The planned Nord Stream-2 natural gas pipeline running from Russia to Germany under the Baltic Sea appears all but dead as a result of Russia's invasion of Ukraine.
The planned Nord Stream-2 natural gas pipeline running from Russia to Germany under the Baltic Sea appears all but dead as a result of Russia's invasion of Ukraine.

Our colleagues at TangentLink share with Armada their latest assessment of the economic and strategic fallout from the ongoing war in Ukraine.

Bottom-line: Events are now moving very quickly. The axiom that economic war can lead to real war, may soon be tested. The timeline on potential Russian escalation has been pulled forward by the impact of Western sanctions, and the European Union’s (EU’s) announcement to reduce imports of Russian gas. Russia is heading very quickly toward a sovereign default on its foreign debts, and a collapse of much of its banking industry. The hope that sanctions will push Mr. Putin to conclude his Ukraine war is optimistic, but not impossible. A complication, aside from his own intransigence, is that he must maintain face with his clique, in addition to the brainwashed masses in Russia starting to aim their ire (from sanctions impact) at the West. The potential shape of Russian escalation has been widely discussed, especially regarding Putin’s willingness to deploy NBC (Nuclear, Biological and Chemical) capabilities. His weaponisation of Ukrainian refugees has failed, doubtless to his annoyance. Collateral damage from Western sanctions is already feeding into global emerging markets; lenders and borrowers alike are scrambling. China and other non-Western creditors clearly have the option to step-in, but as with Iran and Venezuela, it will be on their (geo-political) terms, which are unlikely to serve Western strategic interests. We can expect Mr. Putin to escalate his nuclear posture, and his reliance on China. Global financial markets are yet to fully reflect the damage that is occurring to the world economy. An escalation by Mr. Putin will only compound negative outcomes. A question that the media in the West have started to ask, is which of Mr. Putin’s December ‘demands’ are true NATO ‘red lines’, and whether negotiation and de-escalation is possible. Mr. Putin’s nuclear posture, and NATO’s reaction, will likely be the next pieces to move on the board.

Why escalation now? Mr. Putin has been a master of inventing pretext in his 20 years leading Russia, from the Chechnyan ‘apartment bombing’, to his invasion of Ukraine. Western sanctions and NATO supply of weapons to Ukraine, in combination, are a potential reason for him to escalate against the West. Introducing martial law in Russia would be a key signal, one that he would cloak with, ‘in order to protect Russian society during this extreme uncertainty’. With much of his conventional forces bogged down in Ukraine, he has few alternatives near term, even though he has kept much of his force structure in reserve (as an aside, we do not subscribe to the ‘Potemkin village’ thesis re Russia’s EW capabilities). EU/US moves over the past week to rapidly de-fang Mr. Putin’s energy weapon (and damage the Russian economy), is a seminal move that Putin probably didn’t forecast, especially re EU gas imports. This, combined with the speed of contagion within the Russian economy, would be his primary motivators to escalate.

The potential shape of escalation? In the absence of moving large conventional forces to the borders of NATO nations, Mr. Putin’s only effective tool is nuclear escalation, especially given the speed of deterioration of the Russian economy. NATO and US policy response mechanisms to Russian use of tactical nuclear weapons has been clear, but suggests that strategic escalation, or enhanced conventional response (mainly by the US) would be threatened, rather than reciprocal use of tactical nuclear weapons on European soil.  NATO tactical nuclear capabilities have not had the same spending focus as for Russia. Russia has laid out clearly and publicly, the conditions for the use of tactical nuclear weapons, below a strategic threshold – which justify their use if Russia needed to prevail in a conventional conflict, or was attacked. Mr. Putin could well choose to define ‘attack’ as, ‘existential economic sanctions currently being employed by the West’. Mr. Putin’s potential gambit is considered by arms control experts to be that the US would not resort to a strategic exchange in response to a tactical event. Best estimates suggest Russia has overmatch vs NATO in Europe of between 10-30 times the number of deployable tactical nuclear weapons. This US Congressional Research Service note offers an overview:

The potential shape of ‘global economic contagion’? The Washington Post did an excellent piece on global contagion from the stresses in the Russian financial system, and a potential default by Russia on its sovereign debts ( This potential contagion is separate from (and in addition to) the factors we laid out in our previous note, regarding the new global paradigm for global energy, food costs, and inflation. Moreover, given the shift by global investors in recent years to ‘find yield’, few will have been positioned for a Russia debt default. As revealed by the Pacific Investment Management Company, even they have taken a hit from Credit Default Swap exposure to Russian debt. You could imagine the damage we may see to less savvy, highly leveraged market participants.

China to the rescue? Thus far, China will have assessed that damage to its economy from the Ukraine war is manageable, given China’s substantial internal levers, and strength of the US economy. However, a global-emerging markets meltdown, with unknown global implications, holds substantial risk of economic blowback for China. China has its own real estate crisis, and Mr. Xi needs economic stability ahead of his election for a third term, later this year. China always sees an economic crisis as a geo-strategic opportunity, we’ve seen it so many times over the past decade. Russia would itself be a tremendous opportunity for Mr. Xi, much greater than Iran, Venezuela, Sri Lanka or the Democratic Republic of Congo (as examples). The US would probably try to allay such a bailout. Mr. Xi will ignore this. Nonetheless, if Mr. Putin went bowl-in-hand to China, his desire for retribution against the West would only increase, especially if Mr. Xi starting making noises about a return of Manchurian territory taken by Russia in 1858/60.

When to sit down with Mr. Putin? Mr. Putin isn’t going away, and he’s just getting angrier. The Ukraine invasion is a watershed for the West, but Mr. Putin’s security concerns are unlikely to desist. If anything, the West has ‘proven’ his case to his domestic (and Chinese) audience, and China has made clear that Mr. Putin’s concerns regarding further NATO expansion are legitimate, as they see it. When you look at Mr. Putin’s December ‘demands’, any conclusion to the current crisis may ultimately need to involve reference to some of these. The US isn’t directly engaging with Mr. Putin at present, because it views him as ‘unserious about diplomacy’. This narrative will evolve if Mr. Putin does take us to hitherto uncharted territory – he clearly believes the West is equally ‘unserious’. For the US and NATO, articles 4 and 6 of Mr. Putin’s demands are the most problematic, rightly so  ( These are clear red lines for NATO. Article 7 of his proposals is also problematic, especially regarding Georgia, but does offer a potential path to reduce longer term strategic tensions on the borders around Belarus. Mr. Putin’s demands made little reference to the strategic (especially nuclear and potentially, space) questions that could be addressed between the US and Russia, as part of an eventual agreement.

Mr. Putin will remain asymmetric: Russia’s Foreign Ministry has published a detailed statement implicitly threatening Western civil aircraft with ‘terrorist blowback’ regarding NATO’s supply to Ukraine of MANPADs (Man-Portable Air-Defence System anti-aircraft missiles). Indeed, their press release detailed an attack envelope, presumably around the Ukrainian border, of 4.3 nautical miles (eight kilometres) distance and 11,483 feet (3,500 metres) altitude. This is perhaps what Wendy Sherman, US deputy secretary of state, referred to this week when she said supplying Ukraine would become more complex. Either way, as we laid out in an earlier note, Russia has put Europe on notice that ‘terrorist’ use of captured Ukrainian MANPADs is now on the table.

by Dr. Thomas Withington