These were great days for star managers. I interviewed Jeff Vinik back in 1995, then running the world’s largest mutual fund, Fidelity Magellan. He let slip to me that the fund had added a billion dollars in value that morning. Good news for Fidelity’s fee income.

Back then, a large number of fund management groups were able to make a decent living, with none dominating the market. In truth, this was partly because performance was not far from being random. This worked in managers’ favour, since they would always have a few funds that were outperforming the market. These could attract optimistic clients who hoped that, despite the regulatory disclaimer, past performance would be a guide to the future.

But all that changed. Over the past three decades, the asset management industry has undergone a revolution. A sector which prided itself on its expertise has become a commodity business. Inevitably, fund managers are trying to adapt to this revolution by introducing new products. But while these innovations may look like great opportunities for investors, they may turn out to be a trap — a costly one.

The revolution has been driven by economic realities: clients have gradually woken up to the fact that passive funds, which merely track an index, give them a cheap, simple method for investing in major asset classes. In the US, passively managed funds have grown from just 19 per cent of the market in 2010 to comprising the majority of the market in 2024. The trend is relentless. Morningstar found that the cheapest quintile of funds in 2023 experienced net inflows of $403bn, while the rest of the sector suffered outflows of $336bn.

This has meant that the fees paid by clients have fallen dramatically. Research by Morningstar found that the asset-weighted average annual fee paid by US investors fell from 0.87 per cent in 2003 to 0.36 per cent in 2023. Given that the US industry manages about $30tn in mutual funds and exchange traded funds (excluding money market funds and funds of funds), that is a saving (compared with 2003) of $150bn of fees a year. 

That must be one of the biggest and least-heralded economic gains to consumers in recent history — they are clearly better off under the new regime.

For fund managers, however, the result has been a Darwinian struggle, in which survival went to the cheapest. Index tracking generates economies of scale; it does not cost a lot more to manage a $10bn fund than a $1bn fund. So the industry has consolidated. In the world of exchange traded funds (ETFs), the top three managers (BlackRock, Vanguard and State Street) control nearly two-thirds of all the assets, according to Lipper, the financial data service.

A fightback was inevitable. One of the biggest trends in the industry is the launch of active ETFs, which have higher fees. Active ETFs charge 0.4 per cent a year (using an industry asset-weighted average) around three to four times as much as a typical passive fund. Goldman Sachs launched fixed income active ETFs in February and Cerulli Associates says that 91 per cent of ETF managers are planning to develop an active product.

A significant proportion of active-based ETFs, with around $2.76tn of assets according to Lipper, are in the field of factor-based investing, or “smart beta” in the industry jargon. These select stocks based on a set of financial characteristics. Value ETFs pick stocks with a high dividend yield or a low price relative to their asset value, for example. Momentum ETFs pick stocks that have recently risen in price and so on. In a sense, such funds attempt to exploit the stockpicking insights used by traditional fund managers in a systematic fashion. Fees on such funds average 0.18 per cent a year, about half the level charged by other active funds.

These investment styles can appear to be common sense; in the case of value stocks, it seems attractive to buy shares that are “cheap”. The problem is that the strategy can underperform for very long periods. A study in the UBS Global Investment Returns Yearbook 2024, by academic investment gurus Elroy Dimson, Paul Marsh and Mike Staunton, found that UK value stocks underperformed their growth counterparts from 1987 to 2020. Timing the shift between factors looks very difficult, the academics found, and risks making premature portfolio shifts with high transaction costs.

Thus, it remains to be seen whether active ETFs will be any more likely to outperform the market than their mutual fund equivalents. The maths make it unlikely. The index represents the performance of the average investor, before fees; therefore the average fund manager cannot expect, after fees, to beat it. For the retail investor, buying an active ETF thus seems like the triumph of hope over experience.

Whether active ETFs are replacing passive funds in investors’ portfolios is another question. It may well be that they are taking the place of actively-managed mutual funds instead. This is part of a general shift away from mutual funds and towards ETFs in recent years. Michael O’Riordan, a founding partner of Blackwater, a consultancy, says that “ETFs are basically eating the lunch of mutual funds at a rate that even the most diehard ETF cheerleader would have been surprised by.” According to Oliver Wyman, a consultant, ETF assets grew at 16 per cent a year between 2016 and 2022, compared with 5 per cent for traditional mutual funds. In the US, ETF assets have grown from just $66bn at the start of 2001 to $10tn at the end of last year. Global ETF assets were over $14tn. Zachary Evens, a research analyst at Morningstar, says that ETFs are generally less expensive than mutual funds, are more transparent (in the sense that investors can see their underlying holdings) and are tradable daily.

Active ETFs are not the only alternative for retail investors. Option-based ETFs use derivatives to offer a different type of return. One group of ETFs enhances the yield on the fund by selling call options on the shares in the portfolio. These calls give other investors the right to buy those shares; in return the ETF earns premium income. The effect is to create an equity fund with a higher income but with limited upside (if the shares in the portfolio rise in price, the calls will be exercised and the ETF will have to sell those securities).

A second type of option ETF is called a buffer fund. In these funds managers buy put options giving them the right to sell shares at a certain price. This limits the amount the ETF can fall in price. But buying puts costs money and to offset this cost, the ETF managers sell calls on the shares. This limits the upside of the fund as well. So buffer funds offer a narrower range of returns, which may appeal to more cautious investors. 

How should investors view these assets? The point of investing in equities is the prospect of long-term returns. Higher income in the short term can be achieved by combining equity assets with government or corporate bonds, or with deposits. Many investors will already do this. A diversified asset allocation can thus deliver a higher yield, along with the limits to the upside and downside of returns that option-based ETFs offer. And the DIY option for investors may be cheaper. Figures from Morningstar show that fees on option-based ETFs vary from 0.66 to 0.82 per cent a year depending on the type of fund, well above the charges levied by passive funds. 

Perhaps the ETF sector is best seen as a maturing industry where the basic product is repackaged to give consumers a much wider choice. Whether this choice is in the best interests of consumers or producers is another matter. Starbucks makes a virtue of its ability to offer a wide range of caffeinated beverages. Consumers can order a Java chocolate chip frappuccino with whipped cream if they wish. Whether that is the best value, or indeed healthiest, option is another matter.

One choice that has become less popular recently is the ESG (environmental, social and governance) sector, the modern version of what used to be called ethical funds. There has been a big shift away from this school of thought in the US, particularly after the election of President Trump. Corporate America is scrambling to drop its emphasis on diversity, equity and inclusion; presumably to focus on uniformity, inequality and exclusion. The speed of this reversal brings to mind the old Groucho Marx quip: “Those are my principles and if you don’t like them, well, I have others.”

Well before Trump’s re-election, ESG funds were far more popular in Europe than the US. Europe makes up 84 per cent of all sustainable funds, compared with just 11 per cent in the US. That suggests the sector will not disappear; there were $54bn of inflows last year, according to Lipper.

There is a respectable case for arguing that ESG funds could outperform in the long run; companies that damage the environment, act unethically or are poorly run might fall foul of regulators and the courts or be a casualty of changing consumer sentiment. And they have beaten other funds over some time periods; in the five years to end 2023, for example. But they do involve big sector bets; they tend to be underweight energy and overweight in technology and healthcare, for example.

In the past month or so, the apparent US retreat from its security commitment to Europe means there has been a big rise in European defence stocks; something most ESG funds, which shun defence, wouldn’t capture. Furthermore, while fees charged by sustainable funds have fallen by a third over the past 10 years, they are still, at 0.52 per cent, higher than the average active fund.  

Another potential new choice for retail investors is private credit. This is debt that is not traded on a public market, unlike corporate debt. The bulk of this debt has been issued by private equity firms to finance the purchase of the companies that make up their portfolios. This debt can be pretty high-yielding and this can deliver decent returns; institutional private credit funds made double-digit returns in both 2021 and 2023, for example.

But this asset class is, by its nature, illiquid and thus there is yet to be an ETF launch specialising in the sector. Only high net worth clients are likely to be able to get exposure. And they should be aware of a couple of caveats. The first is that the funds that invest in private credit tend to be issued by the same private equity firms that are issuing the debt; that is a potential conflict of interest. Secondly, in the event of a recession or sustained rise in interest rates, private credit, like any other high-yield debt, is likely to experience defaults. 

The latest IMF global stability report warned: “Some midsized companies borrowing at high interest rates in private credit markets are becoming increasingly strained and have resorted to payment-in-kind methods, effectively deferring interest payments and piling on more debt.” The report also warned that competitive pressure in the sector was leading to deteriorating underwriting methods and weaker covenants (where borrowers agree to financial conditions).

The industry is offering many new options to tempt investors away from the low-cost index funds that are starting to dominate the market. Some may appeal to investors looking for diversification in their portfolios. But one rule should never be far from such investors’ minds; higher returns are not certain, but higher fees are.

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Donald Trump said he is working on a trade deal with the UK and suggested that Britain could escape tariffs if the countries secure one, but the allies failed to agree on US security guarantees for Ukraine.

During a warm joint press conference at the White House on Thursday, the US president said his UK counterpart Sir Keir Starmer was “working very hard” to persuade him not to impose tariffs on Britain.

“I’ll tell you that he earned whatever the hell they pay him over there, but he tried,” Trump said of Starmer, describing him as a “very tough negotiator”. “We could very well end up with a real trade deal where the tariffs wouldn’t be necessary. We’ll see.”

Trump’s suggestion that the UK could avoid tariffs came a day after he threatened the EU with 25 per cent duties on its exports, and hours after he said he would press ahead with tariffs on Mexico and Canada and boost his planned levy on China.

Trump said the UK was a “very different place” from the EU.

Starmer confirmed that the UK and US on Thursday decided “to begin work on a new economic deal with advanced technology at its core”.

British officials said the two sides were aiming for a phased economic and tech agreement that stopped short of a full free trade agreement.

Trump said vice-president JD Vance and US Treasury secretary Scott Bessent were among the senior officials in the US administration working on the potential deal. “I think we’re going to have a deal . . . as quickly as it can be done,” he said.

However, attempts to strike US-UK trade deals have foundered in the past over British refusals to accept certain American farm products. The idea of such a trade pact was a central argument for pro-Brexit campaigners almost a decade ago.

While a full-blown trade deal with the US faces prodigious hurdles, it would be a “real bonus” if the UK achieves the more modest goal of avoiding the imposition of Trump tariffs, said Paul Dales, UK economist at Capital Economics.

The meeting between Trump and Starmer, which was focused on securing a peace deal for the war in Ukraine, came days after French President Emmanuel Macron visited the White House for similar discussions.

Ukrainian President Volodymyr Zelenskyy will meet Trump in Washington on Friday, with signs of a thawing in their relationship. When asked about previously referring to Zelenskyy as a “dictator”, Trump said: “Did I say that?”

European leaders have urged Trump to provide military cover for any peacekeeping mission in Ukraine. But on Thursday, Trump said the US would not need to provide such a “backstop” since Americans working on a proposed minerals deal with Kyiv would serve as a deterrent against possible Russian attacks.

“We are a backstop because we’ll be over there, we’ll be working in the country,” Trump said in the Oval Office.

“That’s a great thing economically for them,” he said. “We’re going to have a lot of people over there. I just don’t think you’re going to have a problem.”

Trump said the US would “certainly try and get as much” Russian-held Ukrainian land “as we can back” and that he and Starmer would discuss this during their private meeting. “They’ve fought long and hard on the land,” Trump said.

The US president, who accepted an invitation from King Charles to visit the monarch in Scotland and the prospect of a second state visit to the UK, lavished praise on Starmer, calling him a “special man”.

“I’ve always cared about the British,” Trump said. “They don’t need much help, they can take care of themselves.”

But the US president added a qualification that is likely to be seized on by Starmer: “If they need help, I’ll always be with the British, OK? But they don’t need help.”

Trump told Starmer, who will host a meeting with European leaders from 18 countries in London on Sunday to discuss European defence, that he believes Russian President Vladimir Putin will honour any peace deal struck with Ukraine.

“I think he’ll keep his word,” Trump said. “I’ve spoken to him, I’ve known him for a long time now.” He added: “I don’t believe he’s going to violate his word. I think the deal is going to hold.”

When asked if he trusts Putin, Trump said he had a “trust and verify” approach to the Russian president.

During the White House meeting, Trump also unexpectedly endorsed Britain’s deal to cede sovereignty of the Chagos Islands to Mauritius under a long-term agreement to secure the future of the UK-US military base at Diego Garcia for up to 140 years.

“We’re going to have some discussions about that very soon, and I have a feeling it’s going to work out very well,” Trump said.

While the conversation between Trump and Starmer was mostly cordial, Vance earlier said the UK had been responsible for “infringements on free speech that actually affect not just the British . . . but also affect American technology companies and, by extension, American citizens”.

Starmer pushed back, saying the UK had free speech “for a very, very long time” and adding that it would “last for a very, very long time”.

Starmer began his meeting with Trump by handing him a letter from King Charles, in which the monarch invited the US president to Scotland.

The visit is intended to prepare the ground for what Starmer called “a truly historic” state visit to the UK — the first time a US president had been twice awarded the honour.

Asked whether he would take up the offer to visit Scotland, Trump said “the answer is yes”, adding that the king was “a beautiful man”.

Additional reporting by Steff Chávez in Washington

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In a double blow to Ukraine on Wednesday, Trump announced he had agreed directly with Vladimir Putin that talks would begin on an end to Russia’s war, while his secretary of defence Pete Hegseth laid out what the cost to Ukraine of that end would be. In comments closely matching some of Russia’s core demands, Hegseth told allies in Brussels that Ukraine’s territorial integrity was an “illusory goal”; there would be no Nato membership for Kyiv, and no US support for its future defence against Russia.

Promises of peace for our time, bought through appeasing an aggressor with the territory of its European victim, will do little to reassure those who have observed Russia’s preparations for further war. There can be few doubts that in the absence of credible security guarantees from the US, a respite from the grinding attrition will allow Russia to rebuild its land forces faster in order to resume fighting sooner — whether in Ukraine or targeting a Nato member state. 

Mark Rutte, Nato’s secretary-general, has been increasingly blunt in describing the challenge that Europe faces. “I am telling you very clearly: we must prepare for war,” he said in an interview with Germany’s Bild newspaper earlier this month. “That is the best way to avoid war.” The German chief of defence, Carsten Breuer, agreed in Handelsblatt, adding that the threat from Russia was “deadly serious”.

Last week, Denmark’s Defence Intelligence Service was the latest to put a timescale on when Nato must be ready, with an assessment that Russia would be able to move against another neighbour in as little as six months.

Such sentiments are losing their power to shock. Indeed, in the three years since Russia’s full-scale invasion of Ukraine, comparisons of the kind heard in recent days between Europe’s situation today and the late 1930s have become almost commonplace. Like all historical analogies, this one is flawed, but for the opposite reason that many western Europeans would assume. In some respects, the danger to Europe’s democracies today is greater, not less, than it was 90 years ago.

Once again, Europe is threatened by a revisionist power that is willing to risk all-out war to achieve its aims of territorial expansion. And once again western democracies will be involved in countering that aggression, whether they like it or not, because they have Nato treaty obligations to countries (including, once again, Poland) that fear they may soon be targeted by Russia. 

Vladimir Putin’s stated aim of revising the “historic, strategic mistakes” that led to the creation of the borders of eastern Europe that we see on maps today directly concerns almost all of Russia’s western neighbours. Russia-watchers point out how the country’s transition to a war economy, and its long-term plans for rebuilding its armed forces, have broader aims than the subjugation of Ukraine. And for all Trump’s claims that Putin “wants peace”, there is no discernible inclination in the Kremlin to consider any path other than conflict. 

Russia’s Nato neighbours are fully aware of the threat, and are investing heavily not only in their own rearmament, but in fortifying the border from the Arctic down through central Europe. But unlike in 1939, western Europe is utterly unprepared. Decades-long reliance on the US for defence has left European militaries hollowed out, while even before Trump’s return to the White House, the attitude of the US itself to European security was the most ambivalent it had been since before the second world war.

Meanwhile, the crash rearmament of the late 1930s hasn’t happened anywhere west of Warsaw; so the UK, for example, lacks a comprehensive air defence system of the kind that enabled it to survive 1940.

Neither is western Europe insulated any longer by distance. Even though the war is currently at the far end of the continent, Russia has been practising delivering damage against those it perceives as adversaries at ranges of thousands of kilometres, through missile and cyber strikes and sabotage delivered by proxies.

The danger to Europe lies in the interplay of three crucial factors: American disengagement, western European denialism and Russian determination.

American disengagement

Europe’s America problem did not start with Trump or Hegseth. Washington has been explaining for years to anyone willing to listen how Europe is slipping down its list of strategic global priorities — and the object lesson of the very different US approach to defending Israel against attack compared with defending Ukraine should have comprehensively rammed the point home well before Trump’s inauguration.

It is only refusal to think about the problem that led to alarm in some western European capitals on Trump’s return, as leaders were faced with the possibility of having to meet their own defence obligations. But the renewed alarm this week is a measure of how little action resulted.

Focusing on whether Trump could withdraw the US from Nato has obscured the reality that no country needs to leave the alliance for it to collapse when tested. As anybody who has read Nato’s founding treaty knows, the much-vaunted Article 5 commitment to treat an attack on one member as an attack on all doesn’t oblige allies to respond, leaving those that do honour the spirit of their commitment rather than the letter potentially isolated. Trump, just as any other Russia-friendly Nato leader, could decide that no action is required to confront Russia in order for “peace and security” to be restored.

While there’s an understanding within US European Command of Russia’s plans and the threat they pose — including, directly or indirectly, to the US — that appears not to have been evenly spread across the Pentagon, even under the previous administration. Now, Trump team members are calling for major cuts to the US military presence in Europe. If these happen at the same speed as the new administration’s slash-and-burn tactics in other areas, they will be far too fast for Europe to react or compensate, leaving a dangerous and inviting gap for Russian assertiveness.

The principle of “extended deterrence” — under which the US remains the strategic guarantor for its allies against nuclear attack — has not (as yet) been challenged by Trump or his administration officials. That guarantee, a far more unilateral one than the mutual obligations of Nato membership overall, seems a curious exception to Trump’s transactional approach to security commitments.

Either way, Europe now has to reckon with the US not as a pillar of Nato unity, but as a startling and unanticipated challenge to it. With Canada and Denmark both suddenly wondering if their strongest ally has transformed overnight into their most immediate problem, Russia’s long-standing ambition to divide the alliance is several steps closer. 

Western European denialism

Europe, meanwhile, remains divided between the front-line states that recognise the risk and the urgency of mitigating it, and much of the continent’s western hinterland that remains semi-quiescent. There is a stark contrast between Poland’s global shopping for arms, with defence spending rapidly approaching 5 per cent of GDP, and the UK at the other end of the continent refusing to countenance spending enough simply to maintain current capabilities.

Even the most forward-leaning erstwhile heavyweights of “old Nato” are focused on incremental increases to defence budgets, rather than the transformative investment that is needed.

The assumption still reigns, west of Warsaw, that war is something that happens to other people, a long way away, and will never come to the homeland. The problem is that Russia now presents plenty of circumstances under which that assumption could be fundamentally wrong.

Some front-line states already enjoy deep reserves of capacity and a clear understanding of what is required to ensure that the economy, society and the country as a whole continue to function while Russia is working hard to prevent them doing so. Others further west will find it near-impossible to rebuild the civil defence systems, stocks and mindset that in some cases were destroyed with astonishing haste in the 1990s.

But the need is clear both to build strong military defences and civil resilience for when those defences are tested. Neither will be a quick or cheap process.

Russian determination

That leaves the question of why, and how, Russia might attack beyond Ukraine.

The popular perception that Russia’s armed forces are incapable of harming Europe because they were eviscerated in Ukraine in 2022 has been slow to dissipate. The fact that Russia’s land forces had been built back bigger by early 2024 is now more widely recognised — as is the way some Nato militaries have become not more but less capable since 2022 as a result of donations to Ukraine not being replaced in inventory.

But what is too often overlooked is the uncomfortable reality that Russia’s primary means of striking at enormous distances remain largely unscathed. Ukraine has swept the Russian navy from the Black Sea, but elsewhere it remains intact; and the air force has suffered losses, but not primarily to its fleet of long-range bombers and missile carriers.

Russia’s capacity to continue waging war is also debated. There’s a growing belief that the war is unsustainable without irreversible long-term damage to the Russian economy. That may be true — but as noted in the Munich Security Report, it’s showing few signs of dissuading Russia from pressing on regardless, including spending almost one-third of total state expenditure on defence. Russia thus still has capability to do serious damage — and is maintaining it with support from partners such as Iran, China and North Korea that is only likely to grow.

In the 2010s, the stock scenario was for Russia to seize a slice of territory in one or more of the Baltic states, and then challenge Nato to respond — after having first assured itself that a unified response would not be forthcoming, and Nato’s raison d’être would thus evaporate, followed swiftly by the alliance itself.

After a period of almost a decade when those scenarios were off the table, they are once again under active discussion, precisely because of Russia’s clear determination and the questions over US commitment to Nato and European security.

Britain’s chief of the defence staff, Admiral Sir Tony Radakin, has more than once stated confidently that Russia will not attack Nato. That puts him at odds with his counterparts across the alliance, who have repeatedly stated with equal confidence that this is precisely what Russia intends to do.

The root of the difference may lie in Radakin’s explanation that Russia will not attack because it knows Nato’s response would be “overwhelming”. That caveat, at least for now, remains a given: nobody seriously suggests that Russia wants to tangle with the combined might of the alliance if it is still backed by the US.

But the unfortunate detail is that this is not the only kind of attack possible. Russia is already waging a proxy campaign of arson, murder and sabotage across Europe, to which the continent struggles to respond.

Where once Russia-watchers focused primarily on a Russian move in the Baltics that would be accompanied by nuclear threats to keep Nato out of it, now they think through what would happen if those threats were backed up with a demonstrative non-nuclear attack on one or more European cities.

Because the best way to focus, for example, German minds on whether their country would be willing to trade Hamburg for Vilnius would be a practical demonstration of what that really means, delivered through a range of possible methods.

In mid-January, a conference in London attended by members of parliament and government officials heard from military and industry speakers how little warning would be available if Russia were to launch a strike with its latest generation of missiles, arriving from far off in the Atlantic or the Arctic Ocean.

But the attack doesn’t have to be this overt and undeniable. There could be massed and co-ordinated sabotage or cyber attacks on critical infrastructure or hospitals, or a sudden full-scale activation of Russia’s plans for planting incendiary devices on airliners, causing not just devastating numbers of casualties but the complete immobilisation of air traffic.

European countries should already be thinking carefully about the impact of any such major attack, and how their publics would respond if the conflict with Russia were suddenly brought home to them.

In already divided societies, the population could well ask why they are suffering devastation over an issue they may perceive as marginal. Even governments that until now have been stalwart supporters of Nato might find that they are not sufficiently robust to withstand civil disorder at home, and mounting public pressure not to incur further damage, destruction and misery from Russia — with or without accompanying Russian nuclear scare tactics.

This would mean that Russia had successfully neutralised Nato in precisely the way it would desire to — after which individual countries in eastern Europe would be at risk of being picked off one by one at a time of Moscow’s choosing.

An overt attack of this kind on Europe might in the long term be catastrophic for Russia. But if we have learnt anything from Russia’s war on Ukraine, it is that Russia does not have to be correct in its judgment of when is the right time to go to war for the consequences to be devastating for those in its path.

‘Si vis pacem’

Looking back at the 1930s, we used to wonder how it seemed that everybody could see war coming but do nothing to stop it. Now we understand, as we see the same mistakes repeated one after another.

Instead, credible European deterrence of Russia is key to avoiding disaster. Europe has seen huge investment in countering terrorism by individuals and groups. What it needs now is also investment in countering state terror of the kind delivered by Moscow.

There is no excuse for pretending that defence is unaffordable. The costs cited for reducing the likelihood of a devastating war are trivial compared with the amount EU states have spent — for ludicrous example — on compensation paid to consumers for higher energy bills.

Poland sets the example through clear recognition that the cost of deterrence — or being ready for defence if deterrence fails — is vastly less than the devastation that would result from being unready. Countries claiming that transformative investment in defence is simply impossible are deliberately making the opposite choice.

Nato’s decade-old spending targets measured as a percentage of GDP in a way now serve as a distraction from the problem. They still have some utility as a measure of shame for those governments unwilling to meet their obligations to keep their countries and their citizens secure, such as the UK. But GDP targets only measure input, not output: and by now, what that spending actually buys is a far more urgent criterion of military relevance.

An even more precious commodity than funding is the time that Ukraine has bought Europe by standing as its first line of defence since 2014. Enough of that time has already been squandered through refusal to recognise the danger. History may never forgive the current generation of European leaders if their procrastination continues.

Keir Giles is a senior consulting fellow of the Russia and Eurasia Programme at Chatham House. His most recent book is ‘Who Will Defend Europe? An Awakened Russia and a Sleeping Continent’ (Hurst)

Cartography by Steve Bernard

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The US has asked European capitals to provide detailed proposals on the weaponry, peacekeeping troops and security arrangements they could provide Ukraine with as part of any security guarantees to end its war with Russia.

The request was sent to capitals this week, four western officials briefed on the document told the FT. It came as European leaders demanded to be part of Trump’s negotiations with Vladimir Putin that he announced on Wednesday.

“This [document] is the way that we make sure we are involved,” said one of the officials.

French President Emmanuel Macron has invited selected European leaders to a summit in Paris as early as Monday to discuss how Europe can step up support to Ukraine, sparked by US officials’ remarks this week about the peace process.

Washington intends its questionnaire, sent to governments by the US State Department, to scope out Europe’s willingness to protect Kyiv after a peace settlement, and the price Europe is willing to pay in exchange for being involved in negotiations with Moscow.

The State Department requested details of military hardware that European capitals would be able to provide and the number of troop brigades they would be prepared to deploy, the officials said.

“The cable poses a number of general questions,” a US official said, adding that it requests “specific proposals or ideas” for what a Europe-led security arrangement might look like.

“I’ve not seen [the questionnaire] myself, but I can totally understand that it would help to basically focus the conversation,” said Mark Rutte, Nato’s secretary-general.

Rutte said that, regardless of the US request, European countries needed to be clear about how they can step up their efforts.

“I hear European countries complaining that they did not immediately have a place at the [negotiation] table,” said Rutte. “My argument is, first get yourself organised together, debate, and . . . think about what the European contribution could be.”

The US request comes ahead of a tour of European capitals by Trump’s Ukraine envoy Keith Kellogg, which begins next week in Brussels.

Kellogg was not listed by the president this week as part of the four-man US team who will hold talks with Moscow, leading officials in Europe and Ukraine to wonder how involved he is in Trump’s peace efforts.

US officials said Kellogg and others were providing options to Trump, who is the ultimate decision maker.

Kellogg said on Saturday at the Munich Security Conference that the discussions were “a two-track process”.

“[US Middle East envoy Stephen Witkoff] has the Russian lane. I have the Ukrainian and European lane,” he said.

Asked whether Kellogg’s influence was waning, a US official said his schedule “speaks for itself”.

“Not only is he part of the team as the White House spokeswoman said, his diplomacy in Munich, in Brussels early next week and the upcoming critical trip to Kyiv, as noted by Zelenskyy personally yesterday, speaks for itself in terms of his leading role in this, working under the president,” a US official said.

The US has indicated it is prepared to accommodate many of Putin’s core demands by pouring cold water on Ukraine’s drive to join Nato and reclaim territory currently occupied by Russia.

On Saturday Kellogg said he did not think Europeans would be “at the table” during the peace negotiations, but that he was talking to European capitals to ensure their views were taken into account.

One senior western official said Kellogg’s focus on what western countries could do to guarantee Ukraine’s security, rather than what financial concessions it could extract from Kyiv in exchange, meant Russia had little interest in dealing with him.

The Kremlin’s focus on figures it saw as having a more direct line to Trump and better command of the brief led Moscow to conclude Kellogg had been partly sidelined, according to three Russian people familiar with the talks.

The US official said Kellogg has been one of Trump’s closest national security advisers for nearly a decade and their relationship is “well-known in Washington”.

Russia feels other interlocutors such as Witkoff, who secured the release of an American teacher from a Russian prison this week, and national security adviser Mike Waltz have a more direct line to Trump and better command of the brief, they said.

“If he’s the envoy, then he probably should have sought out contacts in Russia and Ukraine in short order, hire experts on both countries, and so on,” a former senior Kremlin official said. “Witkoff was snappier than he was.”

Another person involved in Russia’s outreach to the west said Moscow saw Kellogg’s role as largely ceremonial.

“The serious talks, as you know, are with Moscow and you need serious people for that,” the person said. Kellogg “is there to talk to the Ukrainians, talk to the Europeans, go on TV”.

Any progress in the talks would depend on further direct contact between Trump and Putin, the person added.

“Trump’s method is to send someone like that for a bit and then get serious later. Only the problem is his counterpart is Vladimir Putin, who as a specialist in human relations is several leagues above his level.”

Dmitry Peskov, Putin’s spokesperson, said the line-up of negotiators was an internal US matter. “The presidents expressed a political will to build dialogue, and it’s the US president’s prerogative to appoint someone.”

Kellogg’s continued talks with Ukraine and Europe suggest he could still play an important role in the peace process, two of the western officials and the former senior Russian official said.

“Kellogg is still involved,” said the first western official. “Some [European] capitals aren’t taking him seriously, and I think that’s the wrong approach.”

The former senior Russian official said Trump had “forgotten” about Kellogg when naming his negotiators, but then “corrected himself” later by dispatching him to Europe. “Maybe there’ll still be some use for him.”

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Treasury Secretary Scott Bessent offered Zelenskyy the deal during a visit to Kyiv on Wednesday, which came after President Donald Trump suggested the US was owed half a trillion dollars’ worth of Ukraine’s resources in exchange for its assistance to the war-torn country.

Zelenskyy wants American and European security guarantees to be tied directly to any deal on the mineral reserves, according to four people familiar with the US-Ukraine negotiations.

He is also keen for other countries, including EU states, to be involved in future natural resource exploitation.

But the deal proposed by Trump and delivered by Bessent only referenced the US getting Ukrainian resources in exchange for past military assistance, and did not contain any proposals for similar future assistance, according to a person familiar with the document.

“We are still talking,” Zelenskyy said in Munich on Saturday. “I have had different dialogues.”

Speaking to reporters on the sidelines of the conference, Zelenskyy said it was “not in our interests today . . . not in the interests of sovereign Ukraine” to agree to the US deal as it currently stands.

A senior Ukrainian official told the Financial Times that Kyiv was “trying to negotiate a better deal”. 

During his visit to the presidential office in Kyiv this week Bessent brought a document that Trump wanted Zelenskyy to sign before Bessent returned to Washington, according to five people familiar with the matter.

Speaking to reporters before he and Zelenskyy discussed the deal privately for roughly an hour, Bessent described it as an “economic agreement” with Kyiv to “further intertwine our economies”. 

The Trump administration would “stand to the end [with Kyiv] by increasing our economic commitment” which would “provide a long-term security shield for all Ukrainians” once Russia’s war is over, Bessent said.

“When we looked at the details there was nothing there [about future US security guarantees],” another Ukrainian official told the FT.

Asked whether it was a bad deal for Ukraine, a third Ukrainian official familiar with the proposal said it was “a Trump deal”. “This is Trump dealmaking,” the official said. “It’s tough.” 

Ukraine’s main concern is the lack of connection to broader security guarantees, according to three people who have reviewed the proposal.

Ukrainian officials asked how the agreement would contribute to their country’s long-term security, but were only told it would ensure an American presence on Ukrainian soil — a vague response that left key questions unanswered, those people said.

Bessent argued that the mere presence of Americans securing the mineral deposits’ sites would be enough to deter Moscow.

Another sticking point is the document’s specification that New York would be the jurisdiction in which disputes over the mineral rights are resolved, according to two people familiar with the matter.

A person close to Zelenskyy said that US ambassador Bridget Brink presented him with the document containing the proposal shortly before Bessent’s arrival in Kyiv, without prior warning.

Kyiv did not believe the proposal was enforceable under New York law, the person said.

The document shared by Brink was the same one that Bessent later gave to Zelenskyy, according to the person. It was headed “DRAFT AS OF FEBRUARY 7, 2025”. Zelenskyy’s team were told he was expected to sign it on Wednesday during Bessent’s visit.

The US embassy did not immediately respond to a request for comment.

Ukraine supports the concept of exchanging Ukrainian resources for future security, the person close to Zelenskyy said. But the US proposal only referenced past assistance, not future, and a formal binding bilateral international agreement is the only way to ensure both sides’ rights and interests are protected, they added.

After their meeting Zelenskyy told reporters that he would consider the proposal but would not sign anything at that time.

“We will review this document and work swiftly to ensure our teams reach an agreement. The US is our strategic partner and we are committed to finalising the details,” Zelenskyy said at the time.

Bessent said after the meeting that Trump wanted the deal to be done.

“I believe this document is important from President Trump’s perspective in resolving this conflict [with Russia] as soon as possible​,” he said. “We will provide guarantees of American assistance to the people of Ukraine. I believe this is a very strong signal to Russia about our intentions​.”

Zelenskyy said he wanted to discuss the prospect of a mineral rights deal further at the Munich Security Conference, which is taking place this weekend.

At a meeting with US vice-president JD Vance in Munich on Friday, he made a counter-offer which he also discussed with US lawmakers on the sidelines of the forum.

In a speech in Munich on Friday, Zelenskyy said his legal team would review the document Bessent presented in Kyiv to offer advice and suggest potential changes. He described it as a memorandum between the US and Ukraine, rather than a formal security agreement.

Zelenskyy has not signed the deal because he wants to get others, including European nations, involved in mining the minerals too, a European official briefed on the meetings said.

“They’re under intense pressure from the Americans on this,” the official said.

The US proposal aligns with a “victory plan” that Zelenskyy’s team has been developing since last summer to deepen ties with the Trump administration by allowing the US access to critical minerals used in high-tech industries.

Ukraine has precious minerals estimated to be worth several trillion dollars, including lithium, titanium and graphite, all of which are crucial for manufacturing high-tech products. But many of these resources are in areas which are either under Russian occupation or are at risk of being captured by the Kremlin’s advancing forces, as they sit near the front lines in Ukraine’s east.

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