February 18, 2022 - Today the LSTA hosted a webinar, “The Situation in Ukraine: Implications for the Loan Market and the Global Economy”, presented by David Chmiel, Managing Director of Global Torchlight – Geopolitical Risk Advisors.

Chmiel noted that the crisis is eight years in the making and were it not for the events of 2014-2015, we would not be in the current position.  Today there are between 150,000 – 190,000 Russian troops on the Ukrainian border with more along the northeastern border and in Belarus.  In addition, Russia has significant naval forces in the Black Sea.  However, most experts analysing the current situation do not believe that the Russian troops are sufficient to mount a full scale invasion of the Ukraine, and Russia continues to state that it has no plans to invade the Ukraine, instead claiming that it is merely relocating its troops.

The Ukraine’s own military today is very different from its military of eight years ago; they are now better trained by NATO with far more military equipment at hand (Russia’s request that the military equipment be removed from the Ukraine is a non-starter for NATO member states).  On the diplomatic side, there are perpetual discussions to implement the 2015 Minsk Agreement with France looking to play mediator; however, any such implementation is unpopular with the Ukrainian people, the majority of whom support NATO and the European Union.

In 2014-2015 when the crisis first erupted, Belarusian President Lukashenko was not being overtly pro-Russian and instead tried to play a neutral role.  Today, however, Belarus has, for all intents and purposes, been annexed to Russian for security purposes.

Any escalation of the crisis will need some degree of popular support both within the US and elsewhere.  Since 2014, the focus has been on an economic response with very limited appetite to engage combat troops.  That was the public opinion then, and it remains so today.  A recent poll in the US by the Economist revealed that the vast majority of Americans continue to support imposing economic sanctions with a small minority supporting sending troops to the Ukraine to engage in a combat role (Republicans are more reluctant than Democrats to engage US military, although both parties are equal on the sanctions front).  There is little to no desire for military intervention, despite there being a treaty obligation on NATO member states (Article 5 of the NATO treaty states that if a NATO ally is attacked, then each and every NATO member will consider the attack one against all NATO members).  Ultimately, however, this is a European security issue and another poll by YouGov reveals that only in Denmark are people more in support of using of military than opposing it.  Popular opinion can evolve over time, and even for Putin there are so many uncertainties, with the risk of significant casualties galvanising public opinion.

Interestingly, the Levada Center, which conducts independent polling in Russia, noted that a significant number of Russians are not too concerned about the crisis, blaming the US instead for the escalating tensions, with the majority approving of Putin who continues to enjoy an approval rating of over 60%.

Bottomline is that any response will likely be sanctions- or economic-based so the question will continue to be how much pain are countries willing to take.  There will be significant sanctions on the three Russian state owned banks and on Russian oligarchs who are critical to the Russian economy.  In the UK, PM Johnson has said it will also cut off access to the debt markets for Russian companies.   For the time being, however. Russia’s expulsion from the Swift payment messaging system is off the table because European companies are concerned that they may not be able to receive payments from Russian companies if that took place, indicating the limits to how much economic pain companies at least are willing to tolerate. 

The crisis is a test of the liberal international order – the framework of alliances and principles some of which were set up after WWII and after the Cold War.  If we move into a world where larger powers decide how smaller countries can act and decide with whom they can join alliances, it will have implications in other regions.  This is a test of alliance structures; Ukraine is not a member of NATO but we see an issue around whether NATO states agree around the issues and international principles.  Any response taken by the US must also take into account China.  The Russian and China leaders have announced their alliance, and the implications of that will be tested globally.  China will be watching closely and analysing whether they can determine a uniform response from the US. 

Either by mistake or miscalculation, the way the crisis is handled could have unintended consequences that no one foresaw or desires, but that nonetheless do occur because of a force of nature.  The reality is that this crisis will require a wholesale resolution that has implications for Russian, Ukrainian, and EU politics and global security. We must not simply ignore it and then treat it later as something that has crept up on us. 

Click here for the slides and replay. Practical Law has also made available to LSTA members David Chmiel’s recently published article, “Normalizing Uncertainty – Geopolitical Risk Trends for Cross Border Investors”. Click here for that article.

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