The Big Idea

Wars Update

Stephen Stanley | December 23, 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.

This will be the last War Update for a few weeks, as I take a breather during the Holiday season. Merry Christmas and Happy Holidays to everyone. Here’s hoping that the Wars Update can be retired in 2025!

Russia continues to evacuate equipment and troops out of Syria. A Wall Street Journal article on Thursday noted that a significant amount of sophisticated hardware, including high-end air defense systems, had been transported from Syria to Libya. This would appear to be Russia’s fallback if officials are unable to negotiate a settlement with Syria. Such an arrangement threatens to upset the uneasy situation in Libya, tipping the scales in favor of the Russian-supported Benghazi-based warlord Khalifa Hafter vs. the Western-recognized government that controls other parts of the country.

Much remains up in the air in Syria. Turkey wants to wipe out the Kurds (the SDF) and exercise control over a good part of the north of the country. Similarly, to the south, Israel is holding a buffer zone that it may or may not give back eventually. And, of course, the big question mark is whether the HTS and the coalition of rebels now in charge will govern as moderates or will, once empowered, revert to their extremist roots (I suspect that there are plenty in each of those camps, so the outcome of that question is truly to be determined). One thing that looks increasingly certain is that the new regime does not consider Iran a friend. The HTS leader Ahmad al Shara has decided to prevent Iranian civilian and military flights from using Syrian airspace. This is a real problem for Hezbollah and, to a lesser extent, Hamas.

In southern Lebanon, the IDF continues to dismantle Hezbollah tunnels and infrastructure near the border as well as confiscate weapons and ammunition stored in various sites, including mosques. The IDF currently estimates that Israeli civilians will be able to return to their border town homes by March (that’s a one-month postponement from the previous timeline). In preparation, the IDF is conducting cleanup operations in the northern Israeli towns, clearing military equipment, unexploded ordinance, and military waste.

At the same time, the Lebanese Armed Forces are carrying out their part of the ceasefire deal. They have been taking control of a number of facilities formerly used by various militant groups, in the process confiscating weapons and equipment.

The Houthis have lobbed a steady diet of missiles and drones toward Israel. Most of them have been shot down, but some get through. On Thursday, the Houthis launched two ballistic missiles toward Tel Aviv. A fragment of one of them (post-interception) hit a school in Tel Aviv, creating damage but no casualties. As it happens, a long-planned IDF mission was already underway when the Houthis launched their missiles. IDF jets struck Houthi targets in Sanaa, hitting a Houthi-affiliated TV station and power stations (the latter sustained minimal damage and were operational again within hours), and also struck six tugboats at the Hudaydah and Salif ports as well as a nearby oil refinery. Overall, the Israeli attacks did little damage, so that the Houthis can be expected to continue with their drone and missile strikes against Israel. Indeed, another Houthi missile was launched Saturday and managed to evade Israeli air defenses, leading to minor injuries for over a dozen civilians in Tel Aviv.

The dangers of the U.S. not taking decisive action against the Houthis were underscored over the weekend, when an F/A-18 fighter jet was shot down over the Red Sea in an apparent friendly fire incident. Thankfully, both pilots were safely recovered. This came after the U.S. reportedly conducted airstrikes against a Houthi missile storage facility and a command-and-control post in Sanaa.

Ceasefire negotiations between Israel and Hamas continue. News reports indicate that Israel is asking that 34 hostages be released in the first stage of the deal, including 5 female IDF soldiers and 11 men of fighting age. Hamas is demanding that Israel trade 20 Palestinian prisoners for each female IDF soldier. The ultimate endgame in the third and final stage of the deal would involve Gaza being governed by a “committee of technocrats.” At the moment, a key hangup for a deal remains the insistence by Israel that it maintains control of the Philadelphi Corridor (the border area between Gaza and Egypt). With the smuggling routes from the north through Lebanon and Syria now likely off limits, Israel likely believes that it can pretty much guarantee that Hamas will not be able to rearm if it continues to secure the Philadelphi Corridor.

President Putin reiterated during his annual Direct Line news conference last week that any peace settlement with Ukraine would only be on the terms that Russia has insisted upon all along, essentially amounting to an end to Ukrainian sovereignty. Putin seems to believe that Russia is winning, as he is pursuing the same terms as he was in 2022 when Russia initially invaded (and when it thought that Kyiv would fall within days). Thus, Putin appears to be taking the position that Russia can outlast Ukraine and its Western allies. In his 4½-hour news conference, he neglected to mention the help that he is getting from North Korea, apparently embarrassed to acknowledge that Russia is unable to achieve its war aims on its own.

Consistent with his rhetoric, President Putin continues to go all-in on gaining ground in Ukraine in advance of what he hopes will be a ceasefire. One Ukrainian source estimates that Russian troops attacking in the Pokrovsk direction number 70,000, plus another 35K in Kurakhove, and 40K near Velyka Novosilka.

Meanwhile, North Korean soldiers are increasingly leading the charge in Kursk, with disastrous results. Reports point to hundreds of dead North Koreans with many more wounded. One analyst estimated that North Korea lost 4% of its 12,000 troops sent to Russia in the first weekend of fighting, and South Korean intelligence believes that North Korean units suffered over 1,000 casualties in their first week of fighting. Ukrainian sources note that the North Korean have no concept of modern warfare and are even more vulnerable than their untrained Russian counterparts to Ukrainian defenses, such as drones and mines. These units have advanced to a degree thanks to sheer numbers, but they have yet to achieve any sort of strategic victory.

Nonetheless, North Korea appears to be all in at Russia’s side. The Wall Street Journal reports that North Korea has ramped up weapons deliveries to Russia, including artillery shells and systems all the way up to ballistic missiles. About 200 factories in North Korea are running at full capacity to make ammunition for Russia. So far, North Korea has sent Russia over 5 million artillery shells and more than 100 missiles.

Ukrainian missiles reportedly struck a chemical plant in the Rostov region of Russia on Wednesday. This site was said to produce rocket fuel, explosives, and other ammunition. On Thursday, a drone attack led to fires at a nearby oil refinery.

Russia took another crack at Kyiv’s air defenses, sending seven missiles and 65 drones at the capital on Friday. The Russians claimed the attack was in response for the Rostov strikes noted just above. Russia said that they were targeting a design facility involved in missile development, a command post, and Patriot air-defense systems, but Ukraine reported that debris from intercepted missiles only damaged buildings in residential areas of the city, a warehouse, and a business center. 5 of the 7 missiles were shot down, and, as usual, the bulk of the drones were shot down or diverted using electronic warfare.

The Economist recently reported that the Ukrainian economy seems to be weathering the war better than Russia’s. Ukraine’s currency has been stable in recent months and its economy is projected to grow by 4% in each of the next two years. In contrast, Russia’s central bank recently forecast that the Russian economy will barely grow in 2025. Ukraine’s policy rate is 13.5%, while Russia’s is 21% due to inflation that is nearing 10%. Analysts expected the Russian central bank to hike its rate again Friday, but the bank surprisingly decided to hold steady. Now, it will be interesting to see whether inflation accelerates further and/or additional pressure develops on the ruble.

According to the Financial Times, President-elect Trump’s team has reassured European officials that the new Administration will continue supporting Ukraine. At the same time, Trump clearly wants Europe to shoulder more of the burden. He has upped his ask from other NATO countries to hike defense spending to 5% of GDP (even the U.S. does not meet that standard). While that is unlikely to happen, multiple EU countries acknowledge that they will need to spend more than 2% of GDP, the current NATO minimum standard.

Stephen Stanley
stephen.stanley@santander.us
1 (203) 428-2556

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