Wars Update

Stephen Stanley | November 29, 2024

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

Israel and Lebanon agreed to a 60-day ceasefire, which took effect Wednesday (it is interesting that Hezbollah is not a party to the agreement and that Lebanon is responsible for Hezbollah’s compliance).  Israel has two months to withdraw from southern Lebanon, so it may not pull back right away.  The hope is that if peace can be maintained for 60 days, then the two sides can hammer out a permanent arrangement.  As I have laid out a number of times, the trouble from Israel’s perspective is that we saw this movie after their last war with Hezbollah in 2006, and the terms of the peace agreement in that instance were clearly not enforced.  Hezbollah built up extensive infrastructure right along the Lebanese border with Israel right under the nose of both the Lebanese Army and the UN peacekeepers.  Israel is once again trusting Lebanon to prevent, forcibly if necessary, Hezbollah from operating anywhere south of the Litani River.  ISW is skeptical that this would ever happen, and I am too.  Nonetheless, for now, I suspect that Hezbollah will be content to pull back and try to recuperate after Israel decimated their positions near the border and killed most of their leadership in recent months.  Israel can also use the respite, as IDF reservists are exhausted and would like to get back to their jobs and families.  Prime Minister Netanyahu said that the deal would allow Israel to focus on the threat from Iran as well as continue to isolate Hamas.

The ceasefire appears to be holding so far, though Lebanon’s government has complained that the IDF has conducted a few small attacks since hostilities were supposed to end.  The IDF claimed that they fired on advancing militants.  Both Israel and Hezbollah got a heavy wave of attacks in just ahead of the deadline, trying to marginally improve their leverage heading into the 60-day pause.  In particular, Israel struck Hezbollah’s largest long-range missile production facility in the Bekaa Valley as well as a nearby training camp.

ISW concluded that the deal is a defeat for Hezbollah.  The militant group was forced to abandon a number of its negotiating positions, including that any ceasefire with Israel could only happen if Israel also stopping fighting in Gaza.  Israel’s main aim in advancing into Lebanon and destroying Hezbollah infrastructure was to secure the return of its citizens to northern border towns.  The IDF claims that its offensive eliminated the capability of Hezbollah to conduct a ground invasion along the lines of what Hamas did on October 7, 2023.  An end to the threat of missile and drone strikes has been achieved through diplomacy — if the deal holds.

ISW laid out the potential flaws in the deal.  First, as noted above, Israel is counting on the Lebanese Armed Forces and UN peacekeepers to do what they failed (or refused) to do after a similar agreement in 2006.  Second, ISW doubts that Hezbollah will acquiesce: “Hezbollah will almost certainly attempt to reoccupy southern Lebanon because Hezbollah’s stated raison d’etre is to end Israel’s control over the Shebaa Farms, which it sees as Israeli-occupied Lebanese territory.”  Third, Hezbollah fully supports Iran’s desire to destroy the state of Israel and cannot be expected to coexist peacefully with Israel.  I would add a fourth potential problem.  A significant portion of the Israeli public opposes the deal and would have preferred to press the issue, further defanging Hezbollah.  In particular, many of the evacuated residents of the border towns reacted negatively to the deal, arguing that it did not offer them sufficient security to safely return to their homes.

In any case, with Hamas mostly dismantled in Gaza and Israel and Hezbollah observing a truce, if Iran stands down for a while, we may see the most peaceful stretch in the region since before October 7.  That being said, do not expect total peace and comity to break out.  As an example, the U.S. military conducted a strike Wednesday against an Iranian-backed militia weapons depot in Syria in response to an attack against U.S. forces in Syria.  This illustrates that, even if the Lebanon deal holds for a time, substantial risks remain.

There is also another alternative scenario that leads to a re-escalation in the region.  Hardliners in Israel have argued that now is the best time in years for Israel to strike Iran’s nuclear program.  Having destroyed most of Iran’s air defenses in October, Iran is quite vulnerable.  However, Iran’s nuclear assets are said to be dispersed around the country in hard-to-reach locations (such as in deep underground facilities under a mountain).  This is another instance in which President-elect Trump represents a wild card.  He will almost certainly abandon the Biden Administration’s efforts to restore the nuclear agreement with Iran, and he has hinted that he might (at least tacitly) approve of an Israeli strike against Iran’s nuclear weapons program.  Presumably, Trump’s team is in close contact with Israel’s government on this issue.

Another element of Middle East unrest re-emerged out of nowhere this week when Islamic militants in Syria launched a large attack on Syrian government forces near Aleppo, taking over a military base and seizing considerable territory.  This move puts the rebels within 3 miles of the city of Aleppo.  This situation represents a potentially significant problem for Iran, which has been a strong supporter of Syrian President Assad and, even more so, for Russia, which has been Assad’s main patron.  With both of Assad’s main suppliers of weapons otherwise occupied right now, there are many different ways this situation could evolve.

President-elect Trump has named Keith Kellogg, an 80-year-old retired Lt. General, as his special envoy to Ukraine.  Kellogg was the chief of staff for the National Security Council and VP Pence’s national security advisor during the previous Trump term.  Kellogg has proposed in the past that the war between Russia and Ukraine be frozen at the current battle lines and both sides be forced to the negotiating table.  Neither Russia nor Ukraine is likely to be entirely happy with such a plan, and there could be carrots or sticks in the event that one or both sides fails to comply.  Kellogg’s plan entailed telling Ukraine’s government that it would only continue to receive American weapons if it enters talks.  Meanwhile, the Kremlin would be warned that if it refused to negotiate, the U.S. would step up support for Ukraine.  So, if Trump instructs Kellogg to pursue such a plan, then the war could either come to a quick ceasefire or it could intensify, depending on how Ukraine and Russia respond.

Kellogg’s appointment would seem to allay the worst fears of Ukraine that the incoming Trump Administration intends to simply abandon them.  Kellogg has advocated negotiations, but he wants Ukraine to enter any talks from a position of strength.  He recently praised the Biden Administration’s decision to allow Ukraine to fire ATACMS at targets in Russia, but he criticized the Administration for waiting so long to do so.  It will be interesting to see if the Trump team weighs in on the Biden Administration’s proposal to Congress to authorize another $24 billion worth of military support during the upcoming lame duck session.

In the Kellogg scenario, all indications are that Russia will balk.  According to ISW, Russian Foreign Intelligence Service Director Sergei Naryshkin told media this week that Russia is open to negotiations but “categorically rejects” any “freezing” of the frontline or the creation of a buffer zone.  A number of Russian officials in recent days have reaffirmed Russia’s demands that amount to the elimination of a sovereign Ukraine as well as full control of all of the territory that Russia has illegally annexed, including a significant chunk of land that it does not currently control.

As laid out in recent updates, Russia has accelerated its pace of advance over the past month or two.  However, it is not exactly routing Ukraine.  ISW assesses that Russian forces have gained 574 square kilometers since the beginning of November, or an average of 22 square kilometers per day.  At that pace, it would take a year for Russia to gain control over all of the Donetsk Oblast.  And even that exaggerates their progress, as Russia has only gained as much territory as it has by bypassing Ukraine’s well-fortified strongholds.

Media reports indicate that Russia has abandoned its attempts to take the city of Kupyansk in the north.  Russian troops had managed to infiltrate the eastern edge of the city but were unable to establish defensible positions and were forced to withdraw.

Ukrainian sources also suggest that Russian has lightened up its campaign of frontal assaults toward Kurakhove, having taken massive losses of equipment and manpower, and has shifted to attacking Velyka Novosilka, a key logistics point to the southwest.  If Russia can have success in this direction, it might be able to outflank Ukrainian units defending Kurakhove and force them to withdraw.  As usual, the initial efforts to enter Velyka Novosilka failed, leading to substantial losses, but Russian forces have reached a key highway used as a supply line, putting Ukraine’s control of the town in jeopardy.

Russia conducted yet another massive air strike on Wednesday, sending about 100 drones and over 90 missiles to various parts of Ukraine, with the primary targets once again being civilian energy infrastructure.  On Thursday, over a million people were without power due to the damage, even though Ukraine reportedly shot down all but 12 of the missiles and shot down or diverted all of the drones.  Having likely spent their missile stocks for a time, Russia followed up today with a wave of over 130 drones, but Ukraine was able to shoot down or divert all but 2 of them.  President Putin threatened this week to use his new hypersonic Oreshnik ballistic missile to target the centers of power in Kyiv, though it is unclear whether Russia has produced more than a few of them so far.

Meanwhile, Ukraine continues to hammer away through the air as well.  This week, it hit the Atlas oil depot, setting at least three tanks on fire.  More importantly, a missile strike into Crimea reportedly destroyed a high-end air defense system as well as hitting the Belbek Airfield and the adjacent pilot school.

The Wall Street Journal reported this week that European countries are increasingly turning to providing cash to Ukraine to boost its domestic military industry, since many European countries have essentially exhausted their spare weaponry already.  Ukraine’s military industrial base is quite extensive and advanced, dating back to its role in the old Soviet Union.  However, the firms have been cash-strapped, as the government has been unable to afford to pay for all of the weaponry they would like.  As a result, there is ample spare capacity for production.  Thus, Denmark and other European countries have turned to sending cash as opposed to equipment and letting Ukraine build what it needs.  Ukraine will not be in a position to produce high-end weaponry (like Patriot missile defense systems or jet fighters) any time soon, but given time and money, it can become increasingly self-sufficient for some of the more mundane but critical weapons and ammunition, like armored personnel carriers, artillery systems and shells, and possibly even longer-range missiles.

The Biden Administration is urging Ukraine to beef up its military manpower by lowering the mobilization age to 18 (from 25).  The argument being made by the Administration is that Ukraine has plenty of equipment (which is to say, stop complaining about the slow pace of deliveries of weapons and ammunition from the West).  However, Ukrainian President Zelenskyy refuted this claim, noting that Ukraine has new units of soldiers that it cannot put on the battlefield because of a lack of equipment.

The Russian economy is showing signs of wavering.  It is currently facing the war version of what happened in the U.S. in 2021, when the government injected immense amounts of cash into the economy and generated rampant inflation.  In Russia, it is the large and rising recruitment bonuses that are being paid to entice new enlistees into the military as well as the rising wages needed to attract workers to build the weapons that the Russian war machine needs.  The central bank has been forced to hike its policy rate to 21% and inflation is still running above 8% year-over-year (not surprisingly, price hikes are said to be several times higher than the official data indicate).  Thanks to all of this as well as a new round of U.S.-imposed sanctions on Russian banks, the Russian ruble collapsed this week, reaching its weakest levels since the early days of the war (levels that only persisted for a few days), though it rebounded a bit on Thursday and Friday.