Tim Graf (TG): This is Street Signals, a weekly conversation about markets and macro brought to you by State Street Global Markets. I'm your host Tim Graf, European Head of Macro Strategy.

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TG: Two weeks ago, a contentious conclusion to an otherwise business-like meeting between the Trump administration and Ukrainian President Vladimir Zelensky upended the emergent peace process to Russia's war on Ukraine. This Oval Office bust-up of course made headlines, but it's also had knock-on effects that I think we're only just beginning to consider. Not least, a recognition that the great power dynamics that have been in place since the collapse of the Soviet Union are reorienting in ways we likely do not yet understand.

So I'm grateful to be able to talk to this week's guest about her take on events and what shape the relationships between the US, Ukraine, Russia, Europe and China might take. Tsveta Petrova is a lecturer in political science at Columbia University, whose research focuses on democracy, democratization and democracy promotion in Central and Eastern Europe. She's also a senior analyst and consultant for GeoQuant, our research partner who help clients navigate geopolitical risk using unique high-frequency country risk data.

Tsveta Petrova (TP): Hi Tim, how are you?

TG: All right, all right. How's it going?

TP: I'm good. Interesting times, right?

TG: Yes. This is almost a topic. It's not out of date, but it's been overtaken by events in other markets. It'll be good to cover it. Thank you so much for doing this. I appreciate it.

So a lot of this came to my mind as a topic I wanted to talk about because of the breakdown in the Oval Office, which is now a couple of weeks ago, the Oval Office meeting between Trump and Vance and Vladimir Zelensky, of course.

Looking at that from your perspective as an expert on the region in Europe, what were your impressions and particularly what led to this breakdown in your view?

TP: It's a useful reminder that the Ukrainian President Zelensky arrived in Washington, DC on February 28th to sign a critical minerals deal with the US. And that deal was supposed to be the initial step towards a broader peace deal. And the premise around that broader peace deal was that Trump had argued that a US commercial presence in Ukraine would serve as a de facto security guarantee for Ukraine. So that's the context.

I think it's important to remember that there were personal and strategic reasons for that. This isn't the first time that there have been tense words between President Zelensky and President Trump. You might remember in 2019, Trump and his circle argued that Joe Biden had lobbied Ukraine to dismiss a prosecutor and stymie an investigation into an energy firm where Biden's son Hunter sat on the board.

And then there was an escalation in 2023 already. Trump started arguing that he can end the Russia-Ukraine war in one day. And then in 2024, Trump and again, his circle, began a campaign for Ukraine to hold elections as a way to remove Zelensky from office.

And then more broadly in terms of geopolitical strategy, the fallout in a way was not a surprise either. To begin with, there is Trump's admiration and shared worldview with Vladimir Putin, the Russian president. Trump sees an alignment with Putin that was forged through battles against those that Trump believes are Trump's own as well as Putin's mutual adversaries. And those include US domestic actors such as the Democrats and the deep state and international aid sector. They also include a majority of the European leaders in Ukraine. And so again, there is this broader alignment towards a new geopolitical order.

Trump has again expressed admiration for authoritarian leaders and contempt for fellow democracies, particularly in Europe. Trump has been convinced that Europe, including on Ukraine and Ukraine itself, have taken advantage of the US for years.

And Trump seems to prefer to have Europe independent in security and economic terms, and as a result, not to be a drag on US attention and resources. But Trump also prefers a Europe that is still weak enough so that the US can dictate the terms of the US relationship.

TG: Where do we go from here in terms of getting things back on track? I mean, you mentioned the personal, which is really interesting because of course, Zelensky and Trump also had history in that, what Trump called that very perfect phone call ultimately led to his second impeachment.

How meaningful do you think that personal rift now is and do we get things back on track at some point?

TP: I think the personal is important because of the leadership style of President Donald Trump. Ukraine remains extremely dependent on US support, on ongoing US support. And since that meeting, we have seen the US withhold, put a freeze on both its military aid towards Ukraine, but as well as its intelligence sharing. And that has led to Ukraine incurring significant costs in the battlefield in the weeks since then.

Can Ukraine make up for that? It is really hard for Ukraine to do so. Even if Europe were to step up, they're unlikely to be able to make up for the aid, that for the weapons that the US has supplied. And they don't have the capacity to make up for the intelligence that the US is now withholding. So given that, Ukraine has very little leverage.

And we saw that because Zelensky reached out to try and improve Ukraine's relationship with the US. He published the same statement, expressing regret for his public dispute with President Trump and stressed willingness to engage in peace talks with Russia.

It's also important that we've seen Europe also stepping up with important measures to continue supporting Ukraine on the one hand, and on the other hand to beef up their own security, which is something that Donald Trump has demanded from them. And yet, it's what Ukraine has done so far, and what Europe has done so far, doesn't seem to be enough for Trump.

So I think he will continue to push and exert maximum pressure on Ukraine. The immediate step to watch going forward is whether the US and Ukraine will sign a critical minerals deal. That is likely to happen. And that is the first step in the peace process, where there's perhaps a ceasefire negotiated with peace talks and a final peace deal to be negotiated later.

Ceasefire is something that Trump can sell at home as having ended the war, which is what he has promised for a long time. The negotiation of a final peace deal is much more difficult and it might be left to, in a way, to the Europeans.

TG: What do you think, as part of a peace deal, a permanent or as lasting a peace deal as we can maybe hope for at this stage, what do you think Ukraine can live with, whether it's in terms of territorial concessions or anything along those lines?

Would be really interesting to hear about what they might have to give up, given, as you say, they don't seem to have a lot of leverage in the process and are dependent on aid to keep this going.

TP: So there are two really difficult, thorny issues. The two issues where Ukraine and Russia have for a long time diverged are the questions around territory and security guarantees. We have seen over time as the conflict dragged on and as international support for Ukraine softened, we've seen that Zelensky's administration has softened on the question of territory. And as the conflict has taken a toll domestically, the public has also moved.

Even if Ukraine is ready to make some territorial concessions, there are still difficult issues around the territory Ukraine might lose, given the ongoing battlefield successes of Russia. Russia doesn't control all of Donetsk, Kherson and Zaporizhzhia, and it is unclear how those provinces will be treated. President Putin, of course, wants to control all of those, but Zelensky is trying to resist ceding control of land that is still under Ukrainian control.

The second, and to me, the really, really difficult question in these future peace talks is the question of security guarantees for Ukraine. What Russia wants to avoid is a deal that reinforces Ukraine's security, whether that happens through rearmament of Ukraine, whether that happens through NATO membership, or another alternative security guarantee provided by the Europeans. And of course, the Ukrainians would be reluctant to agree to a deal that does not create sufficient deterrence for further Russian aggression in the future.

One set of such compromises would be to have troops, but low numbers on the ground in Ukraine, maybe for just an interim or a short period of time, but not strong enough to permanently deter Russia. Another alternative is European EU membership for Ukraine, which is much more acceptable to put in the NATO membership, but it is still unclear whether those would be acceptable to Russia, the US and Ukraine and the Europeans, who are trying to be part of the agreement, again, for the sake of Ukraine and their own security future.

TG: Yeah. But for the US, what is the goal here, beyond maybe the mineral rights deal that you mentioned?

Are there any other overarching goals the US is really looking for as part of this process?

TP: There is the question of Trump wants to deliver on his ability to broker a deal, if not win one day fairly quickly, right? There is the question of the prestige and the personal success of Trump. And that potentially could be satisfied by a broker and a ceasefire, not necessarily a peace deal.

In terms of the broader peace deal, I think the US's interest is in, in a way pulling out of Europe, rebalancing the US-Europe relationship. And that includes both security and trade, because those in Trump's world view are very much aligned and bound together.

Finally, I think there is a third set of considerations, which is that Trump is transitioning the US and as a result of its power, the world as well, towards a new world order, which is less bound by strategic, values-based, rule-based alliances, and more towards a concert of great powers that negotiate based on their needs and power at the moment of the negotiation. That's Trump and Putin are quite aligned. They share a vision of what that world order would look like and what Europe's role and the Europe-US relationship in that world order would be like.

TG: Does Europe, do you think, successfully now enter this process with the at least stated greater commitments to defense spending and infrastructure spending that were in the news last week? They created significant turmoil in bond markets in particular. But it was all part of this process, I think, of responding to Trump, responding to the breakdown of negotiations between Trump and Zelensky, I think, and JD Vance's speech to the Munich Security Conference, I suspect, also played a part in sort of the separation you mentioned between the US and Europe.

Do you think now, assuming Germany in particular, but Europe more broadly, pursue this greater commitment towards defense spending? Does this give them a seat at the negotiating table, or does this leave them really kind of with the mess to clean up once it's all over?

TP: I think that blow up between Zelensky and Trump was a real wake up call for the Europeans. Trump's world views have not changed since his first presidency, yet for many Europeans there was the hope that they can wait him out and return to the previously good relationship between the US and Europe. And so I think the flurry of new policy measures that have been announced are a genuine indication of Europe's political will to step up their own defenses and support Ukraine.

To me however, the challenge will be that even if they have the commitment, the Europeans have the commitment to do that, they still face a lot of headwinds.

TG: So what are some of those headwinds that Europe needs to address?

TP: First, economic headwinds. The economy is sluggish. Europe fears falling behind in the global tech race. And on the horizon, on its horizon looms the challenge of the energy transition. And they have of course been thrown into turmoil by the election of Donald Trump. And the tariffs he is proposing to impose on Europe.

There are a number of security headwinds that Europe also faces. The first one is that the European military-industrial complex lacks capacity to independently provide for European defense and security.

There's also the question of interoperability between the various European armies. There's still a lot to be worked out in order for these infrastructures and logistics operations to work seamlessly as one. There's also the question of duplication and division. Still, there is no European defense, either in terms of command or unified force. And that is because of still some distrust between the various nations and divisions on the threats that they perceive from Russia as well as elsewhere in the world.

And finally, it's not just about command, but also the political institutions that would need to back such European defense and security, such unified and common European defense and security. That is based on the unanimity rule that much of EU decision making is based on. So there is also a lot of conversation and political reform that Europe will have to go through to be a stronger player in defense and security for itself. And the European continent more broadly.

TG: Ultimately, how successful do you think they will be? It does feel as though it's an existential crisis that has forced Europe into this position.

Do you think they can successfully manage this, number one, and then number two, in the new world order you described that Trump seeks, does Europe have a position as a great power player over the very long term in your view?

TP: Europe is good about responding to crisis and sort of muddling through. And that, I think, is the most likely scenario here. They perceive a crisis, they're starting to work on addressing that crisis, they will likely succeed in some ways, but over the medium and long term, yet it will be a response that's muddling through the challenge, rather than emerging victorious in addressing that challenge.

So, what does that mean and where that leaves Europe in this new world order? As I said, the US used to be a trusted ally, both in economic cooperation and security. It is now increasingly being perceived as an outright threat, especially in Europe, but also in Asia as well, where we, I think, are seeing Asian allies, former Asian allies, beginning to ask themselves whether, after Trump seemed to accept Russia's right to a sphere of influence in Europe, Trump will also seek a similar accommodation over China's ambitions for its own sphere of influence in Asia.

Where does all that lead? I think we are transitioning to a new system, or the US, the Trump administration is trying to transition to a new system, which is an incarnation of the 19th century mercantilism and 19th century imperial-like thinking and deals between regional players. That leaves a lot of room for China to have influence, and it also creates some opportunities for Europe to try and do geopolitical bargaining with the other global powers that are now on the radar of the US and of other countries, Russia and China to mention the most important ones.

TG: Have we crossed the Rubicon then? I mean, presidents come and go. How permanent do you think this ambition might be? Is that model the model we should expect permanently, that interplay of imperial powers?

TP: I think that question is still to be settled, and it's still to be settled in two ways.

The first one is that the outcome very much depends on the battle within the Republican Party itself that currently seems to be under Trump's firm control, and the Republican Party that is under firm Trump control also has a hold on the key institutions in the US. And yet, we're seeing some dissonance and divisions within that party that, again, blew up in quite a public way just last week. What that happens will likely also be influenced by the public's response to some of the domestic reforms that the Trump administration has implemented, and how those are perceived, how happy Trump's electorate is with those reforms, which will in turn empower one of those two wings.

There is, of course, the reaction of the world to what is happening in the US. And as I said, during the first Trump administration, many of allies and adversaries alike would just kind of hold their breath and wait for to see when Trump would be out of office, imagining that everything will go back to Trump times. This time, however, the Trump actions have been a real wakeup call, and they have eroded the credibility that the US has as a trusted defense and economic partner.

Given those two factors, I think it's unlikely that we'll go back to the status quo. We're likely to see a lot of changes in the years ahead that will leave the international system looking different from pre-2016.

TG: Well, I wanted to spend time on Russia, see if you could talk about their perspective. And we'll start with the negotiations over this process, but then I also want to talk about the long-term goals of Putin and what the world looks like after Putin especially.

But for the here and now, as part of any potential peace plan, is there any concession Putin would live with in terms of things that Ukraine might ask for or that the US might ask for that could be potentially exchanged, say, for reducing sanctions or any other incentive that might be given to arrive at a peace that is favorable for the maximum number of parties, I suppose.

TP: Russia wants the complete capitulation of Ukraine. That has been, was, has been, continues to be their stated goal. And frankly, probably the weakening of Europe, that too has been a long term goal for Putin.

More concretely, Russia wishes to keep the territory it has and is trying to currently conquer. It does not wish to concede to security guarantees for Ukraine and wants to reassert its sphere of influence. Unfortunately, given the maximum pressure that the Trump administration has put on Ukraine, even if there was some room for Russia to concede, at the moment, it is not doing so.

And then there are a couple of bargaining chips here and other questions to be discussed that might move us closer to a peace deal The first question is that Russia will demand sanctions relief. And here is where the Europeans have some leverage to exert on their own behalf and on Ukraine's behalf. For them, sanctions are a political statement as well as leverage.

There's also the question of what will happen to the frozen Russian assets. And here again, Europe has some leverage, independent of the US, that it could use in the process. The Europeans, again, given their economic power, could offer economic assistance for the rebuilding of Ukraine. That could be an incentive that moves Russian Ukraine closer to a deal, given that security uncertainty will deter significant investment in Ukraine, and that will hamper the pace of economic recovery after a conflict.

Given all that, I think we're headed to a ceasefire and eventually a very weak deal for Ukraine. An alternative scenario is a ceasefire that is followed by a deal, but a stronger deal, and I don't think that's likely. And a third alternative would be a fragile ceasefire that persists, but no peace deal being negotiated or agreed on.

TG: And then for the long term, let's maybe hope that some sort of ceasefire is agreed and hope that some sort of peace is achieved.

What do you think Putin's long-term goals are with respect to Russia's role in the world?

TP: Russia truly wants a different world order, and that is very much the kind of world order that Trump envisions, where regional powers decide the fate of their near-abroad, and have a say in negotiations that have to do with important issues, economic or security issues on the world stage.

It wants its empire, it wants to be reintegrated in the world economy, and it wants to have a say in world affairs. What's interesting is that Trump has given Russia leverage, vis-a-vis China. The Russia-Ukraine war put Russia in a very difficult position vis-a-vis China, a very asymmetrical relationship that Putin did not like, but had to put up with in order to persist in the war with Ukraine.

And so it is unclear, and an interesting question is, it's unclear how much leverage Russia gives Trump in the US-China confrontation, a possible such confrontation in the future. But Trump's permissiveness towards Russia benefits China in its own imperial ambitions in the near abroad. So this negotiation over the end of the Russia-Ukraine war really has upended the balance of power in interesting ways and created opportunities for new alliances to emerge.

TG: We're coming towards the end here, and I wanted to ask a similar question about Russia as I asked about the US and Trump. Putin is 72 years old. He's younger than Trump, I suppose, so he might be around a little bit longer.

What does Russia look like in his absence? Who are his potential successors? And do you see continuity between himself and anyone who might succeed him in terms of the view of Russia in the world?

TP: I have been talking to Russian experts for a long time now, and a majority of them continue to believe that Putin is likely to stay in power until his death. Putin has really obliterated any opposition within civil society, in terms of political parties. There are currently no viable challengers to his regime or to his way of thinking. We're going to see someone from the same circle assume power, and they're likely to follow many of the same policies, share the same worldview as Putin has. So I don't think that a post-Putin Russia will look significantly different from the Russia that we see today.

TG: Thinking throughout history, and we've talked a little bit about some of the historic examples, we've had systems of great powers where they're sort of unipolar or following the Second World War, two poles. We've had the empire system in the 19th century we alluded to.

What is the most likely historic parallel we can use to think about the coming world order that both Putin, Trump, presumably China want to see happening? What are the parallels we should look to through history that come to mind for you?

TP: I think there is no agreement among the biggest players on the world stage today as to their preferred world order. I think there is an alignment between the US and Russia in a preference for a 19th century-like system of empires and mercantilism. Europe has a preference for the status quo, which is this rule-based liberal international order.

China, and this is interesting here, China benefits and has benefit for the current, from the status quo order. In fact, we are seeing it, arguing that it can be a force of global stability for free trade and prosperity, that it can assume leadership in very international institutions where the US is withdrawing. So China benefits from the status quo system, but what it wants is that it lead the system rather than the US.

So here again, there is some alignment between China and Europe, which could help them partner on an ad hoc basis perhaps. Because again, there is a lot of distrust between Europe and China, and China's tacit cooperation with Russia has allowed the Russia-Ukraine conflict to persist. And Europe, just like the US, has its own trade deficit with China, which has been worrying to many European leaders. So there are near and long-term important divisions between Europe and China that would prevent them to have a strategic alliance. And yet there is some alignment around the kind of world order that they might prefer to see.

TG: There's so much to consider, not least the future relationship, that that might then hold for Russia vis-a-vis Europe and China if they align. But that is probably another podcast for another day. Tsveta, thank you so much for joining me. It's been fascinating to talk to you.

TP: Thank you for having me.

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