The Peter Zeihan Podcast Series - Russia's Largest Port Comes Under Fire || Peter Zeihan

Episode Date: August 8, 2023

The Ukrainians and Russians had a hectic weekend, so let's get caught up. On Friday, the Ukrainians used a naval drone (a motorboat loaded with a crap ton of explosives) to hit a Russian vessel in the port of Novorossiysk. Full Newsletter: https://mailchi.mp/zeihan/russias-largest-port-comes-under-fire

Hey, everybody, Peter Zine here coming to you from cloudy Colorado. It is the 6th of August, a Sunday, and a lot has gone down in Ukraine in the last 72 hours. I'm going to try to catch you up on. First of all, on Friday the 4th, in the early hours, the Ukrainians used naval drone to head a Russian military vessel, an amphibious vessel, in the port of Novosisksk on the northeast shore of the Black Sea. Now, all by itself, this is kind of a big deal. The Ukrainians have been building naval drones of increasing range. explosive power and sophistication. I'm oversimplifying here, but basically take a motorboat, seal it up on the top, load it with a metric ton of explosives and just motor it right into a target. They've been using these for several months to hit military vessels in the vicinity of the port of Sevastopol, which is an occupied Ukraine, and they've been so successful that the Russians have largely evacuated the military vessels from the region completely and moved them

back to places like Noverisks in Russia proper. The problem that the Russians have or really any conventional naval forces are going to have is conventional naval forces are designed to strike over the horizon on a ballistic trajectory traditionally or maybe use cruise missiles. And when you're dealing with something

that's so low in the water like a motorboat, the weapons cannot get a negative inclination that's necessary to shoot down at them. So you're limited to using things like RPGs and bazookas and small arms fire in order to target them and you can't detect them until they're close, and by the time they're close, the main ship weapons are useless.

And so the Ukrainians have damaged and destroyed any number of Russian military vessels and forced them to basically abandon their forward military position in naval terms. They then, a couple weeks ago, used a couple of these to target the Kerch Strait Bridge. And remember that the Ukrainians have no access to the Sea of Izav at all. The Russians have conquered all parts of Ukraine that border that. So the Ukrainians have to launch from places like, Odessa and sail all the way around the peninsula to do it. So these things already have a decent range. But Nova Seisk is even further away and the Black Sea is a relatively rough body of water.

So in order to strike there, one of two things has to be true. Either number one, the Ukrainians have experienced a quantum leap in terms of range and pretty much nothing on the entire Russian coast of the Black Sea is safe anymore. Or they are working with a third party in order to deliver these vessels closer to target. Of course, the Russians are going to say that it's the Brits and the Americans, but a far more likely candidate is Turkey. Now, Turkey is the second military power of the region. And historically speaking, they've easily been able to outpunch the Russians on the Black Sea simply because the Russians are spread out among multiple bodies of water, the Pacific, the Arctic, the Baltic, and none of them can reinforce. Whereas the Turks

have controlled the Straits that go through Istanbul, specifically the Bosporus and the Dardanelles, they can easily move their forces from the Mediterranean to the Black Sea and back. Now, we've seen the Turks starting to change their strategic policy on this region from thinking of the Russians as a potential asset and a partner to something that they might actually be able to eliminate. The Russians have done so badly for so long in this war that the math in Ankara seems to be that, you know,

maybe with a little push from us, we can just break Russian power completely. And if all it costs them is to smuggle a few motorboats basically from here and there, in order to destroy the Russian strategic position, it might be worth it. I don't have any specific information indicating that that is actually happening, but the logic holds, and the Turks are in the process of reevaluating everything. But regardless, it doesn't look like there are now any places in the Black Sea where the Russians need to be able to operate, where they can operate safely. That's kind of piece one.

Piece two has to do with commercial shipping. Because yesterday, the 5th on Saturday, the Ukrainians hit a tanker called the SIG, which is a Russian flag tanker that makes a run between Noverasisk again, and the Syrian port of Tautarus typically carrying aviation fuel, which is critical for any Russian operations in Syria. Now, it was hit on the way back, so it was empty at the time, and it wasn't sunk, but they did hit the engine room. And if this is the beginning of a trend, we've got a real problem for a lot of people.

start with the Russians. The Russian position outside of Russia proper, when you're dealing with operations either in Latin America or Africa, they're dependent on free movement of the seas. And if they can't move men, material, and fuel, in and out of the Black Sea, they're kind of hosed. So this is a hit on a very important strategic asset for the Russians. And if this is the beginning of a trend, the entire Russian position globally is going to go up and smoke in a very short period of time because of lack of fuel and the inability to reach people in the first place. The second problem has to do more with civilian shipping because the Ukrainians now said in the aftermath of hitting the SIG that they are going to treat every ship coming in and out of

any Russian port as a potential target, which, you know, you kind of understand where they're coming from because the Russians have been doing this for Ukrainian port since the beginning of the war. If the Ukrainians stick to their guns on this and at the moment no one in the international community outside of the Russians, there's basically saying any. then a lot of the Black Sea is going to become a no-go zone for Russian vessels of any type or any third-party vessels that want to go in and out of Russian ports. And unlike Ukrainian ports where the world has kind of gotten used to that, this is a shock that we haven't experienced just yet. Now, for those of you who have been following me since the war, especially if you've been

bitching at me for getting some of my more specific forecasts on international trade wrong, it's because we haven't had this sort of blow up yet. My concern early in the war is that we were have a short, sharp shock in which Russian and Ukrainian stuff in and out of the black sea was simply going to go offline all at once, and that was going to have a catastrophic impact on prices. That hasn't happened, and honestly, I've been very surprised about Moscow and Kiev have shown a lot of restraint. That now seems to be in the past. The Ukrainians have now already hit a ship. The Russians are specifically threatening anyone who comes in and out of any Ukrainian ports as well, and it's probably going to become a bit of a free-for-all in the not-too-distant future,

and the Ukrainians have now demonstrated that they can strike several hundred miles from their ports. That should be enough to reach anywhere in the Black Sea where there is a vessel coming to or from a Russian port. And they have given the world's civilian ships two weeks to basically abscond from the region. Now, the way insurance works is in a normal situation, you pay one or two percent the value of your hull every year for an insurance policy. If you sail into a war zone where people are shooting, that goes up by a Russian. roughly a factor of 100. And if you sail into a war zone where someone is actively targeting civilian vessels, you just can't get a policy at all. So we could see the entire position of maritime shipping globally in this region just kind of evaporate over the course month of August.

That takes out, potentially takes out one of the world's largest oil and ore and grain export facilities, which is noveris. And a secondary one at Tuopso, which is a little bit further down the Russian coast and the northeast shore of the Black Sea. That can hit any number of things very, very badly. The Russians don't have the ability to redirect this stuff anywhere because their other export points are either already maxed out. Places like Pramorsk on the Baltic or Nkodka on the Pacific are already operating at maximum capacity.

The rail system's already at maximum capacity. And the only other alternative would be to go through Ukraine, which, and take it to the port of Odessa, which is under embargo. So if this is shut down, it really goes away. A couple complications here. Number one, Russian crude, if it gets locked in, oftentimes in the winter, these wells freeze solid and they would have to be redrilled. So it's going to be offline for years, maybe decades.

Second, not all crude is created equal. And the crude that is exported through Nover Seekintuopsa kind of falls into two rough buckets. You have approximately three million barrels a day that is exported through these two. points total. Half of it is Russian crude, which is a medium sour, and half of it is a called CPC blend, which comes from Kazakhstan, specifically the Tenghis superfield on the northeast shore of the Caspian Sea. It goes by pipeline to Nova Ossesk. CPC blend is super light and super sweet. Now, the medium sour. If you remove that from the market, the biggest beneficiary is probably going to be Canadian select, which is a heavy sour blend that comes out of Alberta. And if you

remove CPC from the market, the biggest winter is probably going to be U.S. shale crude, which is also super light, super sweet. But in both cases, you've got two big customers. The first is East Asia, primarily China. And there is now no longer anywhere that the Chinese can go to get replacement volumes because the Europeans have already grabbed it all up in the aftermath of the war. The second big customer base is going to be in the Mediterranean basin, where companies in the region have basically swore off Russian crude and have gone for CPC blend. If CPC becomes unavailable, their only real option is going to be U.S. shale crude. Now, luckily, U.S. shale has been expanding in leaps and bounds over the last several months and

years, especially since COVID started a let up. And it's nearing record levels and it's only going to go up from here. So there's a possibility here that the Western side, the European side of these disruptions, is actually able to replace what they need from North America, whereas the Asian side just gets completely hosed, which you want to talk about re-referption. ordering the international strategic environment, if you take the majority of this three million barrels of disruption and lay it on China while the Europeans just kind of, you know, hold their nose and take American crude, that really reorders a lot of things in the international economic system, especially since the Chinese are already experiencing what can be best described as

something between an economic slowdown and a sharp break because they're no longer capable of generating their own demand at all. At the same time, they're entering into an ever more bitter trade war with the rest of the world. So we're looking at the Russians losing their strategic position in the water. At the same time, they lose their strategic position in terms of economic penetration. They lose the ability to project power through the wider world, and we get a reordering of international energy, which really hurts the Chinese and the Russians. This is getting really interesting, really fast. Now, there's still a lot of eyes to dot and T's across the Ukrainians, and the Russians still have to make good on their threats,

this doesn't automatically happen. But that does seem to be where we are headed right now. Okay, sorry this one was so long. Everyone take care. I'll see you next time.