The G7 leaders meeting in France was invariably overshadowed by the rush to agree and sign – at the Versailles Palace no less, notwithstanding the historical baggage of that particular location for such signatures – the (shallow deal) Memorandum of Understanding (MoU) between the United States and Iran to extend the current ceasefire, move to reopen the Strait of Hormuz, and initiate a new accelerated negotiation process concerning Iran’s nuclear program.
Yet, as the MoU seems in the end to mostly confirm information already known, perhaps of larger longer-term significance of this G7 meeting is the apparent shift towards a much more unified G7 stance on Russia/Ukraine putting medium-term pressure on Vladimir Putin, joint initiatives on critical minerals, and finally related to Iran a clear G7 position on full normalization of the Strait of Hormuz.
The MoU with Iran in the end verified the “shallow deal” concept, and Donald Trump confirmed that it was in the end – much too late of course for analysts like me, who had predicted that his political pain threshold would have been reached a long time ago – rising political and economic costs at home that forced him to agree to it.
The “shallow deal” though invariably raises significant concerns about Iran’s incentives and willingness to actually complete a meaningful agreement to restrain its future nuclear program. Tehran has received such significant upfront financial gains that its incentives to fully complete a new and verifiable nuclear deal, as opposed to simply “keep on negotiating forever” will be limited. The odds of this being achieved in 60days were never high, and given the content of the MoU are now even lower.
At the same time, as discussed in my previous note on Monday, the precedent towards “normalization” will be politically difficult to reverse. A shift towards a “permanent interim MoU only relationship” without an actual nuclear deal hence looks probable.
This would see the U.S. naval blockade lifted, but Iran keep the Strait open and de facto freeze its nuclear program in return for the Trump Administration maintaining oil and financial sanctions wavers already implemented in place. Yet, it would likely not result in the handover of highly enriched uranium, and as such Iran would remain a nuclear threshold power.
A lot of focus will likely be on what happens to the Strait of Hormuz after the 60day period mentioned in the published MoU? As discussed in the previous note, it remains highly unlikely that Iran – following consultations with Oman and the other GCC countries – will be politically able to implement any meaningful long-term toll for transiting the Strait of Hormuz.
Since the GCC countries would de facto pay the toll from lower margins on their commodity exports brought to the world market from this particular production location, they are unlikely to agree to one.
But more importantly, both Iran and Oman will need constructive economic relations with the rest of the world, and it has made it very clear that everyone else are strongly opposed to a permanent toll on the Strait. The G7 communique is once again quite clear on this issue:
Just as China has repeatedly supported for self-interested reasons the same principle. As such, four permanent members of the UN Security Council, scheduled to vote on this “deal” hence opposes a toll, while Russia’s position may be more conflicted, but as a now de facto vassal of China, Moscow is unlikely to torpedo this against the wishes of Xi Jinping.
The contents of the MoU do not alter the strong base case that no permanent toll will be implemented and that the threshold for once again closing the Strait of Hormuz will be high going forward.
Lastly, as the MoU represents an abysmal outcome of this war for Israel, what Prime Minister Netanyahu does next, not least in Lebanon, likely represents the biggest immediate risk to the agreed framework.
As noted, it is the agreement among the G7 leaders, including President Trump, on what the next steps on Russia-Ukraine should be that instead standout from this meeting. The paragraph is worth reading in full (my emphasis added) to get the true extent of renewed policy convergence among the G7 leaders;
- We, the Leaders of the G7, stand united in our unwavering support for Ukraine in defending its freedom, sovereignty, and territorial integrity. We reaffirm our solidarity with the Ukrainian population suffering from attacks on their critical infrastructure and cultural heritage. We commend Ukraine for its resilience and progress on the battlefield in recent months and emphasize there is now a new momentum.
- To support and accelerate this new momentum, we agree to increase the delivery of air defence capacities, additional systems and interceptors, and long-range capabilities. We are also ready to consider extending to Ukraine the benefit of licenses to allow for an increase in Ukraine’s military production.
- We stress the importance of energy resilience, on the basis of the needs and priorities expressed by Ukrainian authorities. We agree to provide further support to get the country through next winter.
- We commit to increase the pressure on the Russian war economy. In this context, we will strengthen our sanctions, including those on the oil and gas sectors. We consider this the right moment to proceed with additional measures, as President Trump has delivered a deal that we support in reopening the Strait of Hormuz.
Donald Trump’s potential agreement to consider offering Ukraine licenses to produce Patriot missiles in Ukraine is a potentially significant development, as is the indication that the Trump Administration will now reinstate energy related sanctions on Russia going forward. In total, this G7 communique suggests that “the spirit of Anchorage” is long gone, and that instead additional aid is coming to Ukraine and additional pressure will be put on the Russian economy going forward.
This shift in Donald Trump’s position – which of course may at any time be reversed again – adds to rising economic and military pressure on Russia. Ukrainian long-range strikes on the Russian energy sector – including repeatedly in the middle of Moscow – is gradually shattering Putin’s domestic political foundation of Russia’s invasion of Ukraine being a “distant endeavor not affecting the average Russian, and especially average Muscovite”. Once again falling global oil prices, possibly amplified by new US/G7 sanctions, will add to the fiscal pressure on Russia, while at the same time, Ukraine is more or less holding the frontline, preventing material Russian territorial gains.
This is, especially if the Trump Administration follows through with a tougher sanctions policy on Russia, a development in the war that is likely unsustainable for Vladimir Putin. As discussed in earlier notes, he will at some point have to “do something differently”. It seems improbable that he will change anything before the Russian Duma elections on September 18-20th, so the war will continue unabated over the summer. However, after the Duma elections, Putin will face very difficult choices. Slightly simplified, he likely has three options;
- A ceasefire along roughly the current frontline, leaving Ukraine in control of significant parts of the previously unilaterally annexed territories. A ceasefire in the fall would also be unconditional, and as such see Russia have zero influence on the future development of Ukraine and likely remain sanctioned by at least Europe. As such, a Fall ceasefire would represent a strategic, indeed historical, political and military failure for Vladimir Putin. This would be the type of event that Russian leaders have historically not survived (in office at least).
- Mobilization, seeking to raise enough additional manpower for the Russian army to try to force a breakthrough on the frontlines. Mobilization though would likely be highly unpopular among the Russian population, add to domestic labor shortages, and it is unlikely that the Russian army of today would have the capacity to meaningfully train new mobilized manpower, risking extremely high casualties among Russian troops if sent against what is now an increasingly formidable drone-dominated Ukrainian defensive line. Ukraine’s gaining capacity in mid-range drone strikes will moreover make it difficult for Russia to deploy additional manpower to the frontline, as Ukraine successfully will attack Russian rear area logistics and troop assembly locations. There is in other words not a particularly high chance that mobilization will deliver additional military gains for Russia.
- Shifting to a defensive war, which would see the Russian army stop its extremely costly assaults on the drone-dominated Ukrainian frontline. Instead, Russia would shift to a defensive war, entrenching themselves in the Ukrainian territory already conquered, trying to outlast Ukraine in what would be a less intensively fought war, somewhat reminiscent of the Russian strategy ahead of Ukraine’s failed counter offensive in 2023. The aim would be to wear Ukraine down and gradually seek to undermine its financial support from Europe. However, while a defensive war would certainly see fewer Russian soldiers killed, it would further shift the momentum of the war to the now mutual strategic bombing of industries and cities. Here, unlike in 2023, it is no longer a given that Russia possesses any advantages, as Ukraine’s economic potential remains underpinned by European financial support, and Ukraine’s military capacity to bomb Russian infrastructure will enable Kyiv to continue to inflict heavy economic damage on Russia. It is therefore not certain that Russia could economically sustain a defensive war, which obviously would also represent the de facto abandonment of Russia’s territorial claims in Ukraine, posing political challenges for Vladimir Putin not dissimilar to scenario 1.
The G7 therefore looks likely to have added to the pressure of forcing Vladimir Putin to take a decision on the war after the Duma elections in September. There is still not, however, any guarantee that he will then choose peace.
Lastly, the G7 communique on critical minerals represents an example of self-interested collaboration among partners, even if they – due to Donald Trump’s tariff policies – often remain at loggerheads on broader trade issues.
The G7 collaboration comes on top of earlier bilateral agreements between the U.S., EU, Canada and Japan (and other likeminded partner countries), and as such represents a multilateralization of a collaborative effort to confront the risks of Chinese weaponization of critical minerals supplies. This does not mean that a solution is imminent, but does promote it in the medium-term and illustrates the continued usefulness of the G7 decision making forum.
That the G7 is also endorsing a multifaceted strategy involving both elements of recycling, stockpiling, new capacity development, innovation and diversification to overcome China’s monopoly-like position in critical minerals supply is a further positive.
This issue though remains a medium-challenge, and China is certain to remain the all-dominant critical minerals supplier until at least 2030.
Jacob
