In today’s issue:

  • National security depends on energy
  • In Ukraine, energy is a matter of national survival
  • Energy remains a “must-invest” sector

Ever since it became apparent that Russia was likely to invade Ukraine in 2022, I’ve offered occasional commentary on the topic. While I have no military experience, I am an avid reader of military history and strategy, both classics on the topic as well as more contemporary works.

Hence I’m aware of the way in which WWI ended. Field Marshall Ludendorff, in charge of the German Western Front in 1918, attempted a massive attack – the “Ludendorff Offensive” – against the still-green but growing ranks of US forces that had joined the seasoned French and Brits. Up against more manpower and vastly more equipment and supplies, the effort failed.

The allies subsequently counterattacked in great force. Having already used up his reserves of fresh young recruits, ammunition, food and other essentials in his eponymous offensive, on 29 September Ludendorff famously told the Kaiser that he could no longer guarantee the integrity of the front.

Incredulous, the Kaiser forced Ludendorff to resign and placed von Hindenburg in sole charge of the Reichswehr. Yet Hindenburg agreed with Ludendorff that a military defeat was inevitable and the new German chancellor, Prince Maximilian of Baden, immediately set about seeking a negotiated peace.

And so, having lost in the field, the Germans agreed to an armistice in November and peace negotiations that would conclude at the Versailles Conference the following year.

History may not repeat but it certainly rhymes. I’ve argued since before hostilities even broke out in Ukraine that Russia would have the upper hand in this conflict, notwithstanding NATO’s unambiguous support of Ukraine ever since the Yanukovych-led government was overthrown in a coup in 2014.

While I don’t want this missive to descend into a detailed assessment of the current military situation, I will offer a few relevant facts:

  • Russia has been making territorial gains along much of the 1,000+km front nearly every day for the past two months
  • Russia is reported to have a ~7-1 advantage in artillery and other battlefield systems and a ~5-1 advantage in available manpower, which is also growing as newly trained recruits reach the front
  • US-supplied Abrams tanks have recently been withdrawn from the front as their losses have been unacceptably high
  • The head of the Ukrainian military has recently admitted that the army is retreating due to the relentless, overwhelming Russian onslaught.

Does that all sound much like the situation on the Western Front in 1918?

Indeed it does. Hence US Secretary of State Antony Blinken recently travelled to China to ask that it end its support for Russia in the conflict. As Associated Press reported:

Notably, he said he raised ongoing concerns about Beijing’s supply of materials, including machine tools and micro electronics, to Moscow that President Vladimir Putin is using to boost Russia’s defenses and its war on Ukraine.

“Russia would struggle to sustain its assault on Ukraine without China’s support,” Blinken told reporters after his meeting with Xi.

“Fueling Russia’s defense industrial base not only threatens Ukrainian security, it threatens European security,” he added. “As we’ve told China for some time, ensuring transatlantic security is a core U.S. interest. In our discussions today. I made clear that if China does not address this problem, we will.”

Blinken didn’t elaborate further regarding what measures the US might impose on China if it continues to support Russia. The threat may or may not be credible. But that it even exists tells us much about the desperate situation on the ground in Ukraine.

In recent weeks, Russia has been targeting Ukraine’s energy and logistical infrastructure. If the lights go out, so the thinking probably goes, Ukraine’s ability to keep fighting goes with it.

As it happens, Ukraine’s energy infrastructure has played a central role throughout the conflict, including in the opening weeks. While world attention was fixated on what was happening up north around Kiev, in the south of the country, a Russian armoured column seized Europe’s largest nuclear power plant, in Zaporizhzhia, on 3 March 2022.

The plant was subsequently shelled and damaged on multiple occasions, leading Rafael Grossi, the head of the International Atomic Energy Association (IAEA), to express grave concern for its safety. Russian forces remain in control of the plant, although it has long since been taken off-line.

Hence Ukraine lost its single, largest source of power generation right at the start of the war. Last year the large Kakhovka Dam on the Dnieper River was blown up. Ukraine thus now relies heavily on thermal generating plants in the unoccupied west of the country. Now that these are being targeted by Russia, the lights might indeed soon go out.

Taking Zaporizhzhia was clearly a top priority for Russia. Ukraine’s failed attempts to get it back drew grave concerns from the IAEA. Russia formally claimed ownership over the plant when it announced the annexation of Zaporizhzhia and the other Donbass region oblasts.

Perhaps it should be no surprise that the Russians saw Europe’s largest nuclear power plant as a prize worth taking. When they retreated somewhat in late-2022 following their initial assault, they held onto it notwithstanding its exposed position on the Dnieper River.

They clearly still see it as highly valuable. Hence, if Russia wins the war, getting the plant back on-line is probably going to be a top priority. That would certainly assist in the rebuilding of infrastructure in the Donbass region.

The Ukraine war has demonstrated many things, not only that Russia is a resurgent power in Europe and that military technology and tactics continue to evolve apace. It has also highlighted the importance of energy infrastructure, including the first-ever hostile seizure of an atomic power plant and the first ever destruction of an undersea gas pipeline.

Clearly, the importance of energy infrastructure cannot be overstated. It is a matter of national security in peacetime and of national survival in wartime. Investors should take note.

In my opinion, energy remains an absolute “must-invest” sector. While there are many ways to get exposure, there might be a lesson investors can learn from the Ukraine war about nuclear power being a priority.

Over at Southbank Growth Advantage, editors James Allen and Sam Volkering are focusing on several exciting new opportunities in this area. I recommend you take a look here.

Until next time,

John Butler
Investment Director, Fortune & Freedom