Geopolitics: The Investment Perspective
Markets and investors are in their comfort zone when they can count, quantify and measure things and put a value on the relevant assets including bonds, equities, property and commodities. Demand and supply statistics; GDP and economic growth; inflation; employment data; business sentiment indices; wages and many more are its bread and butter. They are less comfortable with intangibles and things they either cannot see or find difficult to understand. Such are designated TBD: To Be Determined, or more prosaically, Too Bleeding Difficult. But overall, markets see themselves as rational and pragmatic.

With many moving parts, geopolitics are difficult. They are usually contextual to investors rather than immediately relevant, though occasionally an event such as Putin’s invasion of Ukraine catches them off-guard and barges its way to front and centre stage, forcing investors to react. The question for markets is, do geopolitics really matter, or are they merely investment wallpaper, always in view in the background but seldom diverting?

Step back, look at the basics and join the dots: economics is essentially the sum of all human interactions distilled into data denominated in pounds, dollars, euros, yen and any other currency; we measure growth, decline and rates of change and look for correlations and relationships. We have economic theorems, some interpreted not always correctly as immutable laws, and we use them to extrapolate data to predict the future with varying degrees of accuracy. But at the base of it all are humans; humans are sentient, prone to being fickle and fallible, sometimes volatile and not always rational. They have a mind of their own, expressed through consumer behaviour, likes and dislikes, and not least most are allowed a say at the ballot box in how they are governed. Politics shape social and economic policy, the outcomes of which are directly relevant to us. Politics and geopolitics with all their competitive (and protectionist) tensions both change behaviours and bend to electorates. Economics do not operate in a vacuum.

Today, the proverbial little green man arriving from Mars looking purely at the markets in isolation would never guess that geopolitically the world is its least stable and most dangerous for at least four decades. Markets remain almost entirely focused on inflation, central banks, monetary and fiscal policies, climate change and technology.

Consider the following: on a 10-year outlook, the difference in the yield on US government bonds between the Treasury cash bond (4.2%) and its inflation protected equivalent (1.9%) is 2.3%, virtually in line with the Federal Reserve’s mandated inflation target of 2%; the differential over 30 years is the same. Peace, stability, calm and tranquillity are implied. The US 10 Year Treasury yield is the proxy for the global risk-free rate of return (i.e. what an investor requires over 10 years for what is considered to be riskless investment): today 4.2%. Hard on the front line in Europe, very much at risk with being potentially on Putin’s shopping list in the foreseeable future is Poland: the yield on its 10 Year government bond is 5.2%, only one point higher than the US. What is it discounting (or not)? Is it correct? Discuss. In this third analysis of the shifting geopolitical landscape (which thanks to Putin has seemingly become an annual affair), I attempt to bring many strands together: the military state of play in Ukraine and the Middle East; the western response to both and other future threats; the challenges posed by powerful competitive forces encompassing climate change; the rising influence of the Global South; also, among the western democracies, the accelerating polarisation and sometimes nastiness of domestic politics, challenging historic norms and producing less predictable (or comfortable?) outcomes; Trump 2.0.

This is not intended to be prescriptive “here are all the answers, this is what you must do”. What it should do is provoke debate, encourage an open mind about the possibilities in an inexorably changing environment for which the future is difficult to predict with certainty. It should then provide a framework for constructive discussion among advisers and with investors at the macro level about attitudes to risk, term and risk premia in fixed income, yield spreads between geographies, equity valuations etc.

The analysis focuses heavily on the risk of war and how to mitigate against it, especially through defence spending; the ESG investment movement is naturally heavy on exclusions (i.e. what it will not invest in) often including defence contractors and energy companies, particularly in the oil and gas industries (indeed just this month, Barclays has joined a lengthening list of lending banks no longer prepared to fund oil exploration, despite the obvious need for oil beyond 2030). As the possibility of war increases and coincides with the significant competitive forces that are inevitable in the climate change compression period over the next decade on the path to carbon net-zero, hopefully the analysis prompts a broader discussion in an ESG context about responsibilities to protect society and democracy as well as the planet.
Introduction: from flash to a bigger bang?
World War Three. Is it going to happen? Are we in a semi-skimmed, war-lite proxy version of it already? Or is it merely alarmist talk, all bluff and bluster, wolf-crying from sabre-rattlers looking for monstrous threats where only overblown ones exist.

Exactly two years ago, when I published “Anatomy of a Crisis” before President Putin launched his invasion of Ukraine, I drew the parallel with the Munich Crisis of 1938 and Hitler’s annexation of the Sudetenland in Czechoslovakia. I described how in both cases a predominant mood of Allied appeasement, compounded by vacillation, complacency and disbelief, had allowed the potential aggressor to conclude that were he to strike, no direct military retaliation from any related parties would result. That proved as correct with Putin as it did with Hitler. In the case of Ukraine, NATO members did eventually respond with military supplies and financial aid but without the unanimity and unequivocal determination to see Putin expelled and Ukraine’s sovereignty restored.

As we approach the third year of significant conflict in Europe and despite nearly $300 billion being spent by its supporters to keep Ukraine in the war, far from an improved situation, Zelensky finds his position deteriorating. More worryingly, beyond Ukraine the world has become geopolitically even less stable. In what is supposed to be a rules-based order overseen by the United Nations and its Security Council, how is it that in 2024 Ukraine’s sovereignty and national integrity are still in doubt when it is being wilfully destroyed and dismembered by a permanent member of that self-same Security Council? Israel also faces an existential threat: promised with extinction by Iran whose sentiment is promoted, shared and acted upon at large and with determination by its proxies.

If Nazi Germany, Fascist Italy and Imperial Japan were the aggressor Axis powers of the 1930s and 40s, nearly a century later a new, significantly more complex Axis has identifiably coalesced. Today, the affiliations, agreements and mutual understandings binding the autocracies of Russia, China and North Korea, and the theocracy of Iran, and their international supporters, pose the greatest threat to global security since the height of the Cold War nearly half a century ago. Ukraine was the original epicentre for significant state-on-state military conflict in 2022; now, secondary tremors are self-evident in the Middle East, Arabia and the Persian Gulf. But as we have seen in the last couple of months the reality is that even if not directly connected with each other, geopolitical tectonic tensions now span the entire Eurasian landmass, ranging from the Balkans and Finland in the west and north, all the way down through the Caucasus, spreading east and taking in Pakistan and Afghanistan, and finishing in the Pacific region with Taiwan and the Spratley Islands.

Surely the two most important questions are these: first, with all the aggregate economic, financial and military might of the western powers, how have we allowed ourselves almost to reach a tipping point on the path towards all-encompassing global conflict? Second, more importantly, from here how do we prevent that tipping point becoming a self-fulfilling prophesy?

President Biden has characterised the new struggle as one between “Good and Evil”. Essentially “you’re with us or you’re against us”. What is evident is that in laying down the challenge in such black and white terms with the intention of shaming, isolating and containing the bad guys, others do not necessarily see it in the same light: throwing down the gauntlet has produced reactions in many uncomfortable shades of grey. In this analysis we will look at the state of play and consider the future. In a dynamic and unpredictable environment we do not profess to have all the answers. Today’s circumstances can only be a snapshot. However, from an investment standpoint, what is important is offering perspectives to create a constructive framework for discussion about potential risk and reaction.
Military Preoccupations 1) The War in Ukraine
If President Zelensky himself remains wholly focused on expelling all Russian troops from every occupied zone in his country and fully restoring Ukraine’s sovereignty and re-establishing its pre-2014 border (i.e. before Putin annexed The Crimea and held his rigged 2022 referenda in the Donbas oblasts allowing him to claim Russian title), whatever their public protestations to the contrary the same steadfastness of purpose cannot be said for his NATO supporters. As challenging for Zelensky are the evident divisions within Ukraine about his prosecution of the war and what needs to happen from here.
Zelensky’s familiar refrain: “More please! (Sir)”
Zelensky is a remarkable man: democratic president; national leader; warlord; statesman; international figurehead. And unrelenting beggar. Every bit as much as in 2022, he finds himself still forced doggedly to leave his homeland and the day-to-day business of fighting a war to tour the international diplomatic circuit, whether NATO, the G7, the G20, the Munich Security Conference, the United Nations, the Davos World Economic Forum, any western capitals and parliaments he can blag his way into, to stiffen their sinews and plump their moral resolve and beg for sophisticated weapons. His story is blunt, familiar and repetitive: “we need to win here, unequivocally and unconditionally. If we do not, any one of you could be next on Putin’s list, make no mistake. We’re doing the dying; that’s a given. But we’re also doing your job making sure Putin can’t do to you what he’s doing to us. So give us the tools to finish it”.

He had explicitly quantified his needs: 1% of NATO’s frontline arsenal of tanks, guns, aircraft and ordnance and he reckoned Ukraine could achieve outright victory. Accused by the former UK defence secretary Ben Wallace of treating NATO like an Amazon warehouse, Zelensky has been directed to be more reasonable and appreciative.

NATO’s hesitancy has been characterised by three principal factors: first, a resolve not to escalate its commitment such that Putin deems a line has been crossed and NATO is either perceived to be the aggressor or in direct conflict with Russia; second, a chronic shortage of kit, not sufficient available to keep NATO’s own troops at full combat capacity; third, also an understandable unwillingness to risk front-line capital combat equipment (tanks, jets etc) which might not only be destroyed but worse, captured by the Russians handing Putin our best kept defence secrets despite this being a conflict in which NATO is not a direct combatant. In the fluctuating fortunes of this conflict, as NATO continually prevaricates, the warfighting balance is shifting away from the Ukrainians and back in favour of the Russians.
Resourcefulness and resilience
Fielding a heterogenous hotch-potch of cobbled together indigenous and foreign donated weapon systems (think of tanks: armoured ‘brigades’ comprising Soviet era Russian models, German-designed Leopard IIs from various sources, obsolescent British Challenger IIs, American M1 Abrams, none of which is directly compatible mechanically or technically, or is interchangeable or has common parts and spares) the Ukrainians have been endlessly resourceful in making the best use of what they have not just on land but also in the Black Sea against Russia’s navy. It came as much of a surprise to British Army anti-tank experts as it did to the system’s manufacturer to find that the Ukrainians had found a very unauthorised means of re-loading what were only ever designed as one-shot disposable Javelin missile launchers (re-loaded Javelin launchers are unreliable and unsafe for the operator, in response to which the Ukrainians are pragmatically willing to take their chances if killing more Russians is the result with as few wasted resources as possible). But having fired away most of NATO’s sophisticated anti-tank inventory and with replacements coming through at a much slower rate than there is demand for them, the real revelation has been in Ukraine’s rapid development of a scaled-up cottage industry producing kamikaze drones in increasingly large numbers for use against targets ranging from ships to tanks, light armour, soft-skinned vehicles and infantry positions. Known as FPV’s (First-person Views), they are little more than over the counter or small commercial drones with adapted explosives strapped onboard; ‘kamikaze’ because once launched, they are irrecoverable so they might as well hit a target if at all possible because they are not coming home to be reused. They are easy to make and adapt, becoming prolific (according to The Times analyst Anthony Lloyd, 10,000 have been procured in the past three months alone with Zelensky planning to source a million this year), and they have radio-controlled guidance for accuracy; against them is that they are slow and easy to shoot down and therefore wasteful and low-yielding, their unsophisticated guidance systems can be jammed and their light payload makes them increasingly less effective the more protected the target (one drone might destroy a soft-skinned lorry, but depending on the size of projectile and warhead it might take several or many to immobilise, let alone kill, a single Russian main battle tank).

Since mid-2022 NATO armies have been training Ukrainian conscripts by the thousand in 5-week crash courses covering basic tactics, weapons handling, immediate medical attention and casualty evacuation (under Operation Interflex, with the help of Commonwealth cadres, the UK provided much the biggest training programme in Europe). However, two years of intense, hybrid and constantly developing conventional-cum-improvised-guerilla warfare make the Ukrainian military the most tactically current and battle-hardened in the West; NATO tacticians are now in turn learning from the Ukrainians they trained about how to deal with the Russians. But none of this gets away from the essential truth: Russia’s economy is now formally on a war footing (Putin has allocated Ruble 10.8 trillion or $110 billion, 29.4% of all government spending, roughly 7% of GDP, in the current year, rising potentially to 40% of the fiscal budget in 2025, all towards rebuilding and reinforcing his armed forces and developing more sophisticated weapon systems); meanwhile, the Ukrainian economy and swathes of its infrastructure including military production facilities are literally shot to pieces. Beyond the home-grown FPV programme, Ukraine is almost entirely reliant on NATO members’ goodwill. Zelensky is still painfully short of modern, sophisticated weapons systems, notably armour, aircraft (a year on since it was agreed in principle, he’s still waiting for any western F-16 fast jets to arrive), integrated communications systems, and medium and long-range missiles; at the basic level, he’s also chronically short of medium and heavy artillery shells which has led to severe rationing in pre-emptive or counterbattery shoots. His remains a charity shop/foodbank supplied war machine, surviving on scraps, hand-me-downs and its wits.
Domestic political challenges
At home, Zelensky faces challenges to his political authority. Critical of Vitaly Klitschko (a former heavy-weight boxer and no stranger to a punch-up) about the poor state of Kiev’s defences and public shelters, Zelensky is in open disagreement with the capital’s mayor. In return, Klitschko, suspected of having one eye on the presidency himself, accuses Zelensky of becoming a virtual dictator, saying of the President, “At some point we will be no longer be any different from Russia, where everything depends on the whim of one man”. Pouring petrol on the fire of this spat will be Zelensky’s inclination to uphold the suspension of the 2024 Presidential election (by law elections are forbidden while martial law persists and for six months following its lifting), under the constitution due to take place on 31 March. Zelensky maintains that an election in the middle of a war and the country still facing an existential threat, the risk of political instability could be self-defeating. Further, legally any election must be demonstrably fair and free of corruption; he cannot guarantee that any more than can the opposition. Complicating the matter is that as at 31 December 2023, UNHCR estimated that 3.67m Ukrainians are displaced within Ukraine and potentially inaccessible (and therefore at risk of disenfranchisement) while a further 6.44m Ukrainian refugees who fled abroad have not yet returned to the country: by fleeing, have they forfeited their right to vote or, if they remain enfranchised, how are they to be reached? In context, the total pre-invasion population was 43.8m.

Zelensky has been at open loggerheads with his military top brass over the army’s insistence that another half a million conscripts are called up immediately. In December, Zelensky took the unusual step of publicly questioning the rationale (it would mean calling up significant numbers aged 18-27, provision for which was agreed at the end of 2023; the average age of Ukrainian serving personnel currently is 43), with the implied criticism of the military thinking. His concern is not just military capacity: taking half a million economically productive adults into military service puts considerable financial pressure on his treasury (to which the military counter is, if you lose the war there will be no treasury to have to worry about in any case). As part of a military re-set, an injection of fresh thinking, he sacked the popular head of the armed forces on 8th February. With an acute shortage of resources, newly appointed Colonel-General Oleksandr Syrskyi has announced a strategic switch in emphasis from attack to defence with the aim of wearing down the Russian forces. Forced by circumstances and the shortage of resources, time will tell whether the change works or not.

As it is, given the resources, Ukraine has proved much more successful in defence than on the offensive. Zelensky’s efforts last summer to recover the lost territories in the Donbas and Crimea failed. In the economic audit of war and the analysis of value for money, he was criticised by countries including Germany for failing to implement standard NATO tactics and bring concentration of force, to which he showed commendable restraint by not issuing the obvious ripostes. On the other hand, Russia’s push westwards to create a seamless southern corridor from the Donbas all the way beyond Odessa to the Moldovan border, thereby cutting Ukraine off from the Black Sea, also hit the buffers. Inaccurately, “stalemate” is a word often used to describe the resulting stagnation of the lines. However, stalemate implies a draw, the end of the game, simply because neither side can make progress. This is very clearly not the case here: this is much more akin to the impasses seen in WW1 on the Western Front. While making heavy weather, both sides have been committed to creating a decisive breakthrough, or at the least, wearing down the opposition until it can no longer go on; but there is no hint of compromise by either towards the end goal; if you don’t win, you lose.
Endurance: who can outstay his opponent?

There are two key prerequisites for military victory for both protagonists: secure political backing at home and the means and resources to wage war such that the opposition is overwhelmed.

NATO: a study in conditional love
For military aid, Ukraine is almost wholly dependent on NATO. It is an easy but lazy trap in which to fall to talk about NATO as a homogenous bloc. It is not. It is, in fact, a rainbow alliance of 31 members with widely differing national views, aims, military capabilities, financial capacities and political willingness to make a difference. NATO has a headquarters and a Secretary General at its head but Jens Stoltenberg’s is mainly a political hustling job. With such a large, diverse membership, his task is akin to herding cats, attempting to maintain unity and keep allcomers pointing in roughly the right direction. It says much that four months on from the official expiry of his term and his enforced agreement to stay in post for another year until 1 October 2024, there has been no public progress towards finding his successor. But while there is some level of coordination, NATO itself as a legal entity is not providing aid (headquartered in Brussels, its formal establishment is supported by a budget of $3bn): ultimately it is national leaders and their governments, circumscribed by their domestic political boundaries and policy limits, which literally call the shots according to their own democratic mandates and financial constraints.
The political morass in Washington
Militarily, the one which inevitably matters the most is the United States. Spurred on by a major injection of vim and backbone provided by Boris Johnson, the Biden administration has been significantly supportive of Kiev. Within limits. Financially and in terms of the types of military systems Biden has been prepared to send (and more importantly what he would not allow, either to prevent escalation or for fear of technological secrets being compromised) his support has been publicly fulsome and privately conditional and hesitant. Having lost the House in the 2022 mid-terms, those limits are now a very obvious political choke-point.

The disruptive influence of Donald Trump is already evident even before it has been determined if he wins the White House race or not. In his presidential electioneering, Trump has flatly declared that were he elected for a second term, he would not send another dollar of financial, military or humanitarian aid to Ukraine (his insistence is that a deal with Putin would bring hostilities to an end; when, how and with what result is not explained; his relationship with Putin remains an enigma: mutual admirers but adversaries, the ying and yang of the Trump-Putin relationship is a true diplomatic mystery). With less than a year to go before the election on November 5th and the presidential inauguration in January 2025, the Republican controlled House of Representatives contains a sizeable minority of impatient right-wingers entirely sympathetic with applying Trump’s views on military aid today, whether to Ukraine or Israel; as far as they can, they seem determined to block any legislation that sets a new aid budget for 2024. The only condition for compromise is that the current Administration agrees to significant curbs on immigration across America’s southern border effective immediately. Three powerful political factors are at work: first, for such right-wingers, the conviction that immigration is going to be the defining factor in the election (they are determined to make it so); second, reminiscent of the periods up to 1917 and 1941 in the First and Second World Wars, for that same group there is the misguided isolationist principle that foreign wars are no longer America’s problem, others need to step up and take responsibility for their own security; third, broader Republican determination to restore prudence to America’s government finances in the face of Joe Biden’s fiscal incontinence which has caused government debt to spiral almost out of control, breaching the debt ceiling twice in a year and nearly forcing the closure of US public services. The ramifications for Zelensky are obvious.

At the time of writing, after weeks of intensive negotiations, a $95bn cross-party deal had been structured by the Democrat Speaker in the Senate and the Republican Speaker in the House that was at least thought to have found common ground, potentially releasing $60bn of military aid to Ukraine and $14.1bn to Israel, plus $9.2bn for general humanitarian aid and a further sum to help Taiwan’s defences. Expected to be voted down in the House but passed by the Democrat-controlled Senate, in fact it fell at the first hurdle failing even to clear the Senate. For the time being, it is moribund. Mired in domestic US affairs and weaponised for political advantage, it remains to be seen whether it is capable of resuscitation. As many say it can as say it will not. Arguably military aid to either Ukraine or Israel could be deemed ‘in the national interest’ and therefore it could be authorised by Presidential Decree, bypassing Congress (but open to legal challenge in the Supreme Court). However, because the funding itself is a continuing budgetary matter, constitutionally the decision can only be made by Congress; Presidential Decrees are not applicable in these circumstances. For Zelensky, apart from what remains of the authorised 2023 spend that has spilled over the year-end, for the moment the US funding tap for 2024 is firmly off.
Factions and frictions in Europe
If the vibes from the US are bad, they are hardly better in Europe. It is important here to distinguish between the EU and NATO: they have members in common but the EU itself is not and cannot be a member, not least because EU countries such as Ireland, Austria and Malta are officially neutral.

For the EU, after a month of serious political wrangling following Hungary’s pro-Putin Viktor Orban initially vetoing a €50bn financial aid package to Ukraine, the EU (defined here as “EU Institutions” i.e. Brussels, rather than individual European countries) finally reached a compromise early in February: the funding will be released in stages subject to annual review and re-ratification. During the arguments, Poland’s new and supposedly liberal Prime Minister Donald Tusk (who when President of the EU Council of Ministers during the Brexit negotiations in 2019 said memorably and undiplomatically “there is a special place in Hell reserved for Brexiteers who voted for it without a plan”) publicly threatened Hungary, a fellow member state of equal standing, with punitive measures designed to bring about its economic and financial collapse to bring it to heel.

As I have discussed on several occasions in our Merlin Weekly Macro articles, led by Commission President Ursula von der Leyen and France’s President Emmanuel Macron, the event of war in Europe has allowed the EU to take the opportunity to harmonise and centralise defence procurement across the bloc. Designed to be protectionist in both military and commercial senses, and a deliberate political step towards creating an integrated pan-EU armed force, potential casualties are programmes (e.g. Eurofighter Typhoon fast jets) in which EU and non-EU defence contractors are consortium partners. But, as ever with the EU which prioritises politics and process over purpose, principle and people, the resulting bureaucracy and regulation have immediately introduced dislocation and significant frictions to supply chains such that on the EU’s own admission, barely 50% of the promised supply of artillery shells from Europe to Ukraine in 2024 will actually be satisfied.

Leaving ‘Brussels’ aside, the fractures among NATO members in Europe run deep. Surprisingly, Germany has emerged as the country with the second biggest military commitment to Ukraine after the US and overtaking the UK. ‘Surprisingly’ because in 2022, Chancellor Olaf Scholtz’s stance on aid was to focus on the humanitarian and financial and, where military, strictly confined to non-combat equipment (field hospitals and those notorious 5000 protective tin hats he donated); he also reassured Putin that he would veto any proposed Ukrainian accession to NATO. Following the relaxation of German constitutional conventions prescribing military aid and expeditionary limits (Germany now has garrison troops based in Lithuania) and now supplying heavy armour (Leopard II tanks), other vehicles and munitions to Zelensky, the real impetus behind Germany’s Damascene conversion has been driven by two key people. First, following a string of eminently forgettable and perfectly useless defence ministers (one of whom was von der Leyen: it was on her watch that German troops exercised with broom handles such was the shortage of rifles) was the appointment of the highly effective, hawkish Boris Pistorius to head the defence ministry in January 2023; second, the political spine surprisingly provided by Foreign Minister Anna Baerbock, leader of the (pacifist) Green Party in the Traffic Light Coalition. In the third quarter of 2023, a German court declared the proposed federal budget to be illegal. It is a measure of how far Germany has changed its stance on Ukraine, and of comfort to Zelensky, that in the ensuing crisis talks to formulate a legal budget and plug a €17bn black hole in the government’s finances, it was agreed that come what may the budgeted aid to Ukraine in 2024 had to be ringfenced.
Ukraine funding support
However, of the ‘big’ NATO members in Europe, almost completely missing in action are France and Italy. Macron’s misguided and confused, not to say vain, diplomatic energy late in 2021 and early 2022 clearly failed to make any impression on Putin (given it involved partition, Zelensky was underwhelmed too); his regular dialogue with Putin afterwards with further peace initiatives (all of which involved major prospective territorial concessions by Ukraine in return for Putin undertaking to withdraw) have been equally fruitless. With the third year of intense warfare almost upon us, one wonders what goes through Macron’s mind when, with no sense of irony or self-awareness, he makes pious and vacuous declarations such as those in a speech in Sweden at the end of January (i.e. last month, not 2022 or 2023): “This is a decisive and testing moment for Europe. We (meaning the EU) must be ready to act to defend and support Ukraine whatever it takes and whatever America decides.” But actions speak louder than words: over the period 24 January 2022 to 15 January 2024, France pledged a miserly aggregate spend of €1.8bn to Ukraine of which only €640m was military, less than 0.6% of the total committed by NATO members and Australia; and it still refuses to send any of its Leclerc main battle tanks.

With budgetary constraints and an over-stretched government balance sheet, Italy too has been a significant laggard, pledging only €1.3bn in total, of which €670m is military spend, similar to the amount provided by a sullen and off-side Slovakia. Slovakia’s GDP is only 5% the size of Italy’s.
To what end in Ukraine? “I used to be indecisive, now I’m not sure”
If that is the situation financially, philosophically and strategically the NATO membership is neither further forward nor any more united than a year ago about how to bring this conflict to an end. Defeat for Putin (define ‘defeat’)? The evidence suggests not. Expulsion from Ukraine (does that include Crimea?)? Territorial concessions by Zelensky in return for what remains being a neutral country (and where does that fit in with Putin’s stated aim of “de-Nazifying” Ukraine, which is as powerful a motive for his occupation as regaining territory)? Ukrainian security guarantees but no membership of NATO (which is where Ukraine was before the invasion)? Full NATO membership and membership of the EU? Neither is achievable or practicable while Ukraine is at war. What about rebuilding the country: who pays? And a fundamental question: in the event of peace negotiations between Putin, Ukraine and NATO/the EU, how can the West hold talks with a man who is on an international sanctions list with an arrest warrant waiting to be served, and who were he arrested would be charged with war crimes and put on trial in the Hague? NATO goes round in ever-decreasing circles with no resolved position in sight.

Worse, as was let slip by Italy’s hapless Georgia Meloni in her unfortunate entrapment interview in October by a pair of Russian pranksters (allegedly also agents of Putin’s FSB) masquerading as Nigerian radio hacks, many NATO governments, particularly in western continental Europe, are demonstrably bored with Ukraine and simply want a deal with Putin that allows them to move on and focus on other more pressing subjects (perversely, being exposed as feckless and faithless on the subject actually forced them to renew their public support to Zelensky, but Meloni’s assertion about those fed-up fellow leaders has a strong kernel of truth to it: they just want the problem to go away).
Russia: not just in the game but gaining the upper hand
There is no doubt that Russia has expended significant blood and treasure thanks to the flawed execution of its military strategy and the remarkable resilience of the Ukrainians in the defence of their homeland and families. If from Putin’s point of view this was not how the campaign was supposed to unfold (it was supposed to have been quickly executed and the Ukrainians wrapped up in days including Zelensky being liquidated as a key part of Putin’s programme of ‘Ukrainian de-Nazification’), in the NATO camp many are scratching their heads as to how Putin is still in the game at all. Two years on and Putin is not only still there but gradually gaining the upper hand despite prodigious losses in both men and equipment. Although China has a defence cooperation treaty with Russia, it has not been drawn into supplying war materiel in support of Putin. However, both Iran and North Korea have had no such qualms, the former supplying one-way drones and the latter ballistic missiles.
A strategic miscalculation

In one important respect, Putin’s strategy has produced exactly the opposite outcome to the original intent: far from creating a buffer between Russia and NATO, in fact NATO has expanded in his direction. Formerly neutral Finland is now a NATO member and brings with it a direct 830 mile border with Russia in the highly sensitive Baltic and Arctic regions. Sweden intends to join too; having overcome Turkish obstacles in a dispute over Kurdish rights, it now only behoves Hungary and its notoriously unreliable Viktor Orban to ratify Sweden’s accession; however, when it is successful, it will complete the encirclement of Russian interests in the Nordic region and the Baltic, home to Russia’s only deepwater, ice-free western seaboard ports.

Resilience in the face of sanctions
Before the invasion, Biden and Boris promised the toughest sanctions regime ever seen that would not only isolate Russia but bring its economy to its knees such that its war machine would grind to a halt. That clearly has not happened. At an estimated $2.25 trillion in 2023, its economy is as big as it was in 2022 and about a fifth greater than in 2021.

At $327bn, about half of Russia’s financial reserves are frozen under western sanctions. $218bn of that sum resides in the EU’s Euroclear system. Last year it generated around $4bn in cash income which the courts have determined legally can be set aside to help fund the Ukrainian war effort. However, the capital assets themselves are legally protected. Under international law, however heinous the crimes of the perpetrators, sanctioned assets may be frozen but they cannot be appropriated and recycled for other purposes by those who have frozen them. The only conditions by which they can be appropriated and re-assigned as ‘reprisals’ are, in this case, if Russia and the country claiming legal title (i.e. the US) are officially at war.

Bill Browder, an American and now naturalised British citizen is the former CEO of Hermitage Capital in Moscow. At one time he was one of the world’s biggest private foreign investors in Russia. In the course of understanding his risk exposure, what exactly he was investing in, and ‘following the money’, his due diligence discovered a highly sophisticated and very complex web of corruption including international money laundering on an industrial scale going all the way to the top of the Kremlin. Browder had scratched the surface of Putin’s Kleptocracy and the source of his power and patronage both at home and abroad. Falling foul of Putin’s regime in a dispute over tax and himself being placed on an international sanctions list and arrested in Madrid, Browder’s subsequent dogged political campaigning eventually led to the US instigation of the Magnitsky Act, named in honour of his friend and lawyer, Sergey Magnitsky who was arrested, tortured and eventually murdered by Russian security services. The US Act was the forerunner of today’s International Sanctions Regime. His extraordinary adventures, the threats to his life, Trump’s public agreement in a joint press conference with Putin to allow Browder to be extradited to Russia are well documented in his best-sellers ‘Red Notice’ and ‘Freezing Order’. At a recent talk given by Browder in London, I questioned him about the successes and failures of the sanctions regime when really put to the test. It was the only time in the allotted hour that he visibly bridled (I assume with frustration rather than the impertinence of question!). He maintained that freezing half Russia’s balance sheet, including the assets of the oligarchs associated with Putin, was a victory; he was clearly frustrated that sanctions had made virtually no difference to Russia maintaining significant unimpeded sources of foreign revenue principally from oil and gas sales to countries such as China and India who chose to ignore the sanctions and actively mopped up any surpluses from former Russian customers who were themselves sanction compliant; as to the point about the inability of the Allies to confiscate the frozen funds for use either in prosecution of the war or in the reconstruction process after, Browder’s response was robust and simple: “so change the law!”. It will not be easy, but don’t bet against him being successful eventually.
Politically, Putin’s position as president appears rock solid
Putin faces re-election in March. In contrast to Zelensky’s position vis-a-vis the Ukrainian election and wanting to cancel it, the Russian one will take place. This is business as normal; normal in Putinland where he changed the constitution removing the cap on his terms of office. It allows Putin to claim what he sees as the moral high ground, holding no fear of his electorate, and renews and reinforces his mandate. The result is a foregone conclusion. Any dissent that was evident a couple of years ago has largely melted away (including the leading opposition candidate being forced off the ballot); having clearly assassinated the chief of his Wagner mercenary group last year after the latter led a comical attempt at a coup, and reinforced by the recent mysterious and sudden death of former opposition leader Alexei Navalny in prison (who had already survived a Novichok assassination attempt in August 2020) it is not difficult to see why. But at the grass roots, the majority of the public is not only behind Putin but is also demonstrably supportive of the cause. And they are confident they will win in Ukraine. Whatever the shape, it will be spun as a victory for Russia and defeat not only for Ukraine but the combined forces of NATO. It will be intended to send a powerful message to the West that a resurgent Russia is not to be trifled with. That’s the plan and they’re sticking to it.
Military Preoccupations 2): The Middle East and Arabia
If state-on-state war in Europe, the first since the cessation of hostilities in 1945, came as a profound shock in 2022, the outbreak of Israeli-Palestinian hostilities last October had numerous more recent precedents and held few surprises. What has been shocking in this case was the depth of depravity Hamas was prepared to plumb in attacking Israeli citizens, and the significant loss of Palestinian civilian life in the Israeli response to eliminate Hamas.
Middle East diplomacy: unravelling a Gordian Knot
The complexities of the Middle Eastern tensions are Byzantine. Some enmities are entrenched (e.g. the Iranian-Palestinian hostility towards Israel and Iran’s intent to see the state of Israel wiped off the map), others fluid and suggestible to a new approach (e.g. rapprochement between some key Arab states including Saudi with Israel, brokered by Trump in his first term and called the Abraham Accords; also, surprisingly, brokered by China, a more recent agreement between Iran and Saudi, erstwhile implacable foes, at least to restore diplomatic relations). But as is only too evident, squaring the circle of so many conflicting interests in a highly charged and febrile environment to bring enduring peace to the region has defied diplomats and peace-brokers for nearly a century. Almost impervious to international criticism of its intense military response in Gaza and the heavy loss of Palestinian civilian life, Israel finds itself virtually friendless in the UN; even support from its key allies, the US and the UK, is being sorely tested.
The broad and malign influence of Iran
The key regional powers are Iran, Saudi and Israel with others such as the UAE, Egypt and Qatar becoming increasingly influential as powerbrokers or interlocutors. But incontrovertibly it is Iran which exerts the greatest influence across the entire region, its tentacles reaching to every corner through its proxies and affiliates including: Hamas in Gaza; Hezbollah in Lebanon and Syria; the Houthis in The Yemen; Palestinian Islamic Jihad; supported by the Iranian Revolutionary Guard (IRG), the Islamic Resistance in Iraq responsible for multiple attacks on coalition installations and the group which recently killed three US soldiers in the drone attack on the Tower-22 base on the Syrian/Jordanian border; Iran’s special forces and intelligence agencies are also known to be active as ‘consultants’ in countries such as Pakistan and Afghanistan. On 17 January, Iran carried out missile and drone attacks on Jaish al-Adl, designated by Tehran as an Iranian domestic terrorist group but based in the Pakistani tribal area of Baluchistan.

Strategically, Iran’s geographic location gives it great geopolitical leverage: straddling the entire landmass between the Persian Gulf and the Caspian Sea, it sits squarely at the nodal point separating three regions. Those are: Europe and the Middle East; Asia; and Arabia. In terms of global energy flows, a fifth of all the world’s oil is transported through the Straits of Hormuz the north shores of which extending both west into the Persian Gulf and east into the Gulf of Oman are Iranian soil.

In recent months, whether in response to the actions of Hamas and Hezbollah and their hostility towards Israel, or the Houthis and their drone attacks on shipping in the Red Sea and the Gulf of Aden, there has been much speculation as to whether Iran’s proxies are under its direct control, or whether despite backing them financially and militarily, in fact they are not under control at all. This becomes important in weighing up whether a number of so far local flare-ups at the periphery of the central conflagration in Gaza have the potential wittingly or unwittingly to become an all-encompassing regional conflict, drawing in western coalition forces, Russia and possibly China.

Despite the recent warning by neo-con former US National Security Adviser John Bolton that the US might eventually be forced to attack Iran, neither the Biden administration nor the Iranians have any intention of entering into direct military conflict if they can avoid it. Biden’s enforced but measured response to the Tower-22 attack in January, sending drones against IRG and Islamic Resistance installations and assassinating three of its leaders in Baghdad were all carefully staged to avoid a direct assault on Iranian territory.
The Red Sea and the mystery of the missing Chinese response

The response to the Houthi crisis has been illustrative of the very differing but typical approaches of those countries most affected by the damage to their shipping and cargoes and the disruption to global trade. The US and the UK have responded directly with targeted air attacks on Houthi launch sites, command and control bunkers and storage facilities. Nearly three months behind after a lot of talking, the EU has opted to send a small joint naval force with ships from Belgium, France, Germany, Greece and Italy; its role will be purely defensive for the protection of shipping and its terms of engagement specifically prevent it from taking part in any offensive response towards land-based targets. Most fascinating is China given the origin of much of the goods being transported from east to west; publicly it has remained entirely silent and totally passive, despite having a permanent naval presence and a garrison of more than two thousand troops based in Djibouti on the Horn of Africa at the base of the Red Sea. China and Iran share a mutual dependency: according to the Kpler energy consultancy, in 2023 Iran supplied 10% of all China’s oil consumption while China accounted for 90% of Iran’s total crude exports. Iran’s cooperation determines whether China’s One Belt One Road initiative (the world’s biggest infrastructure project) is the unbroken road to Europe or whether it is merely a central Asian cul-de-sac. As well as buying sanctioned Iranian oil, China has significantly increased its purchase of sanctioned Russian oil and gas at highly competitive prices. Were China to attack the Houthis, it would simultaneously be siding militarily with the United States (which would seriously rile both Russia and Iran) and, in attacking an Iranian proxy, it might be construed as directly impeding Iran’s strategy designed to bring about the dissolution of Israel. China has therefore opted to do nothing publicly. It has not needed to: so far no Chinese ships or cargoes have been targeted. Whatever negotiations are taking place with Russia and Iran through back-channels, it is quite happy to let the US and the UK take responsibility on its behalf for ensuring safe passage of commercial shipping through the region.

Containment or conflagration?
Since October, the pro-Palestinian reactions which have prompted military flare-ups across the region have been directly linked with the Israeli response in Gaza, however long IDF forces are committed to completing the extirpation of Hamas. Whether the US drone attacks in Syria and Iraq shift the focus of aggression remains to be seen; in response to the US assassination of Islamic Resistance leaders in Baghdad, anti-American feeling is running high with mass demonstrations and protesters demanding the withdrawal of all remaining US (which logically means all NATO) troops from Iraqi soil. Were the Americans to pack up and go, they would be seen to be cutting and running as from Afghanistan in 2021, a propaganda coup for Iran; for Russian and China, another indication of Western weakness.

Finally, any further Western reaction involving Iran (whether indirectly or directly) must weigh up the extent to which Iran a) has a viable nuclear capability and b) is willing to use it. The Iranian nuclear containment agreement has failed to prevent Tehran developing weapons grade nuclear materials; if Western economic sanctions have had no deterrent effect on Russia, nor seemingly have they done so with Iran. Does the West (which essentially means the US) eventually get to that point as indicated by Bolton where it says, “enough is enough, no more!” The dividing lines in the UN and the lingering antipathy towards direct action in the Middle East by NATO countries arising from the deep controversy over the invasion of Iraq and the toppling of Saddam in the 2003-11 Second Gulf War make it unlikely. The greater risk is that a bigger regional conflict happens by accident and escalates from there.
Saudi Arabia: hoping to win more friends and influence people
Once a cornerstone ally of the west, Saudi is now ploughing its own furrow determinedly in its national interest (including investing billions of dollars into major global sports development: the sports themselves are of secondary interest; what matters is exerting soft geopolitical power using the increasing control of that medium designed to promote favourable popular public opinion of the Kingdom abroad). Branded by Biden as “evil” when he came into office, partly because of the significant casualties and destruction from Saudi anti-Houthi air strikes while giving backing to the Yemeni government but also Saudi’s military reaction to the Houthis lobbing missiles at targets inside Saudi Arabia itself, Saudi feels both bemused and vindicated that the US was forced to designate the Houthis as “global terrorists” prior to the onset of coalition airstrikes. But the political damage is done. While still friendly with Great Britain, Saudi has no time for US Democrat presidents who persistently ‘disrespect’ it. It is no accident that since early in President Obama’s first term, Saudi’s allegiances have moved elsewhere, taking in China (Saudi is China’s biggest oil supplier) and Russia with both of whom Saudi has colluded in the long-term project to disintermediate the US dollar as the currency in which oil contracts are traded and settled.
Military Preoccupations 3): Taiwan and the Far East
Earlier this year, Taiwan went to the polls and returned a government committed to independence from China. Beijing’s ill-tempered response was to double down on its determination that Taiwan should be returned to the fold, by force if necessary. The received wisdom among western intelligence agencies remains that China will carry through its intent, it is merely a question of when and by what means. The Pentagon estimates that China will have the military capability and capacity (though the expertise is questionable) to mount an amphibious invasion of Taiwan from 2027. Virtually unchallenged, China continues to appropriate atolls of disputed ownership in the South China Sea for rapid militarisation.

North Korea remains enigmatic and intensely difficult for western intelligence agencies to penetrate. Its ballistic missile and nuclear programmes have continually taken the West by surprise both in the sophistication and rapidity of their development. Encompassing short, medium and long-range cruise and ballistic systems, not only is all of the Korean peninsula within range, but also Japan and the US mainland. It has been actively colluding with Russia and is supplying ballistic missiles for use in Ukraine; allegedly it has also been one of the countries supplying Iran with nuclear weapons technology.
War or Peace? Perspectives on the Future

As the economic sage JK Galbraith said, “forecasters divide in to two groups: those who don’t know and those who don’t know they don’t know”. I do not know the future any better than anyone else. However, here I offer my perspectives over which to mull.

NATO: a Dutch auction of the countdown to war
Since its foundation in the aftermath of WW2, as a mutual defence pact with the nuclear capability of the US, the UK and France, NATO has been a successful deterrent against anyone who would do its members harm. But that deterrent effect is eroding. The depletion might not directly have caused cause malign players such as Russia to take the action they have but it has given them the confidence that if they do, there is unlikely to be any significant repercussion. NATO failed to stop Putin invading Ukraine, a non-member but with security guarantees. It has failed to change his behaviour since. Putin clearly still has ambitions to put a geographic buffer between him and the West as well as reclaiming what he sees as historic Russian territory.

The threat is real. NATO’s own analysts see all-out war with Russia as likely within 20 years; the German defence minister, Boris Pistorius, is less optimistic judging the possibility of direct conflict to be within five to eight years. The head of the Norwegian armed forces, Gen. Eirik Kristofferson, stated on 23rd January that NATO countries have “two, maybe three years” to brace for a Russian attack. Grant Schapps, the new UK defence minister has described us as being in the “pre-war years”. With similar threats to those which arose in the mid-1930s and since the Peace Dividend following the end of the Cold War defence having been hollowed out in most western countries except the US, the parallels are striking. There are clear choices to be made.

Against such a backdrop, one would have imagined that all NATO member states would buck up and rise to the challenge. Sadly not. Last year’s NATO summit should have left nobody under any illusions that defence was the overriding national priority for all its member states. Secretary General Jens Stoltenberg’s exhortation, literally calling the troops to arms, to get every NATO member spending “significantly more than 2% of GDP on defence” was met with a near blank silence. All that could be agreed upon was to renew the commitment to spending that minimum 2% which every country should have been unconditionally complying with in the first place. They could not even choose a new leader to replace the retiring Stoltenberg (the lead candidate, the British Ben Wallace, was vetoed by Joe Biden after Biden resented being bounced by the UK and Holland into committing to training Ukrainian pilots to fly the F-16, and removing the prohibition on other member states including the Dutch from sending their own F-16s to the conflict zone).

The key to defence is deterrence: having the demonstrable military capacity to scare the living daylights out of your enemy: leaving no doubt that should he come aggressively close or cross the line and there will be all hell to pay. Everything from that 2023 NATO summit sent out all the wrong public signals: most countries either do not recognise the threat or, even if they do, they are happy to let America shoulder the financial and military burden on their behalf while they work out whether to get their acts together. It was very difficult to conclude otherwise.
Trump’s Exocet
No friend of NATO, on the stump Donald Trump has launched another laser-precision missile in the direction of the Alliance and watched it explode on target as it undermined the central principle of Article 5. Under his presidency, he would refuse to come to the defence of any NATO member who has not been paying its dues. It is a familiar refrain: he said as much campaigning in 2016; with the authority of office he did it again when at the 2019 NATO summit, he delivered his Grand Remonstrance that he was fed up with delinquent partners who failed to pull their weight, especially those whom he was paying for their defence who were also cosying up to Putin and, in the case of Germany, running a significant trade surplus with the US. Last week, he went even further: he would “encourage them [the Russians] to do whatever the hell they want to them”. “Unhinged!” shouted the Democrats in response. They are quite right: it is unhinged, quite mad, despicable is not too strong a word, to suggest that the Russians should invade fellow NATO partners with Trump’s endorsement simply because Trump cannot be bothered with them. As I said in “Anatomy of a Crisis” two years ago of his 2019 Grand Remonstrance “It was magnificent, blunt, very public and utterly corrosive”; that is every bit as applicable today as two years ago. Trump (more accurately, the US) has every right to be angry with complacent delinquent members. However, that should be dealt with in private, particularly at such a sensitive time when war has already broken out, tens of thousands of Ukrainians are dead, Putin scents victory and is looking for any excuse to go further. Being told by Trump effectively to “go ahead, be my guest” rather than “go ahead, punk, make my day” is as good as Putin being given a green light.
Qualified cause for optimism
As it is, thankfully, Trump’s list of delinquents is declining. There have been improvements since 2019: instead of only six members meeting the minimum 2% spend then, in 2023 11 countries are likely to have met the minimum standard including the ‘frontier nations’ sharing a border with Russia, Belarus or Ukraine: new member Finland; Poland; the three Baltic States; Romania; Hungary; Slovakia (the others are the US, the UK and Greece). The latest NATO assessment as we go to press is that in 2024, 18 of the 31 countries are on course to achieve 2%. This is encouraging. But before we get the bunting out, remember this is only to meet the very minimum requirement; more than a third still fall short and with a few notable exceptions (e.g. the US and Poland), the vast majority of the membership have little or no intention of satisfying Stoltenberg’s demand to spend ‘considerably more’ than 2% (the UK’s stated intent is 2.5% by the end of the decade; time will tell whether it is fulfilled). Even with this catch-up, the stark truth is that the US still accounts for 70% of NATO expenditure and considerably more of its effective firepower.

Germany pledged to spend €100bn on boosting its defences, a significant sum, though given the parlous state of its armed forces having been run down for decades, arguably such an amount barely gets them back to where they should have been had they spent the 2% of GDP annually all along; not helping is a flat-lining economy and a federal budget which for the past three years has tested the bounds of legality under German law.

As I said a year ago in my most recent annual analysis, NATO has undoubtedly come a long way in re-establishing its sense of purpose since the dark days of division and rancour in 2021 after being kicked ignominiously out of Afghanistan. With President Macron’s ill-advised and politically motivated jibe in mind, NATO is no longer “brain dead”.

However, similar to the EU with 27 members, as a mutual defence alliance with 31 (about to be 32 with Sweden) and no central authority, while NATO has critical mass in terms of numbers, its very size and the disparate nature of its membership renders it chronically prone to slow decision-making and vulnerable to changes in its policy aims according to the political whims and electoral cycles of its democratic members’ mandates. Two examples illustrate the point: Hungary, a known quantity within the Alliance as being openly pro-Putin and permanently at loggerheads with the EU, remains off-side and deeply unreliable; second, in a significant change of strategic tack under a new government, Slovakia’s prime minister Robert Fico has declared all foreign NATO troops stationed in his country as ‘Nazis’ and unwelcome. In the event of Article 5 being invoked (an attack on one is an attack on all), a military response requires unanimous agreement. Question: were Putin contemplating a pre-emptive strike against a member state, on top of Trump’s outburst does the possibility of one or more votes against or abstentions increase the likelihood of Putin calling NATO’s bluff? One hopes it is never tested, but arguably the possibility of a veto increases the likelihood of it being so.

While western European countries have been slow to respond to any significant degree, those directly facing the threat from Putin have taken matters in their own hands. As examples, Poland is spending close to 4% of GDP on defence and has publicly said it will double the manpower of its military. As of the beginning of January this year, Latvia has reintroduced compulsory National Service which was abolished in 2006: applicable to all males aged 18-27 born after 1 January 2004, it requires 11 months of active service followed by five years in the National Guard Reserve to build a pool of combat-trained citizen soldiers ready to be called up instantaneously in the event of an emergency.
UK defence: big buck, smaller and smaller bang
The quality and effectiveness of expenditure is every bit as important as the size of the budget. The UK achieves the 2% minimum of GDP, helped across the line by fully-loaded pensions and housing costs. At £54 billion we have the sixth biggest defence budget globally (behind the US, China, Russia, India and Saudi). Yet troop numbers are set to fall below 70,000, nearly a third fewer than in 2010, “hollowed out” according to the early-retiring Chief of the General Staff. The British Army has been downgraded to a Tier 2 military force thanks to sufficient capacity to field and support only one war fighting division (the lowest strategic formation, not even a corps, perish the thought a full army).

The Royal Navy has such a manning crisis (both in terms of recruitment and retention) that the MoD this year has already announced the decommissioning of two Type 23 frigates, reducing the destroyer and frigate ‘fleet’ to 15 by the end of 2024 and no chance of replacements before 2027; also being contemplated for mothballing thanks to a shortage of manpower are the amphibious assault ships HMS Albion and Bulwark. Our two aircraft carriers when they are operational at all (despite relatively short service lives to date, they have a remarkable propensity to break down at the most inconvenient of times) are able to deploy only a fraction of their full theoretical compliments of Lightning II jets without US reinforcements after the UK procurement programme was curtailed as unaffordable.

The Chief of the Air Staff was recently forced to concede to the Defence Select Committee that not only are we already short of fast jets for UK air defence and overseas operations (and the Typhoon fleet will shrink by a further third next year), thanks to delays in the replacement of AWACS, the UK currently has no airborne early warning capability. There has been no national missile air defence shield for decades.

Finally, the services and the MoD are involved in a very public spat over Diversity, Equality and Inclusion quotas with all the knock-on effects on recruitment and retention; it caused Sir Richard Dearlove, former head of the Secret Intelligence Service (M.I.6) to call into question our ‘warrior mentality’ (what in blunter Para parlance would be an unequivocal and unconditional desire to ‘banjo’ the enemy). The UK’s armed forces are still held in the highest regard around the world. They punch above their weight; the problem is their weight is diminishing rapidly. Our potential enemies will draw their own conclusions.

The Tories have form on defence and have had consistently all the way back to 1982. Previously open to the accusations of being variously careless and incompetent, arguably in the face of the obvious threat they are now wilfully negligent. A recent headline in The Times quoted an unnamed senior military source as saying that Rishi Sunak “doesn’t do defence or foreign policy…doesn’t visit our men and women in the field much”. He most definitely should do defence. And he needs to get out more.
Procurement: the structural fault in the foundations
But it is not just about military spending and budgets. It is also about the infrastructure that provides the capacity to wage a sustained war. And here NATO is demonstrably in trouble. Its defence contracting industry is simply not geared up for wartime conditions. It is configured for peace. The extent to which in even the limited commitment to the Ukrainian proxy campaign NATO arsenals have been quickly denuded of missiles, artillery ammunition and weapons has caused deep alarm in defence circles, but clearly not enough in political ones (it is reportedly the case in the UK that one ostensibly front-line regiment of the Royal Artillery still has a full nominal establishment of personnel but it has no guns; they were all sent to Ukraine and have not been replaced). Were the Russians to chance their arm and invade a NATO member in the foreseeable future, NATO would have to bring overwhelming force to bear and very quickly: what is clear is that unless there is a significant increase in the capacity to produce arms and munitions, it will have great difficulty sustaining a long, drawn-out slugging match. Different from the industrialised warfare of the first two world wars, is that modern integrated weapons systems (particularly aircraft and ships) are not only exceedingly costly but of such technological complexity that mass production is very difficult, not only to get up to critical mass in the first place but also to replace kit as fast as it is lost. There is no quick fix. Indeed the CEO of one of Germany’s leading defence companies, Rheinmetall, said even if immediate remedial action were taken of the size required, it would be a minimum of 10 years before Europe was able to defend itself independently of the USA.
NATO: Boris hits the nail on the head
Perhaps the final words on NATO should go to the unlikely character who provided real leadership and backbone, and who became so influential both in NATO and formulating such a strong personal bond of trust with Zelensky: in the BBC’s excellent new follow-up series, ‘Putin vs the West: At War’, it was Boris Johnson who accurately and succinctly summarised NATO’s flat-footedness ahead of the invasion and its reactions since to the Ukrainian conflict and the broader threat from Russia: “NATO mostly gets to the right destination in the end but usually by the wrong route and invariably far too late”. As a blunt assessment, it is difficult to argue with.
If the focus is Russia, pay attention too to China
As discussed previously, Russia’s economy is already on a war footing. The other country coming up fast in defence terms is China. The Chinese defence budget is estimated by the independent Stockholm International Peace Research Institute (SIPI) as having been $290bn in 2022, compared with US expenditure of $800bn in 2023. However, the direct comparison is spurious: thanks to significantly lower wages and other costs of developing and procuring kit, $290bn buys a great deal more in China than the equivalent sum would in the US (one thinktank estimates that for the same nominal wage bill, China can pay four times the numbers of soldiers, sailors and airmen as the US). SIPI estimates that on the equivalent parity of purchasing power, the Chinese budget on a like-for-like basis is closer to $700bn a year, and growing by over 8.6% pa. China already has the world’s largest navy and the quality and technological sophistication of its conventional forces are fast catching up with the best of the West.

Significant developments are also taking place in cyber warfare and space. But where the Chinese lead everyone by a large margin is in the development of hypersonic missiles which can carry both nuclear and conventional warheads. As one UK defence intelligence source was quoted as saying about the pace of development of ultra-high-performance missiles, “if there’s a storm in the Middle East, and a hurricane in Europe, we’re talking about climate change in China”. Targets such as aircraft carriers are particularly vulnerable to the point of being virtually defenceless. The West is trying its best to catch up but is self-acknowledged as being a generation behind. In terms of providing viable defence mechanisms, as the same source said, once the missiles are in the air and coming your way, you’re in big trouble because they are all but unstoppable; the key is to interrupt the ability to launch them so they cannot take off at all.
Non-military considerations
Away from the purely military, but interlinked, there are other political and geopolitical tensions that are increasingly evident.
Sharp elbows and mischief in the climate change and technological revolutions
First is the global march towards carbon net-zero by 2050. The climate change PR spinners like to portray the image of an environmentally green world, one clothed in trees, flowers, bees and butterflies in abundance, majestic wind turbines stretching across the landscape and acre upon acre of shiny blue solar panels providing endless clean, renewable electricity. The reality is that even if 98% of the world’s countries are signed up to the commitment, the path by which it is reached will be potentially the greatest opportunity to gain competitive advantage (the converse of which is others lose out) in industrial history. Control of resources, technological know-how, supply chains, labour and capital will determine who are the winners and who are the losers. Elbows are quick, sharp and pointed. Related, in the continuing technological revolution, the other resource which confers geopolitical power is the control of data (were it not the case, those with malign intent would not bother investing significant time and energy hacking systems to misappropriate it); the abuse of AI to create ‘fake news’ content has the ability to do not only mischief but to inflict real damage on the democratic process.
The New demands parity and equality with the Old

Second, the competitive challenge posed by the ‘Global South’, the emerging market economies which see themselves as the future while the West is in secular decline. It was India’s Narendra Modi who explicitly laid down the competitive/inclusive marker at the G20 summit in India last September: the future is the Global South in terms of economic growth, improving prosperity, technological development and influence; we demand equal representation on international bodies including the UN, the IMF, the WHO etc; it is no longer for the paternalistic powers who won the second world war to have such disproportionate control and influence. It is a challenge that cannot be ignored: as Joe Biden has found in his war between Good & Evil, many countries take exception to being preached at, told what values to hold, and are happy to make their own choices. Many, particularly in sub-Saharan Africa and South America, are abundant in those natural resources we all need to achieve net-zero. The percentage persistently choosing to abstain in the UN votes to condemn Russia over its invasion of Ukraine indicates that countries amounting to half the world’s population either will not take sides or do not regard it as their problem.

Challenging norms and political instability
Third, among the Western democracies, there is a new emerging cycle of political instability with norms regularly being challenged and traditional centrist parties being marginalised. The political landscape is polarising towards the extremes of left and (more usually in the current environment) right. Disaffection with the status quo, a feeling of marginalisation by the political class, politicians seen to be paying lip-service to electorates, growing inequalities between the asset-rich and the asset poor (the ‘haves and have-nots’), the pressures caused by immigration, are all contributing towards less stable politics and more unpredictable outcomes. Brexit was an obvious example. The rise of environmental activism another.

The momentum of the ‘Freedom’ and nationalist parties in France, Holland, Germany, Slovakia, Hungary and Austria are all giving concern even if some are finding it difficult to form governments even when they have the highest share of the vote (as in Holland). Witness the dissatisfaction among EU farmers, now a significant political force across the Union: deploying regiments of farm tractors, through mass angry but peaceful blockades placing capitals such as Paris and Berlin under siege and closing the Franco-Belgian border in a backlash against an overbearing, micromanaging CAP, draconian emissions policies implemented without discussion, and exacerbated by what they see as unfair competition from cheap imports (including Ukrainian wheat), in the past month they forced the European Commission, with one eye on the June EU elections, to capitulate on its cornerstone agricultural and climate change regulation. It has proved both a popular and populist victory over the political class. Further abroad, but also ahead of national elections, India’s farming community is protesting volubly too: consistent with their EU counterparts, a common theme in their dissatisfaction is being undercut by cheap imports.
Finally, in 2024 elections are taking place accounting for roughly half the world’s population: among them Taiwan (already done in January), Indonesia, India, Russia, Ukraine (in theory); the European parliamentary elections, ours and the US. Of them all, the American vote on 5th November is the most important to global investors; whether he wins or not remains to be seen but the momentum and the noise are with Donald Trump.

Trump polarises opinion like no other. It is almost impossible for commentators not to have a view and therefore bias (either way), even in the mainstream media. In the aftermath of his Iowa caucus landslide victory, for balance and moderation and a reasonably neutral view on Trump 2.0, I listened with keen interest to Lord (Kim) Darroch, former UK Ambassador to the US and the UK’s one-time National Security Adviser. It can best be summed up as the rest of the West has to be prepared to both deal with Trump the disruptor and Trump the nationalist but also constructively to engage with him because the US remains the leader of the free world and NATO’s underwriter (looking at it another way, however much you dislike him, and despite his “unhinged” outburst of which there will be plenty more, publicly deriding and dismissing him as some latter day barbarian is entirely counterproductive; as he demonstrated in 2017 in his first term, his memory is long and his vindictive streak far-reaching; those such as Angela Merkel who were downright rude about him subsequently found themselves on the wrong end of his wit, in her case, and shared by others, with a hefty US export tariff). Leaving aside domestic US policies, from an international perspective, Darroch noted the particular challenges of what we know to be of Trump’s agenda (and the easy thing about Trump is it’s all out there, absolutely nothing is hidden, there is no obfuscation): as described in detail already, Trump will stop all military and financial aid to Ukraine, but further, he will demand compensation from other NATO members to pay for the disproportionate quantity of US munitions and military hardware sent to Zelensky thanks to those countries not pulling their weight; he will abandon US membership of the Paris Climate Accord (“we’re gonna drill, baby, drill”); he wants to apply a blanket 10% tariff on all imports into the US; he will actively de-couple all US interests from China. As if not challenging enough, as one US analyst pointed out to us recently, a second-term Trump has nothing to lose, only a legacy to leave; and this Trump 2.0 is an recalcitrant bear-with-a-sore-head, out for revenge, out to get even.

We have our own election in the UK to preoccupy us in 2024. But the real action of greater interest to global investors, is across the Atlantic. We will be developing the themes over the next few months in the countdown to 5th November. Controversial? Most certainly. Crazy? How can it not be, especially with Biden’s errant memory and Trump’s string of court cases and a cartload of criminal indictments. Consequential? You only need to consider Darroch’s observations to understand that a second-term Trump would potentially have far-reaching geopolitical and economic effects. But unlike 2016 and his win, and 2020 and his refusal to leave, in 2024 there are many fewer outright surprises with Trump. Unless he becomes the first US President to be elected from jail: that would be novel!
Parting shot

Politics and geopolitics in 2024 seem akin to playing three-dimensional chess while spinning plates: complex, dynamic, requires intense concentration but with the potential for breakages. However, I hope this analysis has given food for thought to help frame the discussions about future investment risk. Good luck!

The value of active minds – independent thinking

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