The Tone Regarding Ukraine’s Future Has Shifted Significantly And Fast

By Teeuwe Mevissen, Senior Macro Strategist at Rabobank

While Trump still has to be officially inaugurated as the 47th president of the United States of America, it almost seems he already entered the White House. This has already been demonstrated by Trumps attendance of the formal reopening of one of the pinnacles  of French gothic architecture. Indeed, the Notre Dame. In the limelight of this event, Trump, Macron and Zelensky had a meeting where they discussed the future of Ukraine. While no clear deal(s) seem to have been made yet, some would argue that it boiled down to going from a celebrative event organized in a holy place to a meeting that could lead to an unholy deal. While it is unsure yet what has been exactly discussed during the meeting between the three leaders, the tone regarding the future of Ukraine has definitely shifted significantly and fast!

Since February 2022, the Western mantra was that Ukraine would be supported for as long as it takes and that it was up to Ukraine to decide whether it wanted to engage in negotiations with Russia. A logical argument for those who also continued to emphasize Ukraine’s sovereignty and, directly related to it, the right of self-determination. Both are crucial pillars of the concept of the nation state that has it roots in the Treaty of Westphalia. If the West would be as serious about upholding the international rules-based order as has been voiced so often, then Ukraine should be considered the litmus test.  Not continuing or even stepping up support would in effect boil down to the alternative scenario in which the West would signal that they are unreliable guarantors of security alliances or partnerships (remember that Ukraine received those guarantees from the US and the UK in exchange for giving up its nuclear deterrent), that might makes right and that the West can be impressed and coerced by rattling the nuclear sabre, amongst others. The negative consequences should be clear to anybody with even a basic understanding of security studies or international affairs. 

History also provides us with clues of what might be the result of such an approach. During the 1930’s, Germany felt humiliated because of the treaty of Versailles and the Nazis came with a fascist concept of a civilization state claiming territory based on both historic and ethnic grounds. After it could seize some territories without putting up a real fight, it eventually decided to test France and the UK by invading Poland. Back in the late 1930’s, the United Kingdom was still recovering from the impact of the Great War and the gradual loss of control over its empire and its hegemonic status. From Chamberlains point of view, another large war was to be avoided at all cost. But as all of us know by now, this attitude soon proved to be even more costly in a such a way that nobody could ever have imagined. The parallels with the current situation should be clear and as such have often been drawn by international relations observers. 

Making a leap in time, Putin has been very clear all along about his views of the collapse of the Soviet Union which he calls the greatest geopolitical catastrophe of the century. So to be clear, apparently from the Kremlin’s point of view it is not the more than 25 million Russians that died during World War II fighting Nazi Germany but the nonviolent collapse of a communist block that subjugated many previously independent and sovereign states, that was the greatest geopolitical catastrophe of the (last) century. 

Eager to reverse what the Kremlin seems to consider as an unpalatable humiliation, Russia embarked on several ‘adventures’ in Georgia, Chechnya, and now clearly Ukraine. This is relevant because this point of view makes it less likely that a deal between Russia, Ukraine and the West will turn out to be a stable and durable one. 

Taking all of the above into account it is the West that now seems to position itself as deal takers instead of deal makers when dealing with rule breakers. The majority of blame should go to Europe. While the war has already been dragging on for almost three years, many European member states continue to talk the talk instead of walk the walk. At the cost of precious lives and Europe’s own security. It is again a demonstration of Europe’s infamous lack of true leadership. We have plenty of Chamberlains and government officials dragging their feet but there is no Churchill in sight, except perhaps for some countries in the east that have been ignored in the past but have been warning the rest of us in Europe for many years. 

Now what does this all mean for the economy the curious and impatient reader might rightfully ask by now. While the government is primarily responsible for offering security to its inhabitants, It also means that businesses – and especially strategic sectors) should be mobilized to support efforts to enhance security in the broadest way. This means efforts to secure the physical (supply chains, industry and logistics) the digital (cyber security, AI and quantum computing) and increasingly space. It should be clear that part of such a mobilization includes much needed funding.

It is here that the financial sector comes into play. Until recently, many politicians and governments were highly critical on financial sector involvement related to the defense industry, making the banking sector wary of providing funding. The pendulum has swung. At least amongst politicians. In the Netherlands  former Minister of Defence Kaisa Ollongren called for pension funds and other players in the financial sector to increase investments in this specific sector. But this also applies on a European level.  And that means that financial markets will also have to play an important role. 

On a European level we have seen initiatives for EU funding for the defence industry financed via the issuance of Eurobonds. While common debt is still a thorny issue for the more frugal European member states, alternative ways to coordinate funding and effectively channel this to relevant industries or new industrial initiatives should be taken into consideration. The previous Recovery and Resilience Fund could (partly) serve as a blue print. This means that there could also be a role for the ECB. While the possibilities are plentifully it becomes increasingly urgent to act.