Ukraine: A Dangerous Escalation Point

Published on March 1, 2022
SGH Insight
As to Beijing, we share below some comments in private by senior officials. We have edited out their blistering criticism of Washington and of US President Joseph Biden’s handling of the crisis, with no such criticism directed at Russia’s Vladimir Putin.

“China must stick to its inherent position on the Ukraine crisis. Following their secret phone talks on Monday night (February 21), President Xi Jinping and President Putin had another phone conversation on Friday (February 25). The immediate release of the Xi-Putin phone talks by both sides was intended to send a clear and strong signal: Sino-Russian relations will not be harmed by the Ukraine crisis; China respects the territorial integrity of all countries, including Ukraine; China supports Russia’s concerns about five rounds of NATO expansion; the US is behind the Ukraine crisis; China will firmly implement the China-Russia Joint Statement, and will support and help Russia deal with sanctions from the West in economy, finance, trade, high-tech and other sectors.”

Regarding the sanctions on Russia:
“Vladimir Putin is the toughest Russian leaders since Stalin. Putin and Russia will certainly retaliate, and the degree of retaliation will be unprecedented.”

“Russia has $640 billion in foreign exchange reserves right now. Also, Russia’s vast holdings of gold and foreign currencies could be used to help offset the impact of sanctions. [The PBoC] estimates that Russia holds about $1.1 trillion of liquid wealth, and a large share of that is held in US dollars, even after the country sold all its US Treasury holdings in 2018. Russia’s central bank and private sector are holding $250 billion in foreign exchange swaps and $130-150 billion in deposits at foreign banks – enough to disrupt financial markets if reserves are frozen and Moscow is forced to suddenly move them due to sanctions.”
Market Validation
Business Insider 4/19/22

China says it'll 'strengthen strategic cooperation' with Russia no matter what

China will "strengthen strategic coordination" with Russia no matter what, the Chinese Foreign Ministry said.

China's Vice Foreign Minister Le Yucheng made the remark to the Russian ambassador to China Andrey Denisov, CNN reported.
"No matter how the international landscape may change, China will continue to strengthen strategic coordination with Russia," Yucheng said.

China will "strengthen strategic coordination" with Russia no matter what, the Chinese Foreign Ministry said on Tuesday as Moscow continues its weeks-long unprovoked invasion of Ukraine.

The Chinese Foreign Ministry said in a statement on Tuesday that China's Vice Foreign Minister Le Yucheng made the remark to the Russian ambassador to China Andrey Denisov during a meeting on Monday, CNN reported.

"No matter how the international landscape may change, China will continue to strengthen strategic coordination with Russia to achieve win-win cooperation, jointly safeguard our common interests and promote the building of a new type of international relations and a community with a shared future for mankind," Yucheng said, according to CNN, which cited the statement.

Beijing released a statement today after a call between China’s Foreign Minister Wang Yi and Ukraine’s Dmytro Kuleba deploring the outbreak of war between Russia and Ukraine and has publicly called for a negotiated solution between Russia and Ukraine, warning against a further escalation of the conflict. Ukraine’s Foreign Minister in turn added hopefully that Kyiv looks forward to mediation from Beijing.

While China is extremely alarmed at the escalation of the conflict in Ukraine across all dimensions, military, economic, and political – more on that below — we do not expect that Beijing would or could step in at this point to stop Russia’s President Vladimir Putin in what we believe is his goal of overthrowing and replacing the government of Volodymyr Zelensky, and at a minimum of further partitioning Ukraine. Furthermore, we have no indication that Putin has reached out to China for a “face-saving” path of de-escalation, especially at this time, when he would be remembered in history for a failed invasion of Ukraine.

We hope to be proven spectacularly wrong on this assessment, but we believe a cornered and now humiliated Putin will double down in his onslaught on Kyiv and across Ukraine, and while we do not purport to be military experts, it appears that despite the reporting in the western media of what is by all counts an heroic Ukrainian resistance, and of stalled Russian military operations, Russia still possesses overwhelming military superiority on the ground, and in the air.

The lack of any real pressure beyond western media reports of supply line and logistical issues on Russia’s 40-mile convoy bearing down on Kyiv, that by all logic would present a ripe target for attack​, we believe could point to an inconsistency between Ukraine’s ​claims that its air force has withstood Moscow’s bombings and the reality on the ​ground. Zelensky has of course repeatedly begged, with no success, for NATO air support and the establishment of a “no-fly zone” over Ukraine, which would place western forces in direct military confrontation with Russia.

It all presents an extremely dangerous tripwire for deeper NATO involvement as member nations now rush to send arms and support to Kyiv, and perversely raises the costs to Putin of holding back on a full​y-fledged attack on Ukraine’s urban centers, even as Russia maintains it is open to dialogue.

As to Beijing, we share below some comments in private by senior officials. We have edited out their blistering criticism of Washington and of US President Joseph Biden’s handling of the crisis, with no such criticism directed at Russia’s Vladimir Putin.

“China must stick to its inherent position on the Ukraine crisis. Following their secret phone talks on Monday night (February 21), President Xi Jinping and President Putin had another phone conversation on Friday (February 25). The immediate release of the Xi-Putin phone talks by both sides was intended to send a clear and strong signal: Sino-Russian relations will not be harmed by the Ukraine crisis; China respects the territorial integrity of all countries, including Ukraine; China supports Russia’s concerns about five rounds of NATO expansion; the US is behind the Ukraine crisis; China will firmly implement the China-Russia Joint Statement, and will support and help Russia deal with sanctions from the West in economy, finance, trade, high-tech and other sectors.”

Regarding the sanctions on Russia:

“Vladimir Putin is the toughest Russian leaders since Stalin. Putin and Russia will certainly retaliate, and the degree of retaliation will be unprecedented.”

“Russia has $640 billion in foreign exchange reserves right now. Also, Russia’s vast holdings of gold and foreign currencies could be used to help offset the impact of sanctions. [The PBoC] estimates that Russia holds about $1.1 trillion of liquid wealth, and a large share of that is held in US dollars, even after the country sold all its US Treasury holdings in 2018. Russia’s central bank and private sector are holding $250 billion in foreign exchange swaps and $130-150 billion in deposits at foreign banks – enough to disrupt financial markets if reserves are frozen and Moscow is forced to suddenly move them due to sanctions.”

“According to the Central Bank of Russia, the transfer of financial messages within the country is provided by its domestic Financial Message Transfer System (SPFS), which does not depend on SWIFT. The SPFS could be used for international transactions.”

*Note – We would caution against political posturing and that any material alternative for Russia to SWIFT ​at this point is unlikely. Furthermore, the extent to which China will flout international sanctions, as it did with for example Iran without consequence at that time, remains an open question in this far more dangerous global superpower crisis.

Regarding Beijing’s deepening alarm:

“The ongoing crisis in Ukraine could turn into a more serious crisis than the Cuban missile crisis. The confrontation between the US and Russia in the Ukraine crisis is likely to extend to other regions. This is the greatest threat facing the world since the beginning of the 21st century. The ongoing Ukraine crisis is far worse than the 9/11 terrorist attacks, the war in Syria, or the war in Afghanistan. President Putin’s order that Russian nuclear deterrent forces be on the highest alert is an extremely strong signal that if the US threatens Russia like Iran and North Korea, it cannot rule out World War III or even a nuclear war, because Vladimir Putin is not Nikita Khrushchev or Mikhail Gorbachev.”

 

 

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