A Ukraine war deal that puts the energy squeeze on China

Six weeks before Donald Trump’s return to the White House, speculation is rising over how exactly he plans to end the Ukraine war.

The President-elect’s incoming Russia-Ukraine envoy, Keith Kellogg, his former intelligence chief, Richard Grenell and Vice President J D Vance are all proposing some variation of freezing the Line of Contact and blocking Ukraine from entering NATO, Reuters reported.

On the Ukrainian side, Kyiv is finally signaling an interest in compromise. President Volodymyr Zelensky recently hinted to Sky News that he might accept Russia’s continued control over land that Ukraine recognizes as its own in exchange for NATO membership. This represents a drastic break from his prior maximalist demand that Russia completely withdraw from Ukraine’s 1991 borders as a precondition for ending the conflict.

The Wall Street Journal then reported that his closest advisor, Andriy Yermak, met this week with members of Trump’s team, including Kellogg, Vance, and incoming National Security Advisor Mike Waltz. Trump’s incoming chief of staff, Susie Wiles, also reportedly met with Zelensky.

According to the Wall Street Journal report, “Ukraine plans to communicate its readiness for peace.” This coincides with Bloomberg’s report saying, “Ukraine’s allies have shifted their focus from seeking a victory to trying to put President Volodymyr Zelensky in the best position to counter Russian advances or negotiate a possible ceasefire.”

Russia still officially insists on its maximalist demands that Ukraine restore its constitutional neutrality, demilitarize, denazify and recognize the new territorial realities brought about after the September 2022 referenda that saw four of its former regions vote to join Russia.

Russia also wants the West to lift all sanctions and return all of its frozen assets. Russia will likely have to compromise on some or all of these points, but it’s unclear exactly how flexible President Vladimir Putin might be.

At this week’s “Russia Calling!” investment forum, Putin said, “despite the political pressure, many of our partners, including those from Western Europe and the United States, have not left the Russian market…I am optimistic that relations with our Western partners will eventually normalize, primarily because it is in their interest and ours, of course, as well.”

This hints at the role that business can play in bringing Russia and the US together. The Wall Street Journal reported late last month that Miami financier Stephen Lynch, who has a history of doing business in Russia, wants to buy Nord Stream II if it goes to action in a Swiss bankruptcy proceeding early next year.

He has reportedly sought the US government’s permission to do so. If it’s approved, the project goes to auction and Lynch purchases it, then this could set into motion the series of compromises required for ending the largest war in Europe since World War II.

Energy diplomacy could be the key. Trump’s earlier objections to Nord Stream II were that it wasn’t under American control and could lead to Russia influencing Germany in ways that could hurt US interests.

If Lynch purchases the pipeline, however, then the issue would seemingly be resolved. Some discounted gas could then flow from Russia to Germany via the last undamaged pipeline that Putin spoke about during a news conference after October’s BRICS Summit to help Germany avert its reportedly impending recession.

For that to happen, however, some Western sanctions would have to be lifted. The US might let Russia resume using the SWIFT payment system and could even allow the transactions to be conducted in US dollars for convenience’s sake, which would also help Trump counter the de-dollarization processes that he warned about in a social media post late last month.

The added benefit is that helping Germany avoid a recession could help the whole EU eschew one, too, thus maintaining its status as a reliable market for US exports.

The US can continue selling comparatively more expensive LNG to Europe and maintaining the market share that it has poached from Russia over the past nearly three years of war in Ukraine, but some discounted gas from Russia might be required to maintain EU macroeconomic stability during difficult economic times.

Moreover, the proposed lifting of some sanctions on Russia, even if only initially for its gas exports to Germany via what might by that point be the US-controlled Nord Stream II, could pave the way for lifting more later.

These could possibly also involve the energy sector, at least at first, and could be phased as a reward for compliance with whatever ceasefire, armistice or peace treaty the US helps broker between Russia and Ukraine after all three engage in various compromises to that end.

Trump 2.0 is expected to be very hawkish on China so it therefore follows that it might want to redirect Russian energy exports away from the People’s Republic over time, which could be accomplished through more creative energy diplomacy.

The initial lifting of some sanctions for facilitating Russian gas exports to Germany could expand to include Russia’s oil exports to India, which could also once again be conducted in dollars and through SWIFT for convenience’s sake.

Excluding China from these waivers could result in it purchasing less discounted oil from Russia, thus raising the costs of its overall purchases from others. The US might even allow some of its companies to invest in Russia’s Arctic LNG 2 project, which it earlier sanctioned.

The purpose would be to replace frozen Chinese investments with American ones to reduce the amount of energy that its systemic rival can import from Russia in the future. If the right conditions are created, Russia’s LNG gas exports might instead help fuel the Japanese economy.

After all, Japan is committed to ensuring uninterrupted disruptions of its LNG imports from the nearby Sakhalin 2 project in spite of sanctions, which could set a precedent for redirecting other such exports in the future.

The fresh injection of foreign currency, particularly dollars, into Russia could help ease the macroeconomic stresses it is now suffering, thus incentivizing the Kremlin to comply with whatever agreement is ultimately reached with Ukraine.

There’s also a possibility that some of its frozen assets might be swapped for stakes in these same energy projects or others. They could also be used to purchase the Western technologies upon which part of its energy industry depends.

Depending on how successful such creative energy diplomacy proves, the US might try to convince Russia not to agree to the basement-bargain prices that China is reportedly demanding in exchange for signing a deal on the Power of Siberia II gas pipeline.

If more lucrative markets open up after the US stops obstructing some Russian exports, such as if it allows Russia to build southern-directed pipelines to Iran and/or to India via Iran or, Afghanistan and Pakistan, then the Power of Siberia II project might be shelved.

It’s in the US’s grand strategic interests to incentivize Russia not to provide discounted energy to China. The goal could foreseeably be advanced through creative energy diplomacy, which might begin with Lynch’s plan to purchase Nord Stream II and proceed until Russia does not build any more pipelines to China. The only way to get the Kremlin on board, however, is through creative compromises on Ukraine.

Beyond sanctions relief, Russia needs some of its maximalist demands to be met. This could take the form of the US coercing Ukraine to accept the new territorial realities created by the war, limit some of its armed forces and rescind laws that Russia considers to be discriminatory against ethnic Russians and Russian speakers by withholding arms as punishment if Zelensky refuses.

These would be small prices for the US to have Ukraine pay for getting Russia to end the war and informally commit to no new energy deals or projects with China as Trump 2.0 pivots to Asia.