The EU's Blood Money

The €90 billion EU loan prolongs the conflict. More people will die.

It is, or is about to be (depending on when you believe Christmas is), the season of peace on earth and goodwill to all. The Holy Land is indeed more tranquil than it’s been for a while, although it’s just one murderous outrage from yet another battle in the series of wars that have continued since the United Nations created the State of Israel.

Then there is Ukraine, now approaching the fourth year of its war with Russia; another conflict where an irresistible force has encountered an immutable object. The search for a solution is as elusive as it is in the Middle East. Until one can be found the body count, destruction and hatred continue to rise.

So does the rhetoric.

The current NATO Secretary General, former Dutch Prime Minister Mark Rutte, believes that Europe is Russia’s next target. President Putin calls the allegation hysterical while maintaining that Russia was ready to fight NATO if necessary. Unsurprisingly, President Putin denied that he had any intention of attacking Europe. Currently the western view is the Christian Keeler one of “He would say that, wouldn’t he?” Which doesn’t mean it’s not true.

The Cost of Victory

The initial Western theory of “winning” in Ukraine was that economic sanctions would bring Russia to its knees and thereby end the war. As we discovered last week, it turns out that Ukraine has run out of money and without a substantial cash injection would be unable to arm itself adequately next year. Facing the Russian victory that would follow shortly after Ukrainian economic and military collapse, the EU agreed to a €90 billion loan, notionally secured on frozen Russian assets. Ukraine will fight on. More people on both sides will die. Then Ukraine will need more money.

American support for Ukraine has also changed; aside from some $400 million a year of direct support, all American weaponry provided to Ukraine is now paid for by the European members of NATO. They may or may not score that as a debt repayable by Ukraine (if it wins), but it hits their cashflow. The war is costing Ukraine about $140 million a day, so the debt racks up quickly. The UK has provided some £22 billion of support for Ukraine, and the government is committed to £3 billion a year of military aid for as long as it takes. That’s equivalent to 5% of our defence budget.

Ukraine’s national debt is now some $190 billion, growing at $3 billion a month. Zelensky has learnt the Onassis mantra, “When you borrow, borrow big.” Ukraine’s GDP is about $190 billion too, mostly because of its war spending. Ukraine’s one-year bond yield is 27%; Russia’s is 14%. The UK’s is under 4%. The UK’s spending on supporting Ukraine is, at best, a high risk investment. Although nominally secured over frozen Russian assets, the UK can only recoup its debt when Zelensky delivers an agreed peace or Ukrainian victory. Neither seems immediately likely.

Those outcomes depend as much on Russia as they do on NATO and Brussels. If the Russian economy holds up longer than the Ukrainian one, Russia wins by default. The EU bailout of Ukraine a few months before it collapsed must be extremely vexing (I understate) for President Putin. The EU and Downing Street view supporting Ukraine as supporting the vital (in their eyes) “rules-based international order” (if such a thing exists outside the constructs of the International Courts – almost all of which are based in Europe). President Putin views it as supporting a state that was becoming hostile to Russia as it inclined to the West generally and NATO specifically.

How We Got Here

The “Special Military Operation” (SMO) was launched to prevent what Putin saw as an existential threat to Russia, namely Ukraine joining NATO. The SMO failed, although it came close to success and must have had a fair bit of support from inside Ukraine. However the Russian assessments were wrong and the outcome was near disastrous. That’s hardly rare in history – the Arab-Israeli Yom Kippur War was full of intelligence areas and unpleasant military surprises for both sides.

Had the SMO been an opportunist land grab, as many in the West believe, a pragmatist would extract themselves with as much materiel and dignity as possible. President Putin didn’t. Some advisors fell out of fifth floor windows and Russia fought on. Why? Because Putin, with some reason, views a Russia-friendly Ukraine as a vital Russian interest.

It really doesn’t matter what the Zelensky supporters club think; if President Putin regards Ukrainian NATO membership as an existential threat to Russia he must destroy it. The SMO was (probably) designed to enable the installation of a pro-Russian regime. Now Russia is having to do it the hard way and at the cost of over one million casualties.

In Putin’s eyes, what’s causing those casualties? Ukraine’s defence. What’s supporting that? European money and (increasingly) weaponry. What is the obstacle to peace? Ukrainian intransigence, supported by the Europeans. Which must make him wonder why Europe cares so much about what was a corrupt economic backwater of the former Soviet Union. (It’s still corrupt and it’s still an economic backwater with a GDP a tenth of Russia’s.)

NATO Works

Russia invading Europe would be suicidal folly. All the countries with Russian land borders are NATO members and therefore protected by the American-backed Article 5 - an attack on one is an attack on all. NATO forces would respond robustly, and that’s the path to Armageddon.

It’s not just President Putin who says he doesn’t want war with NATO. Back in August the (prematurely) outgoing head of the British Armed Forces, Admiral Sir Tony Radakin, said, “Putin doesn’t want a war with NATO. He can’t even win a war against Ukraine.” That’s a very different assessment from the NATO Secretary General’s. A year earlier, Radakin said any Russian attack on NATO or the United Kingdom would be met with an “Overwhelming response, be it conventional or nuclear.” Radakin’s job was to understand the threat from Russia (and anywhere else) and counter it. He and President Putin both know the likely sequence of events from a Russian attack on NATO.

At the nuclear level we certainly have plenty of warheads at sea, invulnerable and ready to launch at the Prime Minister’s command. Starmer seems to like nukes, as he’s also agreed (date unspecified) to buy nuclear-capable F35A fighters and to store American nuclear bombs to drop from them. Unfortunately, it’s generally considered that using nuclear weaponry against another nuclear power can end in Armageddon, where everyone loses (including non-combatant nations). This is the problem with relying upon nuclear weaponry to deter a conventional threat; it made no sense in the Cold War, and it makes no sense now.

Are NATO’s current conventional forces alone sufficient to deter Russian aggression? Well, they probably are now, as Russia’s armed forces are tied up in Ukraine. Russia’s 300,000 strong conscript army isn’t supposed to be in Ukraine. Most of the professional army and the best equipment is, so they won’t be heading west any time soon, even it Putin wanted them to.

Despite the challenges of sanctions, Russia continues to churn out military hardware; according to Janes, Russia produces some 200 to 400 of the latest model T-90 and T-80. That’s two to three times the entire British Army tank fleet (well, flotilla) every year. The Challenger 3 is a much better tank than the T-90 and very much better than the T-80, but the technical superiority is closing. Is one Challenger 3 more powerful than three or four T-90s? I doubt it. The general NATO drive to rearm seems prudent and necessary.

The Price of Peace

Lord Hastings Ismay, NATO’s first Secretary General, defined its purpose as “Keep the Russians out, the Americans in, and the Germans down.” So far the Russians are still out, the Germans have become part of NATO and the Americans have finally expressed their long-held resentment at Europe’s low spending on defence. At President Trump’s insistence, European defence spending (as a percentage of GDP) is to rise.

In the UK increases have already been announced (largely achieved though accounting sleights of hand as there is no money). The government says more is to come. Embarrassingly for the government, the armed forces continue to demonstrate an abject inability to spend money wisely. The 30 year train wreck that is the Ajax reconnaissance vehicle has put MOD ineptitude into the frame, as has the botched £70M upgrade and subsequent sale for just £20M of the retired warship HMS Bulwark. In the UK increased defence spending is no guarantee of the increased combat power necessary for increased deterrence.

To some extent that’s not the point. NATO is nothing without the United States. America spends over $990 billion a year on defence—double the amount per head that the United Kingdom spends. It’s also twice the amount the entire rest of NATO spends. If the price of continued American involvement in NATO is increased defence spending splurging taxpayer’s cash (even on disasters like Ajax) is sensible. If the spending creates some jobs, so much the better. If it delivers weaponry that works, it’s a bonus.

From the transnational American point of view, a legacy commitment to NATO and a separate one to Ukraine have been turned into a cash cow. Europe now pays for US weaponry sent to Ukraine. And of course it pays for US weaponry that it purchases as part of its increased defence spending.

Chinese Whispers

Better yet, a more powerful European military allows America more time and materiel to focus on China, which became more important to America in the Obama years. The UK occasionally sends an aircraft carrier on an Asiatic jaunt, as it did this year. Aside from that, its presence comprises just two, small River Class Offshore Patrol Vessels to cover the entire Indian and Pacific Oceans. Other European nations contribute less to ensuring the freedom of the seas and containing China.

If China is the emerging threat then a friendly Russia is desirable, and more desirable than a western-leaning, corrupt economic backwater like Ukraine. President Trump wants peace as soon as possible as that speeds the normalisation of relations with Russia – which is the source of 20% of China’s crude oil, currently being sold at a discount. Almost half of Russia’s oil goes to China. The war in Ukraine has created closer relationships between China, Russia, and India. It’s also providing China and India with cheap energy.

That’s a direction of travel that could destroy America’s hegemony. That’s the major US concern. The yapping of the (declining) EU and even the suffering of Israel (which does spend to defend itself) are distractions from maintaining the United States’ position as the world’s largest economy (by far) and most powerful nation. One solution would be to pry Russia back into the American fold. That requires peace in Ukraine, whatever Europe’s concerns.

The United Kingdom is fortunate that this President is an Anglophile – we didn’t get our tariffs sorted so advantageously (and quickly) only because of Starmer’s style and Lammy’s negotiation skills. That speed would not have been possible were we still in the EU. However the UK is testing the President’s affection. JD Vance’s speech at last year’s Munich security conference contains the line “If you’re running in fear of your own voters, there is nothing America can do for you.” Last year the EU was railing against right-wing election victories that it didn’t like. In American eyes the European NATO members are developing into socialist totalitarians, more resembling the Soviet Union, which NATO was established to counter than the free, liberal West. Now Starmer is cancelling elections, indefensibly in the eyes of many – including the Institute for Government. Add in the BBC’s egregious doctoring of President Trump’s speech and the donation of the Chagos Islands to a Chinese ally to assuage “international law”, and it’s hard not to conclude that the “Special Relationship” is under some pressure. President Trump’s $5 billion lawsuit against the BBC is, perhaps, an expression of that frustration.

Of course, the pampered citizens of the EU (and UK) aren’t all that keen on spending money on defence in place of their bloated welfare bills. All EU countries, except for Poland, have reduced their armed forces to mere tokens of military strength. Building them back will be slow and expensive. The EU has gone on a borrowing binge to create the €150 billion SAFE fund (the €90 billion Ukraine loan is additional to that). Servicing those loans can only come from higher taxes in the member states, which won’t be popular. Hence, in part, the often hysterical headlines about the Russian threat to Europe.

Cui Bono?

Back in the early days of the Cold War, the Americans and the West became obsessed by the number of nuclear-capable bombers the Russians had compared to the Americans. In the thinking of the time, which was all about fighting and winning a nuclear war, this was a strategic weakness that could only be resolved by the US Air Force having more bombers – that is sufficient to deliver a first strike to Russia and plenty of spares to deliver a second one, and a third if necessary. Funding for the US Air Force was massively increased and 740 B-52s rolled off the production line by 1963.

The sceptical US President, Dwight Eisenhower, authorised the extension of U-2 flights over the Soviet Union to verify and quantify the gap. These flights proved that the gap was a delusion. Intelligence analysts had seen a photo of an airfield full of Russian bombers and assumed that every other bomber airfield had the same number of aircraft. It transpired that the airfield that had been photographed had the entire Russian bomber fleet parked on it. By the time the error was known, the bomber gap was in the American public’s psyche.

Following the shock of Sputnik in 1957, the bomber gap was augmented by the equally non-existent “missile gap”, widely publicised by John F. Kennedy in his election campaign. In President Eisenhower’s parting speech, he warned, “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex.” Cui bono in the Ukraine War? Cui bono in NATO rearmament?

While we’re very aware of what is happening in Ukraine, our leaders have given less thought to why the war started. It may be convenient for them to think of Putin as an unprincipled expansionist who cares nothing about the average of 1,500 Russian casualties every day. But is that correct? Might he really be dealing with a perceived existential threat, as he says he is?

Those who argue that the expansionist Putin will turn on the Baltic states next need to explain why they think Putin wants to fight NATO. There are US troops based in the Baltics, as well as British and other NATO ones. A Russian attack on any NATO country could get very messy very quickly. While it’s possible, even probable, that Putin was briefed by his (soon to be former) military and intelligence chiefs that Ukraine would fall quickly, there is zero probability that any military briefer would tell him that driving into the Baltic states (or any other NATO country) could be anything other than disastrous.

Sure, Russia is conducting “sub-threshold” operations against NATO and occasionally being a bit cheeky with airspace. But those are surely rational acts against the funders of his Ukrainian enemies who have, so far, killed or wounded over a million Russian soldiers. Actions have consequences – but in the charge to support Ukraine, led by the insouciant Boris Johnson, no one thought that through. When they imposed sanctions, they also failed to think through the consequences of economic collapse in Russia (none of which are good). It never occurred to them that sanctions might fail and draw together a block of economic self-interest that could threaten US hegemony.

Realpolitik Trumps War

In short, the UK and most of the EU are setting themselves on an expensive path to failure. The failure may manifest itself in war with Russia, the collapse of Ukraine and Russian occupation, the collapse of Russia or the imposition of a pragmatic ceasefire on terms the Ukrainians can’t abide (loss of territory) and the Europeans struggle to accept. That path is marked with Russian and Ukrainian graves. Slav blood is swelling the coffers of arms companies.

Where is the British interest? War with Russia, either outright or because of sanction induced Russian political and economic collapse, leads to no good options. The government is calling for the establishment of greater national resilience, at vast expense. Why? Is it planning to fight and win a nuclear war, or merely to fight a conventional one? The risible Strategic Defence Review doesn’t tell us.

A Russian-occupied Ukraine makes little difference to the UK. In 2021, trade with Ukraine accounted for only 0.2% of the UK’s total international trade. For most of my life Ukraine has been part of the Soviet Union. (As an aside, the USSR was run by a Ukrainian, Brezhnev, who succeeded Khrushchev, another Ukrainian). The NATO states bordering a Russian occupied Ukraine would kick up a fuss and NATO forward defence would have to expand. Rebuilding the Iron Curtain a couple of hundred kilometres to the east is neither impossible nor unaffordable.

A ceasefire in place and a subsequently split Ukraine solves the NATO border problem, gives some hope of partial repayment of the loans and stops the killing. The end of the war would ramp down tensions between Russia and Europe. The new Ukraine couldn’t be part of NATO, so it would have to be neutral and a way found of both guaranteeing that neutrality and preventing hardcore Ukrainians from lobbing missiles at Russia, sinking Russian oil ships and blowing up any more gas pipelines.

A neutral, secure, diminished yet peaceful Ukraine is the least bad option for everyone. Unfortunately the €90 billion EU funding package will increase Ukrainian intransigence, delay the inevitable and shed more blood. When the money runs out in the next 12 to 18 months we’ll be back where we started.

Happy New Year.

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