem), and lifted an entire generation out of poverty into relative prosperity.

I went to his very first state of the nation speech where he put demographics at the top of the policy priority list and set the goal of “catching up with Portugal as the top economic priority. And he put his money where his mouth is by hiring German Gref, now the head of Sberbank, as an economic guru who launched the “Gref Plan” to implement a radical economic reform plan. It was a heady time. Gref was a total outsider and had no power of his own, yet thanks to Putin’s personal backing he pushed through radical change after radical changed that has evolved into today’s National Projects 2.1 that is still a top domestic policy initiative.

The heavy irony is that Putin’s ambition is not to recreate the Soviet Union, but, as he recently laid out in great detail in his Valdai speech, to Make Russia Great Again.

His quote about “the greatest tragedy of the 20th century was the fall of the Soviet Union” is widely abused as the rest of that quote, never mentioned, is “… for Russians who found themselves trapped in “foreign” countries…” ie living in the newly independent 15 republics created in December 1991.

European Dreams

And Europe was up for a partnership with Russia in general and Putin in particular – until Russia started booming in the second decade of this century.

Putin has always seen the best way to make Russia great is through partnership with Europe. Former First Deputy Prime Minister Arkady Dvorkovich told me this personally: “China is too far away, and they are too different from us. Russia is a European country. Our future is with Europe.”

It is also widely forgotten that Putin’s first foreign trip as president was to the UK, where he stood on the floor of the House of Commons and announced a 50:50 joint venture with BP and the privately owned Russian oil company TNK. This was not a 51:49 joint venture, but an unheard of even split 50:50 joint venture – in other words, a true partnership. Tony Blair jumped at the deal and BP made an absolute mint over the next two decades.

Putin then went on to Brussels where he met with Mario Draghi, then head of the EU, and asked to join the EU. He was told “no.” Russia is simply too big and would have swamped the EU institutions. Putin accepted that, so he went on to do the next best thing: he started to build the Eurasian Economic Union (EUU).

I interviewed the architect of the EEU several years later, who told me it was specifically designed to mirror the EU (unlike its precursor, the Customs Union), using exactly the same rule book, so that it could easily integrate with the EU and create a single market “from Lisbon to Vladivostok” – a phrase much loved by Putin for many years.

He even asked to join Nato, which was met with a half measure: the Russia-Nato council.

But of course, it went wrong most obviously from the 2014 annexation of the Crimea. In the run up to the annexation, the EU blocked many of Russia’s attempts to create other partnerships like BP-TNK that Putin pursued, like buying shares in EADS (Airbus) in an attempt to get a seat on board to rescue Aeroflot and Russia’s aviation industry, or its attempt to buy the bankrupt Opel carmaker to rescue AvtoVaz. That deal was blocked by the US to prevent the technology transfer to Russia that would have created a European automotive powerhouse. Putin, who had personally brokered the Opel deal with former German Chancellor Angela Merkel, was visibly furious when Washington put the kybosh on it. And that is not to mention Russia’s 18-year-long WTO accession saga that finally ended in 2012 – probably the high water mark in East-West relations, when the long-sought “partnership” looked like it might work. Russia made a lot of significant concessions to get into the WTO, like basically sacrificing its entire pork production business to European imports.

Putin became disillusioned as it became clearer and clearer that the EU would never accept Russia as a partner. The Maidan revolution in Ukraine in 2014 crystalised these fears. Putin came to the conclusion that the West was actively afraid of Russia’s competition in things like aviation and automotive and actively trying to hobble Russia’s development, but at the same time the EU was happily helping itself of Russia’s cornucopia of raw materials and giant consumer market, the largest in Europe.

These tensions came to a head when EU foreign policy chief Josep Borrell came to Moscow in 2021 to broker a deal and repair relations with an increasingly brittle Kremlin. He suggested trade should be separated from politics – a compromise. But it was too late. Borrell was met by Russian Foreign Minister Sergei Lavrov who humiliated the EU diplomat by having three EU diplomats expelled while the two men were sitting across the table from each other and then followed up with the “new rules of the game” speech delivered in February 2021 at a joint press conference. Lavrov’s main point was: Russia would no longer tolerate the West doing business with one hand and applying sanctions and interfering with Russian domestic policy with the other. With this speech, Putin’s patience with the West had run out and the speech was the first shot fired in what would become the Ukraine war a year later.

Putin’s dream of a single market from Lisbon to Vladivostok was dead. Putin never wanted to partner with China – Russians remain as afraid of China as the West is – but given the failure of building a European partnership, the Chinese option is the obvious alternative. By rejecting Putin’s overtures to build real working relations and engaging with Russia, albeit a difficult and daunting prospect, the upshot has been to drive Moscow into Beijing’s arms, which I suspect will prove to be a major geopolitical blunder in the long-term.

Economic revival

As the commentary on Putin’s 25 years in office comes out the focus is on the half dozen wars he has overseen and the growing repression. These things are true, but the Russians themselves focus on the economic revival Putin engineered and the stability he has brought.

It’s hard to overstate how much Russians hated the Yeltsin-era. In the West, Yeltsin is seen as a hero who tried to bring democracy to Russia. In Russia he is seen as the man who destroyed the country.

The Western-advocated “shock theory” introduced by Prime Minister Yegor Gaidar inflicted almost a decade of misery and an early grave for tens of millions of men. I arrived in Russia in 1993 just after the price liberations were put in place and inflation was running at 1,400% a year – 4% a day. The economic crash was an order of magnitude worse than anywhere else in the former Warsaw Bloc, as detailed by bne IntelliNews’ despair index, and the payment system collapsed so completely that Russia became a barter economy as its money became meaningless – the so-called virtual economy, made famous by academics Barry Ickes and Clifford Gaddy – again something that is rarely mentioned these days.

Putin quickly fixed all these problems, starting with a complete overhaul of the labour code that slashed Soviet bureaucracy and the introduction of a flat tax regime that unfettered business. The tax rates – the lowest in Europe – has remained untouched for almost all of Putin’s tenure. It has only just been amended in the last few months to finally introduce the beginnings of progressive taxes 25 years later.

The effects of these reforms were stunning. Russia was still reeling from the default and devaluation on August 13, 1998 when Putin took over at the start of 2000. The International Monetary Fund (IMF) was predicting that Russia’s economy would spend years in recession at the time; GDP expanded by 10% that year in a record that has never been matched. That marked the start of a totally unexpected decade-long boom that transformed everyone’s lives.

“At the time the average per capita income in the US was $30,000. If you took that as the baseline for the equivalent incomes in Russia in 2000, then by 2008 the equivalent per capita incomes in Russia were $600,000 a year,” a Russian friend explained to me to describe what the change felt like.

Again, it is hard to overemphasise how dramatic the economic changes of the first two decades of Putin’s rule have been:

GDP Size:

2000: Russia’s nominal GDP was approximately $278.3bn.

2024: The nominal GDP is projected to be around $1.862 trillion.

Debt Levels:

2000: Central government debt stood at 55.9% of GDP.

2024: This ratio decreased to 14.6% of GDP and it can cover every penny of this debt with its cash reserves.

International Hard Currency Reserves:

2000: Russia’s foreign exchange reserves at the start of 2000 were an astonishingly low $12.5bn.

2024: By the start of sanctions in 2022 they had reached $600bn.

GDP per Capita:

2000: GDP per capita (nominal) was about $1,902.

2024: Now it is approximately $13,005 in nominal terms and $47,299 in PPP (purchase power parity) adjusted terms, on a par with many EU countries.

Average Incomes:

2000: The average monthly income was a mere $79 per month in nominal terms.

2023: Since then, incomes have decupled to $948 per month in nominal terms, by far the highest of any Former Soviet Union (FSU) country. In PPP adjusted terms that is equivalent to around $2,100 a month – again on a par with most EU countries.

This transformation was brought about by Putin’s decision to raise public sector wages by about 10% every year for a decade starting in 2000. Putin realised that the gap between private and public sector wages – half the country is budgetniki – was getting so big that it would inevitably lead to social unrest so he shared Russia’s petrodollar riches with the hoi polloi.

Inflation Levels:

2000: After the hyperinflation of the 1990s, inflation was still high, with rates around 20.8%, and didn’t fall to single digits until 2007.

2024: Inflation remains the main macroeconomic headache but is still in single digits but projected to be around 9% by year-end.

This economic transformation is the foundation of Putin’s popularity. It is not that the Russians love Putin, but they are grateful to him for normalising their lives. They may not like the way he runs the country, but they don’t rebel as they are more scared of losing what they have gained than demanding change in the hope they could live better under a more liberal system.

Moreover, Putin job of making sure there is no alternative has been made easier by the fact that the opposition has remained fissiparous and ineffective. The two opposition politicians that might have replaced Putin – Boris Nemtsov and Alexey Navalny – were both murdered. But even if they had been allowed to run for office, most Russians see both as untested and unqualified to run the country. The irony of Russian elections is Putin would probably still win even if they were free and fair. When criticised by a reporter as Putin took office for the fourth time, he shot back: “And how many terms has Merkel served? Four, isn’t it?” She had just been re-elected for a fourth time two months earlier.

As for the Ukrainian war, Russian surveys conducted in 2022 university found that Russians thought that going to war with their “brothers” in Ukraine was a stupid idea and were very uncomfortable with the idea of Russian troops invading Ukraine. However, since then similar surveys have found that once the war started, and it is universally seen as a war with Nato, which is supplying most of Ukraine’s weapons and half its money, Russia needs to win.

That is another thing that Putin gifted Russia with: the restoration of the famous Russian national pride after the humiliation of losing its superpower status following Yeltsin’s dissolution of the Soviet Union – another reason why Yeltsin is so hated in modern Russia. Today patriotism is at an all-time high.

Make Russia Great Again

Rosenberg is aware of all this but like most is not sure how all this fits together to explain Putin.

“From the speeches he gives, the comments he makes, Putin appears driven by resentment, by an all-encompassing feeling that for years Russia has been lied to and disrespected, its security concerns dismissed by the West,” Rosenberg says. “But does Putin himself believe that he has fulfilled Yeltsin’s request to “take care of Russia?”

Looking at the story from the business perspective I think this is exactly how Putin sees his relationship with the West. As one of the best-known reporters in Russia, Rosenberg had the opportunity to pose this question to Putin personally last month at the annual marathon presidential press conference.

“Boris Yeltsin told you to take care of Russia,” Rosenberg reminded the president. “But what of the significant losses in your so-called ‘special military operation’, the Ukrainian troops in the Kursk region, the sanctions, the high inflation. Do you think you’ve taken care of your country?”

“Yes,” President Putin replied. “And I haven’t just taken care of it. We’ve pulled back from the edge of the abyss.”

Rosenberg said Putin portrayed Yeltsin’s Russia as a country that had been losing its sovereignty. He accused the West of having “patronisingly patted” Yeltsin on the shoulder while “using Russia for its own purposes”. But he, Putin, was “doing everything”, he said, “to ensure Russia was an independent sovereign state”, Rosenberg writes.

“Presenting himself as the defender of Russian sovereignty: is this a view he’s come up with retrospectively to try to justify the war in Ukraine? Or does Putin really believe this take on modern Russian history?” Rosenberg asks. “I’m still not sure. Not yet. But I sense that it is a key question.”

Personally, I think the answer to this question depends on which perspective you choose to take. Obviously, most of the coverage of Russia today compares Moscow of today with London, Washington and Brussels of today — a comparison of the values, democracy, corruption, wealth etc. – and obviously Moscow falls down badly.

But if you take the other perspective, the Moscow of today set against the Moscow of January 1, 2000, then you get a completely different picture, one where Putin’s complaints seem much more reasonable and one where he appears as a much more effective and successful leader. Following the dissolution of the Soviet Union in 1991, since 2000 Russia has made the most progress and is the more prosperous of all the FSU countries created on that day.

The problem is that both these perspectives are valid. The question is which one do you choose, or how do you combine them?

As Rosenberg ends his article: “The answer to it may well influence how the war ends – and Russia’s future direction.”

By Zachary Paikin & Mark Episkopos, Responsible Statecraft, 1/2/24

As the incoming Trump administration prepares to launch negotiations aimed at ending the current phase of hostilities between Russia and Ukraine, the question of security guarantees is certain to feature prominently in talks.

Talk of security guarantees is nothing new — indeed, it has underscored much of the drama that has unfolded since Russia’s initial military buildup in 2021. Moscow insisted that the United States and NATO undertake legally binding obligations in its two “draft treaties,” published on the eve of its full-scale invasion of Ukraine, aimed at guaranteeing Ukraine’s neutrality and rolling back NATO forces in Central and Eastern Europe to where they were prior to the 1997 NATO-Russia Founding Act. Kyiv, for its part, naturally wants ironclad measures that can ensure it will not fall victim to another war of aggression in the years ahead.

To some extent, however, this is all déjà vu. Thirty years ago last month, the Budapest Memorandum was signed.

Aimed at providing security assurances to Ukraine, Belarus and Kazakhstan in exchange for their entry into the Nuclear Non-Proliferation Treaty, the Budapest Memorandum committed Russia, the United States and the United Kingdom to abstain from military and economic coercion against these three newly independent post-Soviet states. Its lessons offer important clues for how to bring peace to what has tragically become a war-torn region.

The memorandum has become the source of considerable mythmaking following Russia’s brazen violation of Ukrainian sovereignty on February 24, 2022 (though some have asserted that the United States was the first to violate the memorandum with its sanctions against Belarus). Most notably, Atlanticists and pro-Ukrainian advocates often insist that Kyiv gave up its nuclear weapons — the ultimate deterrent and guarantee of one’s own security — in exchange for promises that its borders would be respected.

Of course, these missiles were Soviet — they were never functionally Ukrainian and were beyond Kyiv’s ability to maintain. Lost even more often in this discussion is the fact that the newly minted Ukrainian state prohibited itself from accepting, producing or acquiring nuclear weapons in its 1990 Declaration of State Sovereignty, the same declaration in which Kyiv announced its “intention of becoming a permanently neutral state.”

Famously, the memorandum offered Ukraine security assurances rather than legally binding security guarantees, a distinction explicitly stressed by American diplomats during the talks. Indeed, the memorandum was never approved by the U.S. Senate, as treaties must be, because it did not proffer any security guarantees to Ukraine. Nor did it commit the U.S. — or any other signatory — to any specific punitive action in the event of aggression against Ukraine, affirming instead a “commitment to seek immediate United Nations Security Council action to provide assistance” to Kyiv in case of an armed attack.

Given the history of the drafting process, Washington cannot be accused of pulling a fast one on Ukraine with ambiguous language or by using terms that may have been lost in translation. Simply put, the United States has never promised to fight for Ukraine — a position held in 1994 and reaffirmed by the Biden administration since Russia’s full-scale invasion. Any security guarantees offered to Ukraine aimed at bringing current hostilities to a close will be novel ones, not compensation for the West having supposedly failed to uphold its existing obligations.

In this context, Western states will need to weigh carefully just how far they are prepared to go, since Russia has demonstrated its willingness to fight for Ukraine while the West — initial suggestions of European peacekeepers aside — has not. French President Emmanuel Macron’s discussion earlier this year of sending European troops to Ukraine to prevent a Russian victory was promptly shut down by Western allies. One could argue that Ukraine’s status as a security “gray area” is what prompted Russia’s invasion, but permanent neutrality is just as plausible a resolution to this dilemma as NATO membership.

But perhaps the greatest lesson to derive from the history of the Budapest Memorandum is that context matters. The memorandum was agreed at a time when relations between Russia and the West were much more favorable (although by the end of 1994, Boris Yeltsin was already warning of the risk of a “cold peace”). The conclusion is that diplomacy — an evolving mixture of deterrence and reassurance — is consistently needed to tend to international relationships to ensure that agreements are upheld. The same will be true when it comes to “guaranteeing” that Russia will never invade Ukraine again.

By contrast, the Western approach to relations with Russia in the post-Cold War era has often been more legalistic than diplomatic — “throwing the book” at Moscow by pointing out the alleged ways in which it has failed to live up to its international commitments. Yet Kyiv was all too happy not to implement the Minsk agreements, which brought the initial rounds of fighting in the Donbas conflict to a halt, using the intervening years between 2015 and 2022 to strengthen its hand. Similarly, Moscow believed that the post-Cold War status quo was imposed upon it at a time of national weakness — something it sought to rectify by way of its “draft treaties.”

It is easy to say pacta sunt servanda, that agreements must be kept. But this requires building and maintaining trust. Doing so will require all sides to stop airing their tired narratives in public — such as when Moscow dismisses the perspectives of Central and Eastern European states as Russophobic or when Western countries pointlessly insist that NATO expansion is directed against no one — and recognize one another’s security concerns as legitimate.

By Daniel Davis, 1945, 12/31/24

Daniel L. Davis is a four-time combat veteran, retired Army Lt.Col. at Defense Priorities and host of the Daniel Davis Deep Dive show on YouTube.

Donald Trump has been clear since the early part of his presidential campaign that he would end the Ukraine war “in one day.”

He has been even more emphatic about seeking a negotiated settlement since winning the election.

But now, barely three weeks before assuming office, Russian Foreign Minister Sergey Lavrov has publicly put the kibosh on the plan advocated by Trump’s Special Envoy to Ukraine and Russia, retired General Kieth Kellogg.

What does that rejection signal for the likely ending of the Russia-Ukraine War?

The Ukraine War Headed Into 2025: What Happens Now?

Short answer: it’s not suitable for Kyiv – but even that ‘ugly’ deal is better than the alternative: continuing to fight until the Ukrainian Army suffers an outright military defeat in the field.

Here’s the sober truth: too few in the West (and especially in Washington) are still unable or unwilling to contemplate: the war is already lost for Ukraine, and there is nothing militarily that can be done to avert that outcome now. The best that can be done for the Ukrainian side is to conclude the war on the best of the ugly terms Trump can muster for Ukraine.

It is crucial Gen. Kellogg and Trump, along with his entire national security team, understand the ground-truth realities of this war before entering negotiations. 

Thus far, they have not.

According to an analysis of the Kellogg Plan, Trump would seek to force Russia to the negotiation table by a series of carrots and sticks, starting with a ceasefire and then negotiations to end the fighting.

Key to the Kellogg plan is to postpone the thorny issue of NATO membership for Ukraine by a decade or more and the “concession” of allowing Russia to keep the territories it possesses upon the assumption of negotiations.

It would also offer a series of bilateral security guarantees for Ukraine and keep pressure on Russia by continuing to provide military aid to Ukraine until a deal is reached. British advocates have also offered U.K. troops as possible peacekeepers to patrol the final deal.

However, there is a significant problem with these plans: they assume the Russians would submit to such pressures and agree to the concessions.

They will almost certainly do neither.

Russia Response to the Ukraine Peace Plan: Bad News

On Monday, Lavrov rejected some of the key provisions, saying the Russians “are certainly not satisfied with the proposals sounding on behalf of representatives of the president-elect’s team.”

Last week, Lavrov said any talk of a ceasefire was a “path to nowhere” and that the Russian side would not consider one. What they would consider, he said, is what Putin declared on June 14th when he said the war could end if several key conditions were met.

These include the complete surrender of the four oblasts Russia annexed in 2022, Donetsk, Luhansk, Zaporizhzhia, and Kherson, the declaration of no NATO membership ever for Ukraine, and security guarantees for Russia. Putin has said he is not interested in a ceasefire because he claims NATO would merely use the time to re-arm and retrain Ukraine’s Army and resume the fighting.

Further, an examination of the battle map shows significant portions of those four oblasts still under Ukrainian control. To reach a deal under Russia’s position, Ukraine would have to give up significant swaths of its territory that it had not lost to Russia.

That means to end the war on diplomatic terms the Russians say they would accept, Trump would have to agree to a deal that surrenders even more Ukrainian territory and publicly state Ukraine will never be admitted to NATO – both highly emotional issues that presently no one in the West or Ukraine will contemplate. Here’s the massive problem for Trump and Ukraine: these aren’t ‘maximalist’ desires on Russia’s part; they’re entry points for discussions.

Suppose Trump doesn’t agree to these terms. In that case, the Russians will simply continue the war, slowly destroying the Ukrainian Armed Forces, until eventually they capture by force of arms what they’re seeking to obtain by negotiations. Russia can militarily accomplish these objectives, even if at a very high price. And that’s what the Trump team must understand. Putin doesn’t have to negotiate. He can seize what they want by force, and there’s nothing Trump or Zelensky can do to stop them.

By Glenn Diesen, Substack, 12/13/24

The global economy, including capitalism itself, is currently being transformed by a new industrial revolution, as the digital and technological world start to merge with the physical one. Russia’s ability to remain a great power and even to survive as a state will depend on the extent to which it can develop technological sovereignty in the new age.

Technological sovereignty refers to the ability of a nation to have control over its own technological infrastructure. As digital giants increasingly transform and take over crucial parts of the economy, a state must have a solid national digital ecosystem to enjoy industrial and political sovereignty. The objective of technological sovereignty is to enhance the competitiveness of the production process, to elevate the standard of living for citizens, and to reduce dependency on foreign powers to the extent it diminishes political sovereignty.

Russia’s strength is its maturing national digital ecosystem, although its weakness is the apparent absence of a clear technological and economic strategy as it moves forward. Because of this, Russia is unlikely to take a leading innovating role in the world, although a follower strategy would be ideal.

Russia switched from a Marxist economy to a neoliberal economic model in the 1990s and has since pursued course correction towards a not clearly defined strategy policy of technological sovereignty. While Russia has made great progress in advancing technological sovereignty, one often gets the impression that Russia’s economic model is ad hoc and largely reactive in response to Western economic coercion. What appears to be missing is a wider debate and clearly formulated strategies about Russia’s technological sovereignty as the most important component of its economic and political future.

This article argues that since the Industrial Revolution and the birth of capitalism, there have been concerns over the concentration of economic power domestically, as well as concerns over excessive dependency on foreign actors. The ability of a state to resolve these issues depends on the strength of its technological sovereignty.

The Domestic Economy: The Distribution of Wealth and Competitiveness

With each new technology that increases productivity, the subsequent increased income will be concentrated in the hands of the capital owners. If left unresolved, this may eventually lead to economic hardship, societal fragmentation and political instability. This challenge posed by technological innovations were also acknowledged by liberal economists, such as David Ricardo:

“My mistake arose from the supposition, that whenever the net income of a society increased, its gross income would also increase; I now, however, see reason to be satisfied that the one fund, from which landlords and capitalists derive their revenue, may increase, while the other, that upon which the labouring class mainly depend, may diminish”.[1]

This trend is exacerbated by rent-seeking, in which actors who hold existing resources or favourable market conditions can extract wealth without adding reciprocal value to production. In the age of economic neoliberalism, it is worth remembering that liberal economists such as Adam Smith, David Ricardo and John Stuart Mill all recognised the need to limit the power of the rentier class in order for capitalism to function.

An ideal and stable capitalist system would aim to reduce the concentration of wealth, improve the standard of living for people, and increase economic competitiveness by taxing rent-seekers and use the funds to develop infrastructure. During the rise of America’s version of industrial capitalism in the 19th century, government-funded infrastructure and education development improved the standard of living for many and made industries more competitive in international markets, which ideally could have been funded by taxing the rentier class.

Landlords, banks, and monopolies are the most common examples of rent-seekers, which lay the foundation for an oligarchic class that diminishes economic competitiveness by extracting wealth from the production process. Digital giants can fall within all three categories as digital platforms provide the “land” for digital services, they increasingly become providers of banking and financial services, and digital giants have a proclivity for monopolies.

Digital giants naturally form monopolies due to limited ability for diversification and the convenience of having one platform as a shared marketplace. Capital-intensive monopolies emerge due to high fixed costs and low variable costs of establishing and expanding digital platforms, which resembles the economic thinking that led to the creation of 19th-century railway monopolies. The high fixed cost includes the high processing power and access to an abundance of data, while the variable cost of operating in the digital realm is minimal. Subsequently, digital monopolies emerge due to the high entry barrier for competitors and the incentivise for predatory pricing by the dominant company.

Digital giants represent the key infrastructure that can either function as a public utility to increase the standard of living and increase competitiveness, or as rent-seeking monopolies that undermine capitalism. Amazon as a digital platform made over $50 billion in sales in the EU in 2022 and paid zero tax, just like it had the year before. Similarly, Uber is a platform that connects providers (drivers) and consumers (passengers), which results in a large profit for the company that derives from the platform. Furthermore, the data that acts as the lifeblood for the development of AI, is also extracted and sent across the Atlantic.

Digital giants have become the largest companies in the world, with an immense concentration of wealth as there is no need for a large workforce. Furthermore, programming jobs are often outsourced to a global pool of freelancers or replaced with temporary and contract jobs. The “gig economy” is ushering in an era of neo-feudalism in which today’s labourers become the new serfs. As new technology intensifies the concentration of wealth, some national control over the tech giants is becoming much needed. All the largest digital platforms in Europe are American, which is why Europe’s economic future and ambitions for political autonomy will deteriorate over the next few years.

Tech giants will adopt even greater monopolistic tendencies and subsequent rent-seeking abilities due to their economic scope; leadership in one industry provide a competitive advantage in seemingly unrelated industries. Ricardo’s principle of comparative advantage is turned on its head as it becomes a competitive advantage to do everything in today’s day and age. Digital giants are more capable of using shared technological infrastructure, common development and design processes, complementary data analytics, and overall synergy effects. A new economy is emerging in which digital companies begin to absorb entire industries. Case in point, in both China and Russia: domestic digital companies have launched self-driving cars, taken over large parts of the taxi industry, food delivery and even launched their own payment systems.

In the Fourth Industrial Revolution, digital giants are becoming even more powerful rent-seekers. The Fourth Industrial Revolution can largely be defined by the digital world manipulating the physical world with self-driving cars, automation, robotics, the Internet of Things, Virtual Reality, additive manufacturing, drones, smart cities, smart infrastructure, blockchain, digital farming, biotechnology and digital health solutions. With artificial intelligence, every aspect of the economy and society will be revolutionised, and the failure to establish a domestic digital ecosystem will result in technological colonisation by foreign powers.

The International Economy: Technological Sovereignty and Political Independence

Industrial capitalism of the 19th century linked industrialisation to nation-building as excessive dependence on foreign technology and manufactured goods undermined political sovereignty. Economic interdependence is required to increase economic efficiency and prosperity, yet the political consequence of interdependence is some loss of autonomy and some gain of political influence. States subsequently seek to manipulate the symmetry of interdependence by reducing one’s own dependence on others and increasing the reliance of others on one’s own economy.

Geoeconomics is largely about manipulating the symmetry of economic interdependence as it enables a state to increase both its autonomy and influence. Advanced technology is at the core of strategic industries, given the reduced ability to diversify, which implies higher revenue and dependence. Friedrich List aptly argued that the logic of economic liberalism for market efficiency must be balanced by the political realism of the world being divided into sovereign states: “As long as the division of the human race into independent nations exists, the political economy will as often be at variance with cosmopolitan principles”.[2]

Britain’s hegemonic strategy of the 19th century was, to a larger extent, dependent on a monopolistic position in manufacturing, which produced high revenues and political influence. Barriers to entry, intellectual property rights protection, and anti-competitive practices can be considered rent-seeking activities in which the technological hegemon’s activities result in income. Furthermore, technological hegemony creates asymmetrical interdependence in which access to vital technology can be converted into political influence.

Britain repealed its Corn Laws in 1846, as free trade was instrumental in cementing technological and industrial leadership. Under free trade, Britain’s mature industries (high quality, low cost) could outcompete the infant industries (low quality, high cost) of other countries. Free trade was thus seen as a policy to saturate foreign markets with its manufactured goods and thus obstruct their industrialisation. As argued in the British parliament, with free trade “foreign nations would become valuable Colonies to us, without imposing on us the responsibility of governing them”.[3] David Ricardo’s concept of comparative advantage similarly envisioned that the technological competency of manufacturing would be concentrated in Britain, while the rest of the world could compete for the export of agricultural produce: “It is this principle [comparative advantage] which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England”.[4]

Alexander Hamilton’s Report on Manufacturers laid the foundation for the American System in which the government used protectionist means to industrialise as excessive dependence on Britain would undermine America’s political independence. The lessons learned from the American system were also found in Germany, largely through the work of Friedrich List, who warned against becoming Britain’s technological colony by failing to industrialise: “The mother nation supplies the colonies with manufactured goods and obtains in return their surplus produce of agricultural products and raw materials.[5]

Following the destruction of China in the Opium Wars, Japan also realized that technological sovereignty and industrialisation were required conditions for political independence. Erasmus Peshine Smith, a second-generation economic nationalist supporting the American system, served as an advisor to the Japanese Emperor in the 1870s following the Meiji restoration to assist with the development of a Japanese version of the American system to preserve Japan’s sovereignty.[6]

Russia learned a similar lesson after its defeat in the Crimean War in 1856, largely due to its lack of industrialisation. The subsequent Great Reforms starting in the 1860s eventually led to the industrial policies of Sergey Witte in the 1890s that were inspired by Friedrich List. The lessons of the past were seemingly forgotten as Russia succumbed to neoliberal economic practices in the 1990s. Under Ricardo’s principle of comparative advantage, Russia de-industrialised by exporting its natural resources and importing industrial goods. Making matters worse, the revenue fuelled a rent-seeking oligarchic class that reflected growing corruption within the country, which could be cultivated by foreign powers.

Russia gradually began to rediscover economic statecraft and reverse the energy curse by instead using its revenue from energy to temporarily subsidize infant industries until they became competitive in international markets. However, many of these policies were a response to economic sanctions and its increasingly problematic relationship with the West.

A Russian Strategy of Technological Preparedness

Russia should not embrace a policy of economic and technological autarchy that would render its industries uncompetitive, yet it should also avoid excessive dependence on foreign technologies. The overarching goal must be to balance technological sovereignty with economic liberalism.

Russia’s leading digital platforms are already Russian, and the objective should be to pursue technological preparedness. While Russia can pursue innovative leadership in certain areas, Russia should pursue a follower strategy of “technological preparedness” in other areas. Technological preparedness entails the capability to replicate and adapt foreign innovations rapidly into its domestic digital ecosystem and control its own data. Imitation is essential because it is unnecessary for every company and country to reinvent the wheel. Technological preparedness requires the technological know-how, domestic technological ecosystems, skilled workforce, and government support required to rapidly adopt new technologies and implement spin-offs.

A follower strategy has certain advantages as more resources can be devoted to implementation. A technological hegemon will seek to slow down technological diffusion and extend the first-mover advantage, while technological followers will seek to encourage faster technology proliferation. The emergence of a multipolar international system subsequently improves Russia’s position.

The guiding objective should be to develop a domestic digital ecosystem in which Russia controls a majority share of the dominant platforms. China is evidently the most important partner for Russia, although technological partnerships with other rising powers such as India would enable Russia to diversify and thus avoid excessive dependence on a more powerful actor. Case in point, Russian digital giants such as Yandex developed a partnership with foreign partners such as Uber in the self-driving car and taxi industry, which even enabled Yandex to eventually buy out Uber’s share.

Throughout history, states have sought to establish a certain degree of national control over strategic industries such as shipping, energy and agriculture due to national security. National control over digital giants is evidently an issue of national security as they transform all areas of the economy and society, concentrate wealth, and create dependencies at an unprecedented level. China is building its superpower status based on technological sovereignty, while Europe discusses digital industrial policies and nationalising AI due to its disruptive impact. The prevailing argument in Washington is that what is good for Silicon Valley must be good for America. Russia should formulate a similar policy to strengthen technological sovereignty.