Ukraine War Scenarios: Long war, Exhaustion or Cyberattack
- Bottom Line: With a harsh winter awaiting Europe and Putin looking to tilt the table towards saving a seat for the possible arrival of his friend Donald Trump in 2024, Russia might be looking to keep the military action somewhat alive in the next 12-24 months and this is now our central scenario. The main alternative scenario is that Ukraine and Russia becoming exhausted and the war descends into a frozen conflict into 2023 with or without a peace deal. A 10% probability is attached towards Russian escalation (e.g. a major cyberattack of a NATO country or use of battlefield nuclear device in Ukraine).
- Whatever motivated President Putin to start the war in Ukraine, after 5 months he is not getting closer to it. Initial targets such as occupying Kyiv, toppling the government are almost improbable, unless Putin chooses to initiate a full mobilization – a notion that is highly unpopular in Russia. What are the likely scenarios?
- Market Implications: European growth concerns and adverse scenario continue through 2022 and 2023.This restricts the rebound in EZ equities and the EUR.
Figure 1: Possible Scenarios
Baseline — 55% | Alternative — 25% | Worst Case — 10% |
Prolonged War and Waiting for Trump | Exhaustion and Frozen conflict | Cyber Warfare on NATO country or Small Tactical Nuclear Device |
Current grinding military action gets dragged into 2023 and possibly 2024 as Putin tries to break the Western alliance and potentially wait for Trump to comeback as U.S. president. Whether or not Trump supports Putin is uncertain, yet if he was reelected U.S. president it could tilt diplomacy towards Putin's favor. This would prolong the Russian policy of disrupting European gas supplies, which would create uncertainty for European growth. Market implications: European growth concerns and adverse scenario continue through 2022 and 2023.This restricts the rebound in EZ equities and the EUR. | Exhaustion on both sides and pause on territorial advance by Russia as well as the cost of war on their economy brings all the sides to table. This could be a pause and a frozen conflict with or without a peace deal. Market implications: With a weak peace deal an opportunistic Putin would increase gas exports and lower European gas prices. This would help the EZ recovery process and produce more of a rebound in EZ equities and Euro. Without a peace deal, it is less clear that Russia would restart normal gas supplies. | If the signs are accumulating that Russia's army is crumbling under Ukrainian resistance, Putin could feel under pressure to use all tools at his disposal. This would likely first be a major Cyber-attack on Ukraine and possibly a NATO country. The next option could be use of a single small battlefield tactical nuclear strike in Ukraine (though the odds of this are decreasing). Market implications: A major cyber-attack on a NATO country would adversely impact assets for that country depending on the damage. A tactical battlefield nuke use would cause a major global risk-off initially. |
Source: Continuum Economics.(1) Other scenarios would be a remaining 10% including a double cold war with China and Russia versus the west; Putin stepping down or dying or a successful Ukraine counter offensive that reclaims a fair portion of lost territory.
2 Main Scenarios
Baseline: (55%): Our baseline scenario envisages current military action continuing through the next 12 to 24-month period, mainly in Eastern Ukraine. During this time, Russia will try to occupy further territory albeit at a much slower pace, as it gets stretched logistically from the prolonged fighting. Ongoing military action will however be used to break the Western alliance and see if Trump will make a comeback as U.S. President in 2024. Meanwhile, if Russia can achieve full occupation of the Donbas region, a referendum for Russian rule will likely be held similar to the one in Crimea back in 2014. A likely Russian integration result with or without reasonable participation of local population worn-out by extended war could make Putin's hand stronger during peace talks.
By now it is clear that Russia has failed to achieve its initial target of full occupation or toppling the Ukrainian government. Ukrainian forces have defied overwhelming odds standing against Russian aggression. Given the continuance of Western support, a defensive campaign can be maintained. However, military experts point to Russia's much greater artillery power that does allow advances in Ukraine, though with Russian forces being stretched by the prolonged nature of the war.Russian forces are still implementing an offensive campaign albeit at a much slower pace.
The fact that Ukraine has defied whatever Russia initially predicted changes the definition of success for Putin. Whatever that definition is today, Putin will not end this campaign without expanding Russian borders in order to include Donbas region. To that aim, Russia will likely hold a referendum to see whether the locals wanted to join Russia as a federal subject, or if they wanted to remain a part of Ukraine. Russia will likely also call a referendum for the area along the Black Sea from Kherson to the Russia border to also be annexed. The 2nd referendum is more difficult, with less Russians in this area and more potential insurgency risk. Even so, the result will likely be rigged and this region will also probably vote to be part of Russia. In order for Russia to achieve its desired result, the wearing down of locals must continue. Russia could also push beyond the Donbas towards the Dnieper river to disrupt and potentially secure the whole of eastern Ukraine (Figure 2).While Russia's stretched army could argue against such a military aim, the Kremlin political agenda could see this area coming into the spotlight. During this time, the odds of Ukrainian major reclamation of lost territory is rather unlikely. Despite the success of defensive campaign against Russian invasion, the logistics of an offensive campaign is much more challenging for Ukraine. The absence of trained armed personnel and Ukraine's relatively weaker equipment and supplies further compound the challenges of an offensive.
Figure 2: Ukraine occupied by Russia forces
Source: UK MOD
While Russia may eventually accept a stalemate, ending its military campaign at this point leaves Russia holding lands in Ukraine but with western disagreement led by President Biden. Therefore, it is our main scenario that Russia will keep military action alive and try to outlast the Western alliance and President Biden. This will mean major disruptions to energy and supply chains into Europe is ongoing through 2023 and probably 2024, which will damage growth and thus cause divisions among EU governments. It is uncertain whether Trump will provide any kind of support to Russia, if he was re-elected U.S. president in 2024. However, his mere existence at the table will surely hurt the way the Western alliance orchestrates diplomacy, given that Trump recently opposed a $40bln extra military aid package to Ukraine. Trump will also soon come into the spotlight again, with reports in political circles suggesting that Trump will declare for the U.S. president race by September. The reason for such an early announcement is to provide protection in the U.S. justice and state of Georgia investigations, as witnesses would be more reluctant to testify and the Biden administration would be less willing to try to prosecute a U.S. presidential candidate. Even if Putin does not find a friend in Trump, the lack of harmony in his opponents will give him a better chance of getting them to agree to his terms. Putin has an incentive to keep the fighting going until 2024, rather than ending sooner.
Meanwhile, a deal on wheat exports from Ukraine brokered by UN/Turkey should not be seen as a sign that Russia is moving towards peace. Russia gets to export wheat and fertilizers and get support from countries outside of the west for this compromise.
In terms of economic and market significance, what is not discounted is the duration of the war and prolonged nature of the slow fighting in this baseline scenario. Western politicians and financial markets timescales are shorter than a leader like Putin and thus the western thinking that Russia will get exhausted tend to curtail the perceived timescales for how long the war lasts.
This is important as Russia view the field of energy and economics as being part of the wider tools to break the western alliance and annex land in Ukraine. On oil, the EU seaborne ban and restrictions on shipping and insurance can mean some disruption in the global market into 2023 (here), but the EU can secure alternative supplies and oil from Russia can be redirected to Asia. This is not the case with gas, which is crucial to heating residential properties in Europe, plus power generation for electricity and industry use. Europe is addicted to gas and Putin knows that Europe cannot quickly divert to other supplies due to lack of LNG import facilities and the tightness of the global LNG market. Existing high gas prices are curtailing some demand, while the EU wants to reduce demand further by voluntary measures and some switching of power generation to coal/renewables is occurring.However, this would not be enough to eliminate the need for Russia gas imports.Figure 3 shows in theory that enough import capacity exists if Russian supply were cut off completely, but realized import capacity is lower than theoretical capacity due to technical constraints (e.g. maintenance) and as some Iberian import capacity is not linked to the rest of Europe.
Putin's gas war involves restricting supplies to Europe to create uncertainty and potentially leave Europe with insufficient gas supplies and reserves. The Ukraine and Yamal gas flows did not increase when Nordstream 1 was closed for maintenance, which underlines that the geopolitical control that Russia exerts with gas. However, Russia needs some export revenue from gas and cannot redirect easily due to insufficient LNG import facilities or pipelines to other buyers (this will change somewhat in 2025 when the 2nd pipeline to China is completed and links into the main Russian gas pipeline system). This means that Russia will have to supply some gas to Europe for revenue purposes but not enough to bring gas prices down in Europe. We do not see a permanent gas ban to all of Europe by Russia. Our central scenario is that this game of cat and mouse will continue through the European winter and throughout 2023, which will be a drag on the European economies and produces some downside risks (here).
Figure 3: EU Gas Import Capacity (BCM)
Source: IMF/Bruegel
Main Alternative Scenario (25%): The alternative scenario is an early end to military action with or without a weak peace deal. Physical exhaustion and economic cost of ongoing war may bring all sides to the table within the next 6 months, though Putin would likely call a Donbas referendum first to increase his negotiating hand. Ukrainian forces have been stellar in defense, however their military capabilities are not sufficient to go on the offensive and reclaim significant territory. Meanwhile, Putin is reluctant to fully mobilize, which would be hugely unpopular but leaves the Russian army fatigued after a brutal war in eastern Ukraine.With winter approaching and an energy crisis looming, EU countries may be willing to encourage Putin and Zelensky to the table. Since the terms of Ukraine and Russia are irreconcilable, under current circumstances the best outcome is only a weak deal where Ukraine fails to get its security requests met, Russia pulls troops from some parts of Ukraine except Donbas and other contested areas and prompting the EU to reduce its sanctions against Russia. The exhaustion could also lead to peace talks that fail and a frozen conflict occurs without a peace deal and the risk that fighting could restart at a later date.
Worst Case: The Russia Cyberattack option and tactical battlefield nuclear option (10%)
Could Russia use a cyber-warfare attack against Western countries if it felt that war in Ukraine were going badly (e.g. lose of Kherson or attacks on Russia based military infrastructure by Ukraine).While a state sponsored cyberattack could sound like the idea behind a Hollywood movie, Russia is alleged to have been behind cyberattacks prior to the invasions of Georgia in 2008 and Ukraine in 2022 (Figure 4). Russia entities are also alleged to have undertaken major cyber-attacks against Estonia (2007) and Ukraine (2015 and 2017).Cyber warfare attacks using malware are designed to destroy or disable critical computer systems rather than just causing temporary problems (disruption, ransomware encryptions or denial of service).Thus they are potentially much more economically damaging.
Figure 4: Major Cyber Warfare Attacks
Year | Country attacked | Alleged attacker | Notes |
2007 | Estonia | Russia | Wide ranging attack targeting government and commercial institutions |
2008 | Georgia and South Ossetia | Russia | Major cyber-attack, 3 weeks before the invasion of South Ossetia and Georgia by Russia |
2009 | S Korea | N Korea | Denial of service attack against government, media and financial websites. |
2010 | Iran | U.S. | Operation Olympic games against Iran's nuclear facilities at Natanz |
2013 | S Korea | N Korea | Major information leak and cyber-attack. |
2015 | Ukraine | Russia | Part of the Kyiv power grid taken down for 1 hour. |
2016 | U.S. | Russia | Democratic National Committee cyber-attack allegedly by Russia based groups to help Donald Trump presidential election campaign. |
2017 | Ukraine | Russia | Malware attack on government, banks and electricity firms that destroyed or rewrote computer files. |
2022 | Ukraine | Russia | 14 January and 15 February cyber-attack on government and bank website ahead of Russia invasion on 24 February. |
Source: Various
Putin's Russia has a wider view of hybrid warfare than the western media. Russia current disruption against EU gas imports by restraining flows through key gas pipelines can be seen as an extension of Russia war in Ukraine, with the aim of disrupting political and popular support for NATO and western support for Ukraine. Cyberattacks are a further tool in a hybrid war.
However, NATO in 2014 agreed that that international law applies in cyberspace and that NATO must defend itself properly in cyberspace. A major malware attack on a NATO country could trigger more sanctions or military support for Ukraine. Additionally, offensive cyberattacks are estimated to take huge resources and time, with the U.S. attack on Iran in 2010 and Russia attack on Ukraine in 2015 said to have taken years to prepare.
Realistically, a major destructive cyberwarfare attack on a NATO country is low risk and only becomes applicable if Russia really felt under threat. A temporary disruptive denial of service or ransomware attack is somewhat more feasible to show offensive cyber capabilities. This could be targeted against a NATO country that Russia views dimly (e.g. UK, Baltics or Sweden). Lithuania has already had a denial of service attack in 2022 from a Russia hacker group, after blocking Russian trains to Kaliningrad. Political disinformation campaigns in the 2023 Italian/Spanish elections or 2024 U.S. presidential elections are probable, given Russia alleged track record of inference in previous western elections.
The next alternative if Russia really feels under threat and is losing substantive ground in Ukraine would be a tactical battlefield nuclear weapon. Recent reports have suggested that Russia could consider this option if it lost Kherson. Russia military doctrine includes the potential use of battlefield nuclear weapon, both due to weakness with Russian forces and as Russia feels that NATO would be reluctant to directly retaliate – unlike ICBM missiles where mutual assured destruction makes this a very unlikely option.Despite some of the continued jawboning, we feel that the risks of a tactical nuclear weapon being used have probably decreased from our previous estimate of 9%. NATO countries clearly do not want to get directly involved in Ukraine and Ukraine does not really have offensive capabilities to take major portions of land from Russia. This means the trigger for use of a tactical nuke is lower. Meanwhile, use of a tactical battlefield nuke would be geopolitical watershed and this could hit neutral countries support for Russia and willingness to buy Russian commodities.