Ukraine War Stalemate
Bottom Line: With the Russian surge in eastern Ukraine having failed to gain significant ground, the key is now what will happen with the Ukraine counteroffensive expected in May. Our central scenario remains a military stalemate, which we do not see leading to a credible peace deal given the gulf in negotiating positions between Russian and Ukraine forces.
Figure 1: Possible Scenarios
Baseline — 45% | Alternative — 35% | Worst Case — 10% |
Stalemate and Frozen conflict | Prolonged War, Waiting for Trump, Ukraine Strikes Back | Cyber Warfare on NATO country, political meddling or Small Tactical Nuclear Device |
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 the table. This could be a pause and a frozen conflict with or without a peace deal. China may act as a broker of peace, if it allows its peace plan to evolve to better meet Ukraine’s demands. | Current grinding military action continues in 2023 and possibly extends into 2024 as Putin tries to break the Western alliance and potentially wait for Trump to comeback as U.S. president. If Trump was reelected U.S. president it could tilt diplomacy towards Putin’s favor. Ukraine may start an aggressive counter-offensive with the military aid it received from the West. This may allow for some regaining of lost territory. This would prolong the Russian policy of disrupting European gas supplies, which would create uncertainty for European growth. | 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). |
Source: Continuum Economics. Other scenarios are the remaining 10% eg Putin steps down.
A number of developments in the Ukraine war are worth highlighting
- Little Russian progress in eastern Ukraine. Fighting for the city of Bakhmut continues, but Russian progress is very slow. The Russian surge has not been a success in the early spring, which has raised questions among military strategists on the ability and willingness of Russia to push westward.
- Russia and the Grain deal. Russia is also claiming that it’s preconditions for extending the UN/Turkey brokered grain deal have not been meet and that the deal will end May 18. This could be a further phase of brinkmanship by Russia, that previously claimed the deal over before then extending.
- Russia exports and fiscal squeeze. Russia is suffering from the fall in gas prices, which now means lower gas export volumes are not being offset by high prices. Combined with the soft profile for oil prices, this means that Russia export momentum is fading. In turn, this is hurting fiscal revenues and is providing some pressure on Russia. However, government debt/GDP is still modest and so some debt financing could be used.
- Ukraine counteroffensive? Speculation is now turning to whether Ukraine could launch a counteroffensive either in southern Ukraine to regain the corridor to Crimea or in eastern Ukraine. Western military hardware is now reported to becoming through, including tanks from European countries. Crossing the Dnipro river at Kherson remains a difficult challenge however. Meanwhile, a counter offensive may not succeed in Eastern Ukraine says military strategists, as the Ukraine air force is not strong enough to fight the Russian air force. Ammunition is also reported to be a key problem for both sides.
The Ukraine counteroffensive will be the most interesting. If Ukraine can make meaningful advances in Eastern Ukraine, then it will strength Ukraine hand but also mean that the war could drag on. Alternatively, if a Ukraine counter-offensive fails to gain ground, then the war will increasely shift towards a stalemate. This remains our central scenario (here), but the question is what happen then.
Putin could try to split the West by asking for peace talks based on current territories held.Such an approach would be rejected by Ukraine, U.S./UK and Eastern European countries that want to see a Russian withdrawal. However, some European countries and major BRICS could encourage an attempt to have peace talks and this could cause some optimism in the summer ahead of the crucial G20 Summit in India on September 9-10. We would suspect that any peace hopes could cause optimism that commodity supplies from Russia could improve and this could depress commodity prices and help risk sentiment. The reality is that a credible peace deal between Russia and Ukraine remains unlikely given the differences between the two sides. Additionally, Putin may not want to make the step towards peace negotiations, both as it could be seen as a sign of weakness among the Russian hawks and given Putin’s stubbornness.
An alternative is an offer of a ceasefire, which could be only temporary. This could be accepted by Ukraine and Russia if they are in a military stalemate. However, this may not mean peace talks (the Korea ceasefire in 1953 ended the war but did not lead to peace, but could mean further discussions on changing the preconditions for peace talks!