For Russia, with Love? What the US policy reversal means for Ukraine, Europe, and China

Agora Strategy Executive Briefing on US policy reversal

Executive Summary

• The current dynamic between Russia and the United States is likely to have negative short-term consequences for Ukraine but is unlikely to overcome deep-rooted mistrust of the West or structural economic problems in Russia.
  

• If the Trump administration's goal is to coax Russia out of its partnership with China, it risks misjudging the latter’s solidity, leaving Washington vulnerable to being manipulated by Russia.
  

• Irrespective of its specifics, a U.S.-Russia deal on Ukraine will have far-reaching consequences for great power relations across the globe, including for China’s stance on Taiwan and the potential nuclearization of Japan and South Korea.
  

Implications for International Business

• Trump’s unprecedented advances to Putin do not change the Russian economy’s fundamental dynamics and risks. Businesses should exercise caution and avoid prematurely reconfiguring their investment approach towards the Russian market and supply chain strategies based solely on the current diplomatic dynamics.
  

• Companies should focus on maintaining diverse supply sources, identifying new avenues for acquiring raw materials and rare earth elements, and developing robust strategies to mitigate the risks posed by escalating trade wars – and, potentially, new military conflicts.

State of Play

America making advances to Russia at Ukraine’s cost

The apparent recalibration of American-Russian relations continues with neck-breaking speed. In fact, U.S. President Donald Trump is keen to meet his Russian counterpart, Vladimir Putin, considered a pariah in the West until recently after his assault on Ukraine, without receiving any concessions. Yet, a genuine thaw is by no means guaranteed, as both sides have drastically different expectations: While Russia wants U.S. acquiescence on the expansion of its sphere of influence in Europe, beginning with maximalist demands on Ukraine, the Trump administration wants to use Russia in its confrontation with China, peeling off the Sino-Russian relationship to isolate Beijing. Until both parties realize the limits of their rapprochement, actual alignment will be difficult – and many initiatives will rather cause frustration.

The short-term effect on Ukraine of this potentially long-term realignment will largely depend on how President Volodymyr Zelensky can navigate his personal relationship with Trump. The latter has suspended and then reinstated military and intelligence assistance to Ukraine, underscoring his incalculability and his ruthlessness. The threat of another holdup, even if not felt immediately on the battlefield, will hang over the coming negotiations. Under any scenario, the main – if not sole – burden of supporting Ukraine is now on Europe's shoulders. China, in contrast is capitalizing on the US-European divide to steer the EU away from a confrontational stance in their relations.  

Key Issues Geopolitical implications for Europe and the world

The resumption of direct negotiations holds greater significance for Russia than for the United States. Moscow stands to gain several strategic advantages: a widening rift between Washington and its European allies, potential leverage over Ukraine, and a restored superpower status no longer isolated by the West. While Trump himself may see a gain in projecting the image of a peacemaker, this is largely symbolic. More concerning is the – not yet confirmed – assumption that his goal is the subjugation of Europe, no longer “whole and free”, under the thumb of two global powers. The pressure on European capitals, nonetheless, is real: If, over the past decade or so, Russia and China sought to divide Europe, now the United States is in that game, too.

As a first step, Washington will attempt to impose a 'peace deal' on Ukraine, with little European and involuntary Ukrainian involvement. While this may not fully satisfy Russia's objectives, a ceasefire combined with the lack of robust security guarantees for Ukraine and a forced leadership change in Kyiv would give Moscow enough of a victory and provide it with a pause to rebuild its military capabilities for future action. The bigger picture revolves around Trump’s alleged ‘reverse-Kissinger’ strategy, i.e. the attempt to isolate China by cozying to Russia. However, despite sending soft signals, Moscow will not abandon Beijing; rather, it will try to outplay Trump.

In fact, China’s strategic importance for Russia cannot be overestimated. Going far beyond shared grievances about U.S. dominance, there are solid reasons for close Sino-Russian partnership: a long mutual border, economic compatibility, and non-democratic regime characteristics. Moreover, in the last three years, Russia has become highly dependent on China, which accounts for 40 percent of its imports and 30 percent of its exports. Reversing this economic dependence would require coordinated efforts by Americans and Europeans to increase bilateral trade with Russia, which is hard to envisage even under a pro-Russian Trump approach.

At the same time, certain aspects of Trump’s handling of the war in Ukraine could be incorporated into a broader Sino-American agreement, including on Taiwan. Given his transactional, business-oriented approach to foreign policy, he might turn U.S. support for the self-governing island into a bargaining chip to secure concessions from China on other matters, such as reduced tariffs on American products, eased market access for U.S. companies, or commitments to increase imports of American produce. Concretely, Beijing might halt its investigations of companies like Google or agree to specific quantities of U.S. agricultural imports, as during the first trade war.

The consequences of such an unprecedented move would be far-reaching, ending any semblance of U.S. security guarantees in East Asia. This would push states like Japan and South Korea to ponder immediate nuclearization to establish a deterrent. Still, the demise of the rules-based, liberal world order need not be definitive. Although international institutions struggle with global conflicts, they maintain a role in regulating state behavior, as the continued pretense of democratic legitimacy by nations like Russia and China underscores.

At global level, China will double down on its display as an anchor of stability compared to America under Trump. Its emergence as the primary provider of financial resources, coupled with its expanding global presence, will translate its economic leverage into political influence. Especially smaller countries in the Global South are likely to seek closer ties with Beijing, while middle powers will strive to avoid being caught in the superpower confrontation. European countries will need to adapt to this new reality by proactively engaging with China in third countries. At the same time, all countries will have to adjust to the new great power rules, from economic sanctions to imposed conflict resolution to outrights threats. This will foster regionalization, as middle powers seek a distance from conflictual power dynamics and establish regional frameworks with other states.

The geoeconomics of a ceasefire and sanctions relief

While a partial easing of U.S. sanctions against Russia is possible, complete removal remains improbable. Not only will Washington want to retain some leverage over the Kremlin; some sanctions have indeed been enshrined by Congress and are therefore difficult to undo. Nor is pressuring the EU to lift sanctions likely to succeed. Ukraine's economic recovery, in turn, will be severely challenged by the widespread damage to critical infrastructure. Moreover, a cessation of hostilities could trigger the eruption of social grievances that have been largely ignored or suppressed during the war.

Even if Trump manages to reach a deal with Putin, it will not significantly affect economic integration or competition in Eurasia. Russia has proven to be a state with a hazardous investment climate. Its economy, structurally transformed over the past three years, cannot easily return to pre-war conditions: Its dependence on China and on its own military industry, tied to the war against Ukraine, will remain significant. New laws and realities allow the Kremlin to seize the assets of any investor, even those who previously had guarantees from powerful figures. So, while Russia will continue to integrate its economy with countries it considers friendly, it will face problems since even China is reluctant to invest in unstable economies.

Even with an unexpected warming of U.S.-Russia political relations, the fundamental negative trends will remain. Europe should focus on diversifying suppliers, strengthening economic resilience, ensuring access to critical raw materials and rare earth elements, and formulating strategies to withstand new trade wars. To prepare, companies should invest in technologies that improve supply chain and agility and proactively seek partnerships with diverse nations to broaden their supplier base. Investments in defense industrial base and deterrence capabilities will also be crucial to safeguard peace in Europe. Businesses should also expect greater volatility of the major powers’ currencies, first and foremost the U.S. dollar, as well as of the U.S. stock market. Given China’s and Russia’s efforts to create tools for undermining American sanctions, including trade in national currencies, alternative payment systems, and mechanisms for sanctions evasion, companies should examine their current exposure to the U.S. dollar and the Chinese yuan. They should experiment with other currencies and payment hubs depending on their major export markets – tough costly, these measures help them prepare for further fragmentation of the global financial system.