Weekend Update #116: One Day Until A New World: Case Study on Sanctions
Ukrainian Ranged Strikes Continue; The Two Races
Hello All,
This is the last weekend update written before Donald Trump becomes President in just over 24 hours. The Biden Administration was no “success” for Ukraine—but at least it was somewhat predictable. Biden didn’t want Ukraine to fail, so kept a regular(ish) supply of short range weaponry heading to Ukraine for the past almost three years. On the other hand, Biden made sure Ukraine never became too strong or capable, and did what he could not to make the Ukrainians too threatening to Putin.
He played a huge role in creating the war that we have to this point—and now his influence will be over. We are left with outwardly a far more pro-Putin force in Donald Trump and many of the people around him. He will have many decisions to make, and his instincts are doubted. I will start this update with one—maybe the crucial one the fate of the sanctions on Russia. The Russian economy is creaking—but will it be enough?
Also in this update, even without finished US weapons, the Ukrainians now seem to have the ability to mount a more impressive and regular ranged campaign. They had made sporadic attacks before, but over the last weeks we have seem quite regular ones—which the Russians seem to struggle to defend against.
And I will end with an analysis of where we are, as heard from some Ukrainians with whom I’ve been in contact.
One Day Until A New World: A Case Study on Sanctions
Its amazing its taken this long—but only just this week did the sanctions against Russian oil sales become strong enough to make a major hit to Russia’s ongoing ability to sell huge amounts of oil around the world using its fleet of uninsured, dilapidated, tankers (called its “Shadow Fleet”). On January 10, the US brought in sanctions against the Russian oil and gas industry that put anyone receiving Russian oil, even from this Shadow Fleet, in real risk of being sanctioned by the US. 183 ships, for instance, were named as now operating under US sanction under the new measure.
This seemed to bring an immediate halt to the Shadow Fleet’s ability to be received in places such as China and India, which had been hoovering up Russian oil (at discounted prices) over the last 3 years. Many of these tankers were forced to drop anchor just off the coast of China and India. Here is how one story which tracked the development started.
At least 65 oil tankers have dropped anchor at multiple locations, including off the coasts of China and Russia, since the United States announced a new sanctions package on Jan. 10, ship tracking data showed on Monday.
Five of those tankers were stationary off Chinese ports and a further seven dropped anchor off Singapore, with others halting near Russia in the Baltic Sea and the Far East, according to Reuters' analysis based on MarineTraffic and LSEG ship tracking data.
Now, on the one hand the fact that this has not happened until January 2025 tells you everything about how the Biden Administration has handled this war. Basically, they never wanted to damage Russia that much—certainly not to the degree that it might effect world oil prices drastically. So for the last 3 years they basically allowed Russia to create and operate this Shadow Fleet to harvest billions and billions of dollars in world oil sales, and to keep the Russian war effort going. Now only when the Biden Administration is heading out the door—do they have the courage to do what was right.
Now these sanctions (combined with Ukrainian ranged attacks) could be part of a process of really damaging the Russian economy in 2025. That economy is suffering. I don’t want to use the word collapse because it is really hard to “collapse” an economy and the Russian economy is still functioning and war production is still happening.
However wars require money in mass amounts, and the less money a state has the weaker its ability to fight a war will be. And Russia is showing real issue generating the capital it needs to keep prosecuteing this war in the way that it has. The Russian state has basically been taking money from wherever it could—spending down all reserves, selling oil more cheaply through the tanker fleet and (interestingly and worryingly for the real state of the Russian economy) forcing institutions to loan the state vast amounts.
The Financial Times in one striking piece published this week, likened the Russian economy to a House of Cards. If you do have a subscription, please read.
What has happened is that the Russian government has basically been taking and spending all the money it could to fund the war effort, and that has led (inevitably) to a surge in inflation and interest rates. Basically the war created a boom-time economy, but with nothing underwriting it except war spending. Here is a chart—pay particular attention to the interest rates that you now have to pay in Russia (over 21 percent—imagine if you had a loan or mortgage at that amount).
So the Russian economy is not in great shape—and it could get in much worse in 2025 as its access to capital is restrained. Its been hooked on massive infusions of capital to keep running—and soon that capital might be greatly restricted. So these newer, tougher sanctions could be one of the great levers to damage Putin’s rule and the Russian war machine—if they will be continued for a while.
And here is the rub. The Biden Administration was so late in bringing in sanctions that they have basically handed all the power about them over to the Trump administration. And Trump can take the US in a completely different direction.
What will Trump do? Well I will give you the optimistic argument first. This is that he will keep the tougher sanctions regime in place to try and compel Putin to stop fighting now. If Trump does (finally) realize how weak Russia really is, he could use this pressure to try and force Russia to stop the fighting.
And there was one sign that at least someone of importance in the new administration is entirely onboard with this strategy. This week the incoming Treasury Secretary, Scott Bessent, (arguably the best pick in the entire Trump Cabinet), had his confirmation hearings in the Senate. He was surprisingly robust in his call for tough sanctions on Russia. Here is how a story about that testimony started.
President-elect Donald Trump's pick for Treasury Secretary, Scott Bessent, said he "100%" supports raising sanctions on Russian oil producers if the future president requests doing so.
Bessent told U.S. senators on the Senate Finance Committee that he believes the Russian sanctions from the Biden administration "were not fulsome enough."
"I think if any officials in the Russian Federation are watching this confirmation hearing, they should know that if I'm confirmed, and if President Trump requests as part of his strategy to end the Ukraine war, that I will be 100% on board with taking sanctions up --especially on the Russian oil majors -- to levels that would bring the Russian Federation to the table," Bessent said.
Nor was Bessent entirely alone. There was leaks to the press that the Trump administration was preparing a tough package of sanctions on Iran and Russia to try and compel an end to the Russo-Ukraine war. That being said, no one else close to Trump was publicly this encouraging. Marco Rubio, for instance, in his Secretary of State testimony was far less encouraging and frankly seems absolutely cowed by Trump (more on that later).
Now even Bessent was careful to say that the call is Trump’s and here the evidence is not nearly so clear. Trump has called for years for sanctions not to be strengthened against Russia, but to be relaxed. During the election campaign he was explicit about his dislike of using sanctions—specifically mentioning Russia. In an early September address, he went into his position in more detail.
“I want to use sanctions as little as possible….You’re losing Iran, you’re losing Russia. China is out there trying to get their currency to be the dominant currency,”
“There’s so much conflict with all these countries that you’re going to lose” the dominance of the dollar.”
Moreover, there are strong voices around Trump (Musk, Don Jr, Bannon, etc) who have been far more vociferous on the need to work with Russia—to the degree that Musk actually has called for better relations with Russia and a cut-off of aid to Ukraine.
At this point speculation is not really necessary—in just over a day we will get the real deal. However if you want an issue that will really tell what Trump wants to do—check out his new administration’s positions on Russian sanctions. That will reveal a great deal.
Ukrainian Ranged Strikes Continue
Last weekend I wrote a long section on the Ukrainian ranged strike campaign that seemed to be ramping up.
It was a very impressive week then—with major attacks across Russia. Those attacks were very well coordinated, with different types of UAVs being used to at least partly confuse and distract Russian air defense—allowing for a number of high value targets to be hit. In particular Ukraine seemed to be focussing on Russian fuel production.
This week not only did the attacks continue—they might even have been ramped up (stress on the might). On 14 January the Ukrainians claimed to have successfully attacked a range of targets across Russia which, in their own words, was the “most massive” attack Ukraine had launched so far.
Again, while we don’t have hard damage reports (and people should not overreact to pictures of fires—they can often look to be doing more damage than they are and the areas hit can be repaired more quickly), it does seem that a large range of targets were hit.
Once again, the Ukrainians seem to have undertaken a complex operation, using dummy drones to force the Russians to activate their anti-air defenses and then follow up with the real attacking force. Here is how one report on the subject described it.
Representatives of Ukraine’s 14th Separate Regiment of Unmanned Aerial Systems confirmed that decoy drones were used to distract and overwhelm Russian air defenses, creating openings for missiles to hit primary targets. Once defenses were compromised, some targets were then struck by additional waves of long-range drones
And once again, there seems to have been a heavy emphasis on Russian fuel production and its chemical industry. One target the Ukrainians specifically mentioned was the refinery at Saratov (picture below).
Here is a description of that, and some other of the facilities targeted by the Ukrainians.
Saratov was just one of the places that came under massive attack. Videos shared on Russian social media showed a significant fire at an industrial site.
In Engels, where a fuel depot had been extinguished just a day earlier after burning for five days, another drone strike reportedly ignited the same facility. Russian Telegram channels reported at least two new hits.
Drones also targeted a plant in Kazan, the capital of Tatarstan. This facility is a strategic site producing materials for military equipment, weapons, and components.
Additionally, Russians reported a missile attack on Bryansk, including strikes on the Bryansk chemical plant and the Kremniy plant.
(Boy—one could do a detailed piece comparing these targeting choices with that of the Anglo-American Combined Bombing Offensive in World War II—that will have to wait).
Anyway, the attack announced on the 14th did not end things. Just last night the Ukrainians claimed to have launched another round of attacks on oil depots in Russia’s Tula and Kaluga oblasts. No early reports of damage—but there definitely seems to have been some fires.
So the heartening thing from the Ukrainian perspective is not any one of these attacks, its that they seem to be able to keep it up—and at a pretty heavy clip. They seem to have found a way to spoof Russian air defenses, and they are hitting a wide range of targets.
Overall, added with a more robust sanctions regime—this is one of the worst period for the Russian war economy since the conflict started.
The Two Races
I’m going to end this update by discussing an intellectual framework for understanding how the war is now progressing that I have heard from a few Ukrainian contacts. Basically they are saying that the war has turned into a race to see which side will exhaust first—the Ukrainians or the Russians. The way that Ukraine has been forced to fight (and how Russia has been protected to this point) has turned the war into the kind of constant force generation-destruction contest that neither side can continue indefinitely—and at some point something will have to give.
The Ukrainian fear that I hear voiced is that with a US aid reduction or even cut-off, they could the side to exhaust first. They will start running short of the military equipment and the trained, motivated troops, to fight a cohesive defense. It wont be a case of a collapse, but the line will become harder to hold—and the result might be a cease-fire on very bad terms.
On the other hand, those same Ukrainians understand that in the second half of 2025, a Russian exhaustion of war fighting resources becomes ever more likely. The Russian economy is showing great strain (see above), Russian forces are depleting their equipment stores and can’t replace losses, and Russian troop quality is, if anything lowering. So, they see a very vulnerable enemy that they believe can be brought to the point of military failure—particularly if they can receive continued and improved western support, and wage a true ranged campaign.
So its a very schizophrenic picture—both sides are heading towards exhaustion. Ukraine could reach a crisis first, but Russia almost certainly will if Ukraine is aided in the right way.
Have a good rest of the weekend everyone.
The sanctions are still too timid. E.g. there has been no response to Russia jamming GPS signals over the Baltic area. The appropriate response would be to announce that any airline flying through Russian airspace would be banned from North American and European airspace. That would stop all major non-Western airlines from flying to Russia or even flying over Russia between East Asia and Europe (giving them competitive advantage over European and Japanese airlines flying longer routes to avoid Russia). Furthermore, a warning could be issued that if Russia does not cease and desist, airlines holding a stake in sanctioned airlines would be sanctioned too (and then airlines having codesharing agreements with them), potentially with further escalation to ban US banks from dealing with any sanctioned airline and (ultimately) any bank dealing with a sanctioned airline. That would lead to virtually no foreign airline flying to Russia. And pressure could be further notched up by banning all flights between North American and European airports and any airport allowing Russian planes (either airliners or private jets) to land.
Looking at the US and parts of Europe and one might well ask if we are all f*cked. This might be the last normal Sunday for a while. Good luck everyone, especially to the Ukrainians.