<figure class="wp-block-image size-full"><img src="https://api.kyivindependent.com/storage/2022/02/GettyImages-1238719320-2.jpg" alt="" class="wp-image-12793"/><figcaption>People are seen outside the cordoned off area around the remains of a shell in a street in Kyiv on Feb. 24, 2022 after Russia launched an all-out war on Ukraine. (AFP via Getty Images)</figcaption></figure>



(Editor's note: This op-ed was first sent out to Mr. Ash's mailing list subscribers. The Kyiv Independent is republishing it with permission.)



I'm sad to say that my baseline scenario, which I have held since the US intel warnings in November, is playing out - I have warned of a defining Russo-Ukrainian war since 2015.&nbsp;And that war is happening.



Very, very sad. Ukrainians are the good guys here - standing up, fighting to defend our system of Western liberal market democracy.



Here is my initial assesment on what Russia's full-scale invasion means for the countries involved, and the world, at this point:



 Ukraine: depends what Putin wants. Is it regime change, or a new Treaty which puts Ukraine under Russia’s geopolitical orientation? If Putin forces regime change on Ukraine then that new administration in Kyiv would be a pariah in the West. It will not be able to finance itself in international markets and Russia will have to pay the substantial price tag for funding it -- tens of billions of dollars. If it’s a new treaty that will create social and political instability in Ukraine -- but that’s likely what Putin wants. But Ukrainians will fight Russia, so let’s see how this all plays out.



 Russia: It's interesting to listen to Western leaders today: there is real shock and emotion. They feel totally let down and threatened by Putin. Putin is now recognised as the most imminent threat to our system of Western Liberal Market Democracy. I think massive sanctions will follow -- making Russia a global market pariah and uninvestible. 



This will increase borrowing costs, cut investment, lower growth, subdue living standards, and create social unease even unrest but likely put migration. Russians will be poorer. Eventually, they might rise up against Putin -- like in Kazakhstan recently -- but this might take years and will be met with brutal force. Russians will be paying for Putin’s adventures in Ukraine, Transdniestr, Abkhazia, South Ossetia, Syria, Libya, Mali, et al.



Remarkable the devastation wrought on Russian markets today. Equities down 50%, rouble down 10% and trading suspended, the Russia long bond down at 40 cents, it had been at 130 cents last year. This tells me that Russians did not think this was going to happen. They believed the Kremlin’s lies of "no war". They are now paying the price in their investment portfolios. 



Russians seem to be panicking trying to buy foreign currency due to uncertainty where this is going. Putin is crashing Russian markets -- but he does not seem to care.



As for the oligarchs? They should come out publically against Putin or face devastating Western sanctions.



China: This can go two ways. Either Xi will see a Putin win in Ukraine as a green light on Taiwan. Alternatively they might think that, with Putin now the number one pariah in the West, they can look to improve relations with the U.S. and Europe. Where Putin hated the status quo -- time did not work for him -- Xi likes the global status quo. So maybe Xi will reach over to Biden and offer to try and contain Putin, for a price.



 Global markets: This is a globally systemic hit to Western security. Putin is drawing a new Iron Curtain across Europe. Expect higher defence spending, higher energy prices which will play into the global stagflation story. Watch for energy importing losers - India, CEE, Turkey, Asia. And winners - GCC.

(Editor's note: This op-ed was first sent out to Mr. Ash's mailing list subscribers. The Kyiv Independent is republishing it with permission.)I'm sad to say that my baseline...

Timothy Ash: What Russia's attack means for the world

<figure class="wp-block-image size-large"><img src="https://api.kyivindependent.com/storage/2022/01/270313635_1401120896956886_3549547120483214467_n-1-1536x864-1-1024x576.jpg" alt="" class="wp-image-7841"/><figcaption>A Ukrainian recon team soldiers conduct live fire exercises near the border with Russian-occupied Crimea on Jan.4, 2022 (Joint Forces Command) </figcaption></figure>



Editor’s Note: This op-ed was <a href="https://www.atlanticcouncil.org/blogs/ukrainealert/putin-the-gambler-may-have-gone-too-far-to-back-down/" target="_blank" rel="noreferrer noopener">published by Atlantic Council</a>. It is republished here with permission.



Russian President Vladimir Putin has moved to escalate tensions with Ukraine in recent months by putting a huge and unprecedented Russian military force on its borders while launching a concerted “coercive” diplomatic effort sketching out new red lines for NATO.



While his next steps are uncertain, some still believe he will ultimately deescalate. However, it is far from clear whether he can do this without losing face if, as seems likely, NATO and Ukraine only concede to very few of his demands. This will loom large in his decision-making process from here on.



So far, Putin has secured a number of wins from the current crisis.



He has got the attention of the Biden administration and the West in general. Biden rewarded him with a summit call in late December, while there have also been subsequent high-level meetings between Blinken and Lavrov and their deputies.



It is important to remember here that the likes of US National Security Advisor Jake Sullivan had earlier persuaded Biden to pivot to Asia and focus on the three Cs: Covid, Climate and China. Instead, this year it has been all about Russia. Putin has made clear that he is not just a footnote in US foreign policy but remains the first chapter and maybe an entire book to be written later this year.



Putin has enhanced his image as the guy who calls the shots and the poker player with all the cards. More than ever, he is seen as a leader who everyone has to contend with if they want solutions to the geopolitical problems that he typically creates himself.



He has also forced NATO to focus on security challenges in Europe. By setting outrageous red lines in terms of no NATO deployments to members that joined after 1997, he has made people question further enlargement, particularly to Ukraine.



By creating a crisis in Eastern Europe, Putin has succeeded in exposing Western weakness and divisions, both within the EU and in terms of Europe's relations with the US. Herein note Emmanuel Macron’s ludicrous idea that Europe can decide on its own security arrangements. How does the French President hope to defend Europe against Moscow’s overwhelming conventional military superiority without US troops?



Germany’s role has also been brought into question by tribulations over NS2 together with Berlin’s incredible double standards in not providing defensive weapons to Ukraine and preventing others from doing so.



Meanwhile, energy prices have been driven higher by the current geopolitical crisis, helping improve Russia’s balance sheet. That said, this could have been achieved without a military escalation and by just restricting energy supplies to Europe, which also seems to have been done according to IEA chief Fatih Birol.



The crisis has allowed Putin to highlight Russia’s significant military capability to the world and demonstrate his willingness to use it in support of “coercive” diplomacy. The build-up along the border with Ukraine has served as a showcase for the huge upgrade achieved thanks to the investments made in the Russian military over the past decade. However, this impressive vision of military might has yet to pass the ultimate test of effectiveness in action and might still be a Potemkin Village.



These are all clear wins for Putin, even if he chooses to go no further. But what about the other side of the ledger?



If the Russian leader does not proceed with some form of military action in the weeks ahead, his bluff will have been called. Critics will inevitably say that while he was able to move thousands of troops up to the border and make threats, he lacked the gumption to pull the trigger. He had the chance to take Ukraine and he bottled it, they will argue. As a result, any future attempt to threaten a major escalation may not be taken seriously.



By backing away from a military escalation, Putin would risk being accused of failing to secure serious concessions on Ukraine or from NATO. He would be seen as a man who talks a lot and threatens but, when faced with a tough response from the other side, eventually backs down.



While exposing divisions in the West, Putin’s coercive diplomacy has also shown him to be the main threat to European security. Even in Germany and France, the PR campaign has been lost by Putin and public opinion is shifting against him. The West is uniting around the idea that Putin is a problem and needs to be countered.



This crisis and the pressures put on energy markets in Europe will re-enforce the view that Russia is an unreliable energy supplier. Irrespective of the ongoing debate over the Nord Stream 2 pipeline, this will accelerate Europe’s diversification away from Russian energy and Russian trade in general, weakening the Russian economy and increasing its dependence on China. This might not be particularly appealing for Putin as Russia faces a huge long-term security threat from China in its Far East.



Crucially, Ukraine has not buckled under Kremlin pressure. Instead, Putin’s military build-up and the threat of a full-scale invasion have cemented opposition to Russia in the country. Ukrainians have rallied in large numbers to join self-defense units, while the West has come out clearly in defense of Ukrainian sovereignty and the country’s right to self-determination.



Ukraine is currently being re-armed at an accelerated pace, despite this being one of Russia’s main concerns. Ukraine is now considerably better able to defend itself that at the beginning of the crisis just a few months ago. US military aid has increased while Britain, the Baltic states, Poland, Canada, the Czechs and the Dutch have all stepped up military support or vowed to do so. As a result, the cost of any Russian military victory in Ukraine is now likely to be significantly higher.



Putin is already paying a price for the current confrontation, which is further damaging Russia’s image as an investment destination. Geopolitical and sanctions risks have increased. Fewer foreign investors will want to invest in Russia and those already there will reduce exposure.



This means higher cost of capital and lower growth. It also means lower living standards for Russians and a greater risk of Kazakhstan-style social unrest. Putin will likely respond with more repression. Russia risks becoming trapped in a vicious cycle of less foreign investment, lower growth, and declining living standards.



Given the numerous negative outcomes Putin presently faces, I would argue that he risks emerging from the current crisis as a net loser unless he proceeds further. Does he see it the same way? If so, will he escalate from here? At this point, he may feel that he has little choice.

Editor’s Note: This op-ed was published by Atlantic Council. It is republished here with permission.Russian President Vladimir Putin has moved to escalate tensions with Ukraine in recent months...

Timothy Ash: Putin the gambler may have gone too far to back down

<figure class="wp-block-image size-large"><img src="https://api.kyivindependent.com/storage/2021/12/hIqLJ3DWZmsyAdkFjyF8wqKOXZkpVIJT-1024x683.jpg" alt="" class="wp-image-5438"/><figcaption>Russian President Vladimir Putin holds his annual press conference at the Manezh exhibition hall in central Moscow on Dec. 23, 2021. (kremlin.ru)</figcaption></figure>



I have certainly put myself out there as having the most hawkish view on Russia (compared to the street consensus), but I still find it difficult to see anything but escalation by Russia with Ukraine from the current postures.&nbsp;



Why?



First, I just don’t see much room for compromise between the two sides.&nbsp;



Moscow has in recent weeks clearly set out its wish list in terms of what it would want from any security settlement with the West. These demands include:



<ul><li>No further NATO enlargement, including to Ukraine and Georgia, but also to the likes of Finland and Sweden;</li></ul>



<ul><li>No NATO deployments/training exercises in former Soviet Union states like Ukraine and Georgia;</li></ul>



<ul><li>No NATO deployments to member states which joined the organization after 1997, so the likes of Poland and the Baltic states (which would in effect become second class NATO members);</li></ul>



<ul><li>No re-armament of Ukraine, in effect Russian President Vladimir Putin is arguing for Ukraine to be put back into Moscow’s strategic orbit, or de facto rendered unable to defend itself and hence put at the mercy of Moscow which has shown its willingness to militarily intervene in Ukraine when it previously had little defensive military capability (2014-2015);</li></ul>



<ul><li>No deployment of U.S. nuclear weapons outside of the U.S. – so a pull back from Europe;</li></ul>



<ul><li>No deployment by NATO of short or intermediate range nuclear missiles within strike range of Moscow.</li></ul>



In the weeks leading up to the <a href="https://kyivindependent.com/national/russia-nato-remain-divided-on-key-issues/">meetings</a> this week the U.S. hinted of a possible compromise, in terms of offering further U.S. troop withdrawals from Europe – but this seemed to generate a furious/concerned response from Europe, which appeared unnerved if this meant a reduced U.S. commitment to European security. The U.S. subsequently appeared to backtrack.



And this week we have appeared to see the crystallisation of the Western/NATO response to Russian demands which has been that the West will not be forced to concede ground due to Russian bullying, and that Russia needs to first pull its 100,000 troops from the border with Ukraine, before any deal/concessions are possible. But even then the West has made clear that Russia has no veto on NATO enlargement, and that countries like Ukraine and Georgia have still a route to NATO membership, but it is up to NATO and the prospective members to determine membership, or not, not Russia.



The Russian demand for NATO to withdraw troops from post-1997 NATO members has been met with incredulity, especially from the 97+ new entrants.



Even the demand for no NATO deployment to former Soviet Union states/re-armament of Ukraine has received short shift, with the view being that these states have the right to be able to defend themselves, and that is all that NATO is doing – it is not giving them offensive military capability. Indeed, if one considers Ukraine, it had little defensive capability in 2014, and yet this did not discourage Russian annexation of Crimea or military intervention in the Donbas. The view hence is that well if non-aligned/non-armed in effect status in 2014 did not work, these states might as well be helped to build capacity to defend themselves, and indeed, this is the best defence for NATO against future Russian aggression.



So herein on the Russian wish list above, on the security-related agenda, it's hard to see much/any room for compromise.



Second, the focus this week has very much been on the security agenda, but it's hard to get away from the basic fact that the current crisis centres on Ukraine, and Putin’s difficulty in accepting the results of the EuroMaidan Revolution in 2013-2014.



I think Latvian Prime Minister Arturs Krišjānis Kariņš summed things up very well this week when he quipped that “Moscow is not afraid of NATO forces but Ukrainian democracy.”



Moscow talks a lot about security risks from NATO and Ukraine, but again it is worth restating that Russia annexed Crimea in 2014, and militarily invaded the Donbas, resulting in nearly 14,000 deaths when Ukraine back then had no NATO ambitions (opinion polls showed single-digit support), limited capability (seen by the fact Crimea was annexed in a weekend, and Ukraine’s heavy military defeats in Illovaisk et al in 2014-2015) – it had a tough time defending itself against the Russian-backed assault in the Donbas only halted by the Franco-German peace effort which resulted in the Minsk 2 peace plan, but also Ukraine’s military doctrine back in 2014 was aimed Westwards, not against Russia.



Putin cares about Ukraine – so much so that he wrote a 5,000-word essay on Ukraine over the summer where he challenged Ukraine’s very right to exist. I think what is clear from Putin’s actions that he cares deeply about Ukraine and you can take the annexation of Crimea, the invasion of the Donbas, efforts to diversify trade and energy transit/supply away from Ukraine, cyberattacks, the $3 billion Eurobond dispute in London courts, as all part of an agenda to undermine Ukraine, and its push Westwards. Putin wants Ukraine’s Western post-EuroMaidan orientation to fail, albeit perhaps perversely his actions have had the opposite effect of making Ukrainians more determined to move West – note here that popular support for NATO membership has increased from single digits in 2013 to 50-60% now.



Putin thinks Ukraine is really Russian/Russia, but Ukraine’s own democratic profile threatens Putin’s system of governance at home in Russia itself. If Ukraine’s democratic model is successful, then maybe, indeed likely, Russians would want something similar, meaning the risk of a coloured revolution and regime change itself in Russia. Putin not only wants the Ukrainian democratic model to fail but he wants to pull Ukraine back under Russian tutelage.



There was some sense with Minsk 2 that Putin was willing to wait, to bide his time, on the assumption that the Ukrainian democratic model would inevitably fail, leaving Russia to then pick up the pieces. But Putin now seems to be suggesting, with his deployment of 100,000 troops on the border with Ukraine, that the status quo achieved with Minsk 2 is no longer working. I think here he thought that the greater “autonomy” promised for the occupied parts of Donbas in Minsk 2 would push Ukraine towards a federal structure where its eastern regions would ultimately have a veto on its Western orientation. But lack of clarity over what greater autonomy meant in Minsk 2 has crippled its implementation and has not stopped Ukraine’s shift West.



Putin now seemingly wants to stop this process. But how? How can Putin prevent another sovereign country’s right to self-determination and the right to decide on its own geopolitical orientation? He cannot give the status quo – which he seems now to have realized, hence the new threatening military build upon Ukraine’s borders. Putin seems to be trying to use menace to force Kyiv to implement Minsk 2 as per the Moscow interpretations, but not the interpretation of others, including Kyiv.



Third, I just feel the timing is so opportune for Putin in terms of his desire to fundamentally change the geopolitical status/orientation of Ukraine and the security settings in Europe, through conflict. It’s kind of now or never.



Herein I would just highlight:



a) Europe, and the West, is more divided than at any time since the end of the Cold War. The EU is weak, has little joined up thinking or real strategy on foreign policy, and no security capacity. The US administration is still reeling from the effects of the Trump presidency, and the impacts of the Capitol Hill riots. The U.S. President Joe Biden's team wants to focus on the three Cs, Covid-China-Climate, and up until Putin concentrated their attention in late November with his military buildup on the border with Ukraine, wanted to focus on China. The withdrawal from Afghanistan, left an impression that the U.S. was in decline and was uninterested in foreign military intervention, and lacked the stomach to support allies – and Ukraine might not be a NATO member, but it is a U.S. ally. Never since the end of World War II has the U.S. been signalling such a reluctance to “get involved” overseas. Perhaps Putin could also note the U.S. focus on China, and the risks therein of a Chinese push against Taiwan, as being a bigger security concern/priority for this U.S. administration. Putin senses a lack of stomach in the Biden administration to stick up for Ukraine.



b) NATO/the West has no ability/desire even capacity to intervene militarily to assist Ukraine. Moscow knows this.



c) The West might threaten sanctions, but the experience with Russia sanctions post 2014 has been they have tended to underwhelm, as Western countries have not been prepared themselves to take any pain. The West has hence tended to cross out sanctions which would hurt Russia, but which threatened backdraft to Western economies. In reality it has not left very much of effect left to deploy on the sanctions front. And surely Russia thinks that if it attacked Ukraine, similar constraints on the West would apply. For example, any move to sanction Russian SWIFT transactions likely would result in Russia restricting energy supplies to the West – hence SWIFT is unlikely to be sanctioned. In a scenario where Russia again attacks Ukraine, the West might try and roll out some face-saving, low-impact sanctions, but its priority at that point in time will be at getting the sides back to the negotiating table and it will be reluctant to do anything which might complicate this effort. It's fine talking about tough sanctions now, but after the event it's kind of a bit too late. And Moscow knows this – as it has spent huge effort and expense lobbying in the West against sanctions.



d) The Russian macro/balance sheet is strong enough to ride thru any likely Western sanctions. Maybe this is as good as it might get given the longer-term outlook for the carbon transition. The current account is running a large surplus of 7-8% of GDP, the fiscal deficit is small, public debt is less than 20%, and sovereign financing needs limited. CBR FX reserves are close to $630 billion, with the sovereign wealth fund close to 10% of GDP in assets. 



e) The carbon transition suggests a challenging longer-term outlook for energy exporting Russia. Likely Europe will look to reduce carbon energy imports, and particularly from Russia. It is interesting that even during the Cold War, Russia did not mess with energy supplies to Europe – worried about killing the golden goose and pushing Europe to diversify away from Russia. This year has been different – if you believe the IEA chief in the Financial Times, Russia has been restricting energy supplies to Europe for geopolitical advantage. Why? It seems here that Moscow has realized that the carbon transition is going to happen anyway, Europe will diversify away from Russian carbon energy supplies whatever. And as a result Moscow’s leverage through the energy channel will inevitably fall with time. If it has leverage it is now, this winter, and helped by other structural energy/demand problems in Europe which are bolstering energy prices in Europe. It has sought to take advantage of these even though it will accelerate energy diversification away from Russia – Moscow seemingly thinks this is a risk worth taking, as it's going to happen anyway.



f) Putin absolutely controls domestic politics – he recently won re-election, and the ruling party, United Russia, swept up State Duma elections. The political opposition has been arrested or forced underground. Demonstrations are not tolerated, and the example of recent Kazakhstan protests would suggest that any repeat in Russia would be met with extreme force. People argue that a military intervention in Ukraine would be unpopular – Russians would not like to see large numbers of Ukrainians killed. Well the answer to that is they have not done much in response to nearly 14,000 Ukrainians dying in the Donbas as a result of Russian aggression. And ultimately Putin controls the domestic media narrative at home – and if it was a successful military assault, he would win domestic popularity. A further military assault in Ukraine, if successful, would not see regime challenging protest in Russia. And even if there was, Putin would likely see this as a risk worth taking if it results in a geopolitical win cementing his place in Russian history.



g) And for Putin it's all about history – the end of the Soviet Union was the biggest catastrophe in the 20th century, he believes. Last year marked the 30th anniversary of the end of the Soviet Union, and Putin is likely focused on his place in history in his 22nd year in office. Would he want to go down in history as the Russian leader who had the chance to win Ukraine back, and bottled it?



Some have argued that the talks this week are enough of a win for Putin, that he has made his concerns on Ukraine in NATO heard, and already the latter de facto is a non-event. But I just cannot see this being enough for Putin – he has set out such explicit red lines/demands for them to be ignored.



This looks like a loss for Putin – his bluff being called. And again, I would argue that the status quo no longer works for Putin, albeit it works for the West and Ukraine. The status quo allows Ukraine to continue on its Western path, moving even further out of Russia’s orbit. And that is absolutely not what Putin wants.



Time is not on Putin’s side, has he just figured this out?

I have certainly put myself out there as having the most hawkish view on Russia (compared to the street consensus), but I still find it difficult to see...

Timothy Ash: Putin is preparing for war

<figure class="wp-block-image size-full"><img src="https://api.kyivindependent.com/storage/2022/01/photo_2022-01-05_07-44-31.jpg" alt="" class="wp-image-6237"/><figcaption>Activists take part in a rally on Jan. 5, 2021 in front of the administrative building in Aktobe, Western Kazakhstan. (orda_kz)</figcaption></figure>



Editor’s Note: The following are the analytical notes that Timothy Ash, senior strategist at Bluebay Asset Management, distributes to his subscribers. The Kyiv Independent is reposting it with permission.



It seems that “order” will be restored in Kazakhstan, but only with the help of Russian/CSTO (Collective Security Treaty Organization) troops.



The subsequent crackdown will likely be far reaching.



Events this week seemed to suggest that Kazakh security forces were reluctant to fire on their own people - no such problem exists for Russian President Vladimir Putin, who has proven more than willing to put down his own citizens, so will have absolutely no qualms in doing the same in other countries.



I would expect the bulk of the manpower here to be Russian, but with Belarus’ security forces using some of the “techniques” they have recently deployed at home.



Lesser parts are likely to be played by more reluctant partners such as the Armenians and Kyrgyz. All very sad but predictable, as it was always clear that Putin viewed Kazakhstan to be firmly in the Russian “sphere of influence” and Moscow would ultimately intervene if needed.



I think Moscow likely gave Kazakh President Kassym-Jomart Tokayev the ultimatum to clear demonstrations, or Russia would do it for them. This might ultimately end up with Northern Kazakhstan sliced off - the part where ethnic Russians are mostly located.



One can see shades here of Ukraine’s revolutions in 2003-2004 and 2013-2014, where Moscow gave Presidents Leonid Kuchma and Viktor Yanukovych orders to clear the streets of Kyiv, or else. Kuchma largely avoided bloodshed during the Orange Revolution, Yanukovych didn’t in 2014, and the rest is history.



In any event, the Kazakh “spring” looks set to turn into a long winter for the opposition.



What’s notable here is how the West has held its punches in criticizing Tokayev or still-influential ex-President Nursultan Nazarbayev. Perhaps Western leaders are mindful of not playing into the Russian narrative that this is all a Western plot and another attempt at a color revolution.



The West’s focus is on the looming US/NATO - Russia talks on Ukraine, and U.S. President Joe Biden does not want to make those negotiations even more difficult. There may also be a recognition of Kazakhstan’s important position as a major supplier of raw materials to global markets. There may also be a desire to see how this all plays out before reacting.



Global economic impact



From a market perspective the question will be: if the worst case happens and we see a brutal crackdown, will the West respond with sanctions and how does this impact Kazakhstan’s Environmental, Social, and Governance score (a rating used by investors to assess the social impact of putting money into a country)?



Will Kazakhstan follow Belarus’ course? It has become difficult lately for Western portfolio investors to hold Belarusian assets. Again, the broader setting in terms of U.S.-Russia relations and Kazakhstan’s importance in the global raw material supply chain will likely be significant.



There are still huge Western foreign direct investments in the country - from oil and energy to metals and even agriculture.



Presumably any crackdown will be accompanied by big social spending - looser fiscal policy and worsening the public finance profile, albeit from a very strong starting point with low debt ratios and plenty of foreign currency reserves. The popular focus on inflation will likely see the National Bank of Kazakhstan adopt a very hawkish monetary policy stance, as well as foreign currency intervention to keep the national currency, the tenge, stable.



A question arises here: if Russian troops are used to suppress Kazakh opposition, how will this impact popular perceptions of Russia, and will it risk a longer-term surge in Kazakh nationalist sentiment, which might be more difficult to control?



Ukraine crisis impact



I still don’t see all this having much of an impact on the crisis around Ukraine, and the U.S. President Joe Biden-Putin Geneva summit.



I think Putin will be smarting over what he will see as a Western plot in Kazakhstan. He will look for a face-saving payback in Geneva and ultimately in Ukraine.



Biden likely sees less need now to concede ground to Putin - he will see Putin as weakened by this and militarily stretched and less likely to further attack Ukraine. I think that would be a miscalculation as I think the wounded Putin is likely to be more dangerous now.



One final note in terms of Russia’s reaction to events in Kazakhstan: clearly Moscow would have planned for such an eventuality in Kazakhstan.



A military playbook would already be prepared, and they have just rolled it out. While Moscow likely will have been shocked by how quickly the unrest spread, and how quickly Kazakh security forces were overwhelmed, it has still tried to take advantage of the crisis — as it did in Belarus after elections challenged President Alexander Lukashenko’s dominance.



What we are seeing as a result is Russia tightening its grip on the near abroad — Russia is weakening the sovereignty of Belarus and Kazakhstan. Will this make the Russian-controlled “bloc” stronger?



The danger here is that a less free former Soviet Union space sees economic stagnation, outmigration, and decline. Security might be tighter in the bloc, but the long-term economic outlook is weaker as a result.

Editor’s Note: The following are the analytical notes that Timothy Ash, senior strategist at Bluebay Asset Management, distributes to his subscribers. The Kyiv Independent is reposting it with...

Timothy Ash: What Kazakhstan's protests mean for the global economy

<figure class="wp-block-image size-large"><img src="https://api.kyivindependent.com/storage/2022/01/Clip-11-1024x682.jpg" alt="" class="wp-image-6111"/><figcaption>Protesters storm the mayor's office in Almaty, Kazakhstan's biggest city, on Jan. 4, 2021. Mass demonstrations broke out in Kazakhstan in early January following a spike in fuel prices. (Courtesy)</figcaption></figure>



Editor’s Note: The following are the analytical notes that Timothy Ash, senior strategist at Bluebay Asset Management, distributes to his subscribers. The Kyiv Independent is reposting it with permission.



Despite fighting talk from Kazakh President Kassym-Jomart Tokayev, it’s unclear whether he has the support of enough of the security forces to re-impose control in the country where demonstrations have erupted over the weekend following a spike in fuel prices.&nbsp;



Reports are of security forces surrendering to the demonstrators and of Almaty airport also falling.



In the end, the question is whether Kazakh security forces are willing to fire on their own people, and as of writing the answer seems to be no.



So Tokayev’s days in office seem to be numbered unless he gets outside support.&nbsp;



He could get external security support from Russia, Belarus or less likely Uzbekistan (Kazakhs and Uzbeks are regional rivals and going to Tashkent for support would be seen as almost treacherous by most Kazakhs).



Russian President Vladimir Putin is likely furious by events on the ground and will no doubt blame the West/CIA.&nbsp;



This is a threat to Putin on multiple fronts:



<ul><li>He hates coloured revolutions as these make him fearful that Russians could in turn rise up to overthrow him.</li><li>He hates the prospect of a more liberal Kazakhstan turning to the West - he still sees Kazakhstan as falling under the Russian strategic umbrella.</li><li>He fears political instability in Kazakhstan could provide a breeding ground for Islamic extremism feeding then through to southern Russia.</li><li>He is fearful of the security and status of Kazakhstan’s large ethnic Russian population which is largely located in northern Kazakhstan adjacent to Russia.</li><li>This is an afront to Putin’s vision of a Eurasian Union, which Kazakhstan has been a member of. Unrest in Kazakhstan implies things are not all sweetness and light and people in the Eurasian Union are discontented - unrest in Belarus underlines this image of the common economic space between Russia, Belarus and Kazakhstan not working.</li><li>It’s an afront to his vision of autocracy and sovereign democracy.</li><li>Kazakhstan had been presented as a model for Putin’s own retirement - following former Kazakh President Nursultan Nazarbayev’s move to the position of father of the nation, a position that has clearly proven unsustainable. Putin now should worry about his own retirement.</li></ul>



If Tokayev is unable to deploy sufficient security forces to stabilize the situation then Putin will. Expect little green men to appear soon on the streets of Kazakhstan.



Failing that, expect Russian forces to annex northern Kazakhstan to protect ethnic Russians.



And how does this play to the Geneva talks between Biden and Putin on Ukraine?



Putin is likely to be smarting about developments in Kazakhstan and hence less likely to compromise over Ukraine - he will just see developments in Kazakhstan as another Western plot against him. He is also likely to be smarting and looking for a big win on Ukraine as a diversion from his humiliation in Kazakhstan.



Biden will likely see the situation in Kazakhstan weakening Putin - the US will appraise the situation as making it less likely that Putin would risk a crisis on two fronts. So Biden is less likely to compromise. So I would surmise that this makes the situation in Ukraine more, not less dangerous. Putin the wounded leader and Biden feeling to be in the ascendancy.

Timothy Ash: What Kazakhstan unrest means for Ukraine amid upcoming US-Russia security talks

<figure class="wp-block-image size-large"><img src="https://api.kyivindependent.com/storage/2021/12/Untitled-1-1024x683.jpg" alt="" class="wp-image-4097"/><figcaption>The building of the National Bank of Ukraine. (bank.gov.ua)</figcaption></figure>



Editor's Note: The following are the analytical notes that Timothy Ash, senior strategist at Bluebay Asset Management, distributes to his subscribers. The Kyiv Independent is reposting it with permission.



With lots of focus now on the heightened military threat from Russia, I assume there will be concern about how durable the Ukrainian economy would be through a period of accentuated Russian pressure.



Not sure we are going to see a collapse in investment into Ukraine until the bullets actually fly. I think most real asset investors in Ukraine are well versed in the geopolitical risks around Ukraine and are in the country for the long run. They understand the challenges but see great long-term opportunities still. 



Foreign direct investment flows have been disappointing in recent years and I think that is reflected to some extent in the disappointing growth/recovery story in 2021, with real GDP (gross domestic product) growth likely to come in around 3% for the full year, after a 4% real GDP contraction in 2020.



That’s disappointing given the low base, and is around half the rate elsewhere in the region, as compared with the likes of Hungary, Poland and Romania. The latter though has had the benefit of various European Union recovery funds. Ukraine obviously has geopolitical risks, but also lots of noise around corruption, judicial reform and general business environment stuff. 



But the broader macro position is encouraging. I think technocrats at the National bank of Ukraine (NBU) and the Ministry of Finance, backed by the International Monetary Fund (IMF), have done a stellar job since 2014 turning the story around - they deserve medals for their contribution to the defense of Ukraine. 



Just to think back, but compared to 2014-2015 foreign exchange reserves at the NBU are now six times higher, at over $30 billion, and providing something like 100% coverage of gross external financing needs. This is a reflection of a much-improved balance of payments (BOP) position. Compared to 2013 when the current account deficit was a stonking 9.2% of GDP, it was actually in surplus last year at 4% of GDP and is expected to be close to balance this year, before moving into a moderate deficit in 2022 due to the increased cost of energy imports.



The improvement in the current account reflects structural changes in the energy sector, with higher prices and energy conservation reducing consumption and import demand. It also reflects the remarkable resilience and growth in worker remittances which are up around 25% year-over-year in 2021 to something close to $14 billion (and double the level from 2014).



I guess the downside on the latter account is that this reflects the migration of young, talented Ukrainian workers to places like Poland and the UK. Great for the recipient countries but a brain drain for Ukraine, albeit the plus is the support the return flows bring to the current account, helping to support the hryvnia.&nbsp;



Finally, on the foreign trade front, Ukraine has benefitted from favorable terms of trade, and also a great harvest this year.



The trade turnaround from 2014 is again remarkable, as there has been a complete reset and reorientation from heavy reliance on trade with Russia, to now overwhelming dominance of the EU/UK in trade - a decade early two-thirds of trade was with Russia, now it is single digits. This has again reduced Ukraine’s vulnerability to economic warfare from Russia.



As noted the strong balance of payments, solid foreign exchange reserve buffer, plus also IMF/IFI support have kept the hryvnia strong this year - one of the best performing emerging market currencies. Arguably it is a little too strong and might benefit the broader economy if it were a little weaker. 



Public finance has also much improved since 2014, with the quasi-fiscal deficit cut from 8% of GDP to around 2% of GDP before Covid-19 hit. Around 6% of GDP last year, it is expected to be something at or below 5% of GDP in 2021, with the hope to reduce the deficit to something around 3.2% of GDP in 2022.



Fiscal restraint/reform, strong debt management, and real federal exchange appreciation (still high share of FX debt in the total) have enabled the ratio of general government debt to GDP to decline to something like 55% this year, from a peak of close to 90% in 2015 around the time of the debt restructuring, and a pick up due to Covid-19 to 61% last year.



Fiscal performance has been strong relative to its Central and Eastern European peers this year, which are still running much larger deficits and have benefited from stronger real GDP growth drivers. Much of the acclaim herein should go to the Ministry of Finance for spending restraint and reform, revenue collection and debt management.



So the balance of payments and public finance profile looks solid, there is a decent foreign exchange reserve buffer and the hryvnia has been strong/stable, albeit there have been some signs of some local selling around geopolitical concerns this week. But the latter has been met by some foreign exchange reserve intervention, and the NBU has helped send a message of assurance by keeping monetary policy orthodox, continuing to follow its respected emerging market peers by continuing to hike policy rates in response to inflation rising above 10%.



This week we saw another 50bps hike in the base rate to 9% which was absolutely the right move. And the latter kind of shows that, despite some fairly worrying management changes at the NBU in recent years, the policy remains reassuringly orthodox.



Ukraine’s economic problems in my mind are more long-term, and the challenge is about raising long-term growth potential - which requires a faster pace of structural reform. This means doing more to fight corruption, revamping the judiciary, making Ukraine a better place to do business, invest and live - and get some of those likely 5-6 million talented Ukrainians working overseas back. 



Obviously reduced geopolitical risks would help - it would be great if its big eastern neighbor would stop doing stuff to derail its development. Without the latter threat, I think Ukraine could end up being a remarkable success story.



I guess the reality is the Russian military threat is real. And conflict would be very damaging as in the peak of the Russian intervention in 2014-2015. Likely the hryvnia would weaken on a worsening security situation in the East. The NBU likely would meet some of that with further foreign exchange intervention and likely further rate hikes. I also expect further and significant Western financial support for Ukraine - good recent news with an additional £1 billion from the UK, increasing its export support program to £3.5 billion. I expect other friendly states to follow suit, seeing Ukraine as in the front line defending Western liberal market democracy from autocracy and bullying.



In conclusion, though, I think the Ukrainian macroeconomic situation is a world apart from that in 2013-2015 at the time of the Euromaidan Revolution, the annexation of Crimea and then Russian military intervention in the Donbas.



Better macro underpinnings, a likely strong and credible policy response and significant Western financial support should provide a large degree of durability. But obviously much depends on the scale and level of destruction wrought by any Russian attack.



You would hope that if Russian President Vladimir Putin’s end game is ultimately better relations with Ukraine he would be mindful of the level of economic chaos wrought, albeit in truth that seemed low on his list of priorities back in 2015.

Editor's Note: The following are the analytical notes that Timothy Ash, senior strategist at Bluebay Asset Management, distributes to his subscribers. The Kyiv Independent is reposting it with...

Timothy Ash: Ukraine has much stronger macro, better able to endure Russian aggression

Timothy Ash is a London-based senior emerging markets sovereign strategist for Bluebay Asset Management Company.

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Timothy Ash