Russia/Ukraine War Update - June 2nd, 2022

 *** MILITARY SITUATION ***

The Ukrainian counteroffensive in Kherson Oblast has gotten the attention of Russian forces in the area, and the Russians are scrambling to secure the vital ground line of communication (GLOC) the Ukrainians have threatened.  Ukrainian forces carried out a series of organized counterattacks targeting settlements on the eastern bank of the Ihulets River that are very close to a key highway supporting Russian forces further north. The Russians have responded by destroying the bridges the Ukrainians used in one of those counterattacks and other bridges across the river in an effort to hold their line against anticipated continued Ukrainian counter-offensive operations. Ukrainian forces are likely still close enough to the highway to disrupt its use as a main supply route, potentially undermining the Russians’ ability to hold against Ukrainian counter-offensives from the north.

Russian milbloggers are expressing growing alarm about the threat of Ukrainian counteroffensives in the areas Russian forces have deprioritized while concentrating on Severodonetsk. Russian milbloggers have increasingly focused on tracking the rate of Ukrainian counterattacks in late May.[1] Pro-Russian Telegram channel “Dmitriyev” (over 100,000 followers) reported that Ukrainian forces are fully capable of inflicting ”painful and cutting blows” on Russian GLOCs in Kherson, Kharkiv, and Zaporizhia Oblasts by July-August due to lack of adequate Russian defensive forces in the areas.[2]  Former Russian Federal Security Service (FSB) officer and milblogger Igor Girkin claimed that Ukrainian forces “will grope for weakness” in Russian defenses in Kherson Oblast.[3] Russian milbloggers are effectively criticizing the Russian military command for endangering Russian territorial gains across other axes by prioritizing the Donbas offensive operation so heavily.

 

Russian authorities are likely anticipating Ukrainian partisan pressure in Luhansk Oblast. The Main Ukrainian Intelligence Directorate (GUR) announced on June 1 the launch of the “Luhansk partisan” project to galvanize resistance to Russian attempts to consolidate control of Luhansk Oblast.[4]  A Russian Telegram channel reported that the Russian Internal Ministry is sending a special detachment of its employees on “leave” to the Luhansk People's Republic (LNR), which is a likely attempt to reinforce Russian administrative presence in the LNR in the face of growing internal and partisan discontent.[5] The Ukrainian General Staff additionally stated that Russian forces moved a battalion tactical group (BTG) to Kupyansk, a Russian-controlled city in eastern Kharkiv Oblast along the P07 highway within 30 kilometers of the Luhansk Oblast administrative border.[6] Kupyansk is far from the front lines and in no apparent danger of imminent Ukrainian conventional attack.  Taken together, the reported deployment of Internal Ministry employees and a BTG suggest that Russian forces are anticipating partisan resistance against their attempts to gain control of Luhansk Oblast.

 

Russian forces continue to undermine the economic viability of areas they are attempting to capture. Russian forces reportedly hit the “Azot” fertilizer production plant in Severodonetsk on May 31 and caused the dissemination of toxic nitric acid smoke.[7] The production plant was an economically-significant resource for Severodonetsk and the Luhansk region and it would have been prudent for Russian forces to maintain and take control of the plant’s production capabilities. Russian forces similarly destroyed the Azovstal Steel Plant in Mariupol, which had considerable industrial significance for Ukraine and could have been economically exploited by Russian occupiers if they had not destroyed it. While the Azot plant in Severodonetsk was less productive on whole than Azovstal, its destruction is part of the systemic failure of Russian forces to take effective control of the economic and industrial capabilities of occupied territory. Russian forces will likely continue to destroy productive infrastructure and continually undermine the economic benefits they could have hoped to gain from occupied territories.

-A Russian missile hit rail lines in the western Lviv region, a key conduit for supplies of western weapons and other supplies, officials said. Lviv regional governor Maksym Kozytskiy said five people were wounded in the strike. Anton Gerashchenko, an adviser to the country’s interior minister, said the Russians hit the Beskidy railway tunnel in the Carpathian Mountains in an apparent effort to cut a key railway link and disrupt shipments of weapons and fuel.

*** ECONOMIC & POLITICAL ***

-Fed's Beige Book noted that growth is slowing in some areas and price hikes are not as large but are still sizeable. All twelve Federal Reserve Districts reported continued economic growth since the prior Beige Book period, while a majority indicated slight or modest growth and four Districts indicated moderate growth.

Fed's Bullard (2022 voter, hawk) said Fed forward guidance is already affecting the economy and the Fed must follow through to ratify its previous forward guidance. Bullard said it is not advisable to move too quickly in central banking and that they have already announced the Fed will raise rates by 50bps per meeting which is a good path, while he added they could be in for a very long haul if unable to control inflation, according to Reuters.

Fed's Barkin (2024 voter) said a recession can't be found in the data or actions of business executives, while he added that a reduction in the balance sheet does a little more on top of rate hikes to tighten policy. Barkin also noted he is perfectly comfortable with the path of rate hikes for the next couple of meetings and said the stronger the economy and inflation, the better the case is to do more on rates, according to Fox Business.
    
US President Biden said he will discuss how to bring down other costs for Americans but they cannot take immediate action to bring gas back to USD 3/gallon, according to Reuters.
    
US Department of Education will discharge all remaining federal student loans used to attend now-closed Corinthian Colleges which will result in USD 5.8bln of full loan discharges for 560k borrowers, while it is investigating other cases that could lead to further loan discharges for students cheated by their colleges, according to Reuters.

-Auto sales numbers for May are starting to trickle in and they're ugly. The lack of stimmy money and unemployment check bonuses, combined with the fact that rates are rising and spending is slowing, made for a tumultuous May report for some of the most well known legacy auto manufacturers. Here's a look at four of the first names to hit the tape this week, with most other major auto manufacturers set to release data within the next day or so.

    *HONDA MAY U.S. AUTO SALES -57.3%
    *TOYOTA US MAY SALES 175,990, -27.3% Y/Y
    *MAZDA N. AMERICA MAY SALES DOWN 63.7%
    *NISSAN APRIL GLOBAL SALES -29.1%

the Manheim Used Vehicle Value Index, a wholesale tracker of used car prices, printed the most significant monthly decline in terms of rate of change averaged out over three months in April at 6.4%. It didn't beat the April 2020 print of -11.2% nor December 2008 of -11.5%, but those two periods were in full-blown financial crises. The Fed routinely says monetary tightening will create a soft-landing, similar to the mid-90s. However, tightening financial conditions could only spark trouble for an economy based 70% on consumption and driven by access to cheap credit. The cooling in the used car market could suggest a broader economic slowdown is ahead.

-The European Union is taking another step away from Russian oil, but they're not doing it quick enough to crush Russia's energy complex as new customers are found in Asia, Russian analysts told Reuters. On Monday, EU leaders approved the sixth round of sanctions against Russia that reduces Russian oil imports by 90% by year-end but only covers crude and petroleum products by sea, excluding crude routed through pipelines. EU's sanctions against Russia are not hard-hitting, which were initially meant by Brussels to penalize Moscow for its invasion of Ukraine. Though Western analysts and market watchers say, the latest round of sanctions won't imminently crush Russia's energy industry.  

 

-Washington’s arming of Ukraine with heavier weapons increases the risk of direct US-Russia confrontation regardless of American statements about mitigating such a possibility, Russian Deputy Foreign Minister Sergey Ryabkov said on Wednesday. The diplomat was commenting on the news that the US has decided to supply HIMARS multiple rocket launchers to Ukraine. Washington has insisted that the weapons system will not allow Ukrainian forces to attack Russia and argues it prevents a scenario in which Moscow would consider the US a party to the conflict.

-White House said offensive cyber activity against Russia does not violate the policy of avoiding direct military conflict with Russia, according to Reuters.

 

-Amid growing calls for naval intervention to open up Ukrainian ports for grain exports, Chairman of the Joint Chiefs of Staff Gen. Mark Milley said such an operation would amount to a "high risk military operation." The West is blaming Russian ships for blocking grain exports from leaving Ukrainian ports, but there are other factors, including mines laid by Ukraine. Russia said last week that it cleared mines around Mariupol and that the Azov Sea port is now open to civil vessels. This week, Retired Adm. James Stavridis, a former supreme allied commander of NATO, suggested that naval vessels under the auspice of the UN or NATO could escort convoys of grain ships out of Ukraine. Ukrainian Foreign Minister Dmytro Kuleba suggested on Tuesday that Ukraine was pushing for a UN convoy to open its ports. "Ukraine is working on an international UN-led operation with navies of partners ensuring a safe trade route with no security risks," he wrote on Twitter.

Milley said such a plan would be high risk due to the presence of Russian ships and mines in the waters: "You can take the grain out by truck or train, or you can take it out by sea. Right now, the sea lanes are blocked by mines and the Russian navy. In order to open up those sea lanes would require a very significant military effort," Milley said. "It would be a high-risk military operation that would require significant levels of effort."

Whether under the banner of the UN or not, trying to send Western warships into Ukrainian ports obviously risks sparking a direct war with Russia.

 

-The Biden administration plans to sell Ukraine four MQ-1C Gray Eagle drones that can be armed with Hellfire missiles for battlefield use against Russia, three people familiar with the situation said. The sale of the General Atomics-made drones could still be blocked by Congress, the sources said, adding that there is also a risk of a last minute policy reversal that could scuttle the plan, which has been under review at the Pentagon for several weeks. Ukraine has been using several types of smaller shorter range unmanned aerial systems against Russian forces that invaded the country in late February. They include the AeroVironment RQ-20 Puma AE, and the Turkish Bayraktar-TB2. But the Gray Eagle represents a leap in technology because it can fly up to 30 or more hours depending on its mission and can gather huge amounts of data for intelligence purposes. Gray Eagles, the Army's version of the more widely known Predator drone, can also carry up to eight powerful Hellfire missiles. The sale is significant because it puts an advanced reusable U.S. system capable of multiple deep strikes on the battlefield against Russia for the first time. Today, none other than Reuters' senior energy analyst John Kemp confirms that behind the surge in US nat gas prices are LNG exports to Europe, writing that "US natural gas production will have to accelerate significantly if the country is to keep growing record export volumes without creating shortages for consumers at home." And while we may avoid shortages, we certainly will have much, much higher prices to look forward to before the European nat gas crisis "converges" with the US. According to Kemp, gas exports in the form of LNG were up by 674 billion cubic feet or 87% in the first three months of 2022 compared with the same period in 2019.

 

-The Pentagon announced on Wednesday that the U.S. will send Ukraine four sophisticated, medium-range rocket systems and ammunition to help try to stall Russian progress in the Donbas region of its country, the Associated Press reports. It will take at least three weeks to get the precision weapons and trained troops onto the battlefield, the Pentagon added. The rocket systems are part of a new $700 million tranche of security assistance for Ukraine from the U.S. that also includes helicopters, Javelin anti-tank weapon systems, radars, tactical vehicles, spare parts and more. Asked if the weapons are arriving too late to make a difference, as Russia makes progress in the east and south, Colin Kahl, the defense undersecretary for policy, said he doesn’t think so.

Officials said the plan is to send Ukraine the High Mobility Artillery Rocket System, or HIMARS, which is mounted on a truck and can carry a container with six rockets. The system can launch a medium-range rocket, which is the current plan, but is also capable of firing a longer-range missile, the Army Tactical Missile System, which has a range of about 190 miles (300 kilometers) and is not part of the plan.

The Pentagon statement about the military aid did not include the specific number of HIMARS launchers. In addition to them, however, the US is sending five counter-artillery radars, two air surveillance radars, 1,000 Javelin missiles and another 6,000 anti-tank weapons, four Mi-17 helicopters – presumably originally intended for the US-backed Afghan military – and 15 “tactical vehicles,” along with 15,000 rounds of 155mm artillery ammunition. These will come out of US military stockpiles and are valued at around $700 million.

-The German Defense Ministry said on Wednesday that it could not provide details on Chancellor Olaf Scholz’s pledge to supply Ukraine with a certain air defense system. The reason cited was that the Bundeswehr – the nation’s armed forces – does not have the weapon in stock. The weapon in question is called IRIS-T and it can come in the form of a short-range air-to-air missile or a ground-based short-range or medium-range air defense system. When asked which of these systems Berlin plans to send Kiev, the Defense Ministry’s spokesman, Naval Captain David Helmbold, replied that “this question should be ultimately addressed to the [defense] industry since we do not have these systems in our service.” He added that he could not clarify the issue as the Bundeswehr does not possess such air-defense systems in its arsenal.

-Russia’s foreign minister, Sergei Lavrov, said the supply of US advanced rocket systems to Ukraine increases the risk of a “third country” being dragged into the conflict. Lavrov’s deputy, Sergei Ryabkov, said that Moscow viewed US military aid to Ukraine “extremely negatively” and that it would increase the risk of a direct confrontation. The Kremlin spokesperson Dmitry Peskov added: “We believe that the United States is purposefully and diligently adding fuel to the fire.”

-Regular readers will be aware of our view regarding the soaring US nat gas price, which we have repeatedly said is to a large extent a function of US nat gas exports to Europe, meant to ease Europe's historic natgas shortage which is the direct result of the Ukraine war (as Putin turns the screws on European nat gas exports) and Europe's disastrous "green" policies which virtually assured that the continent would have a historic energy crisis. Indeed, as we noted a few days ago in "US NatGas Prices Top $9, Hit 2008 Highs As EU 'Convergence' Accelerates", when addressing a recent Pew Poll which found that "61% of Americans would favor exporting large amounts of natural gas to Europe", we doubt 61% would be supportive of such policies if they knew they are behind the historic spike in domestic nat gas prices.

-Denmark has voted overwhelmingly to join the EU’s common defence policy, becoming the last of the bloc’s members to sign up. The referendum on Wednesday, in which voters backed the government’s proposal by 66.9% to 33.1%, followed historic applications by Denmark’s previously non-aligned Nordic neighbours, Finland and Sweden, to join Nato last month.

-The Chinese military said on Wednesday it had conducted a combat "readiness patrol" in the seas and airspace around Taiwan in recent days, saying it was a necessary action to respond to "collusion" between Washington and Taipei. China, which claims democratically governed Taiwan as its own territory, has stepped up its military manoeuvres around the island over the past two years or so, as it seeks to pressure Taipei to accept its sovereignty claims.

-NATO military drills planned for the Black Sea have been postponed or canceled outright, Turkish Foreign Minister Mevlut Cavusoglu has revealed, citing the "Montreux Convention," a decades-old protocol which gives Ankara veto power over naval deployments in the region. Speaking to Anadolu in an interview on Tuesday, the foreign minister explained Turkey’s reluctance to cooperate with the Western sanctions campaign against Russia in response to its attack on Ukraine, stating that his country is seeking to avoid increased tensions as it attempts to broker a negotiated end to the conflict. “If we had joined the sanctions, we would not have been able to fulfill the mediation role that we have now. We applied the Montreux Convention to warships, but the airspace, that corridor, we have to keep it open,” he said, referring to a 1936 agreement granting Turkey rights to regulate maritime traffic through the Black Sea. “We have, in accordance with the convention, canceled or postponed planned NATO drills. We play an important role, and we fulfill our obligations,” Cavusoglu added.

-Nato’s secretary general, Jens Stoltenberg, said he will convene a meeting in Brussels in the coming days with senior officials from Sweden, Finland and Turkey to discuss Turkey’s opposition to Sweden and Finland joining the alliance. Blinken said there was a “strong consensus within Nato, broadly, to support the rapid accession of Sweden and Finland” to Nato and he was confident it would happen.

-The head of Interpol raised alarms on Wednesday about a possible uptick in weapons trafficking once the war in Ukraine end. Interpol Secretary-General Jurgen Stock told the Anglo-American Press Association that he has “no doubt” illegal arms trafficking will increase. Stock encouraged Interpol’s 195-member countries to “intensively use available databases that can help trace and track weapons, for instance those stolen in another country.”