Ukraine War: Stalemate and Frozen Conflict or Prolonged War?
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Bottom Line: As Ukraine counter offensive operations continues without much success, the possibility of a stalemate and frozen conflict increase in the medium term taking into account Russia’s failure to gain ground in 2023. We foresee a protracted conflict, coming with varying degrees of intensity into 2024 while peace negotiations are unlikely, as both Ukraine and Russia perceive the war as existential. Under our baseline scenario the key difference is that military activity decreases and ceasefire talks may occur – though unlikely to be successful (Figure 1).
Market Implications: The war continues to create an increasing financial burden on Russia due to high military spending in addition to aggravation of staff shortages, elevated inflation, and risks posed by the sanctions. Ukraine’s economy continues to contract, inflation surges and exports decrease while termination of Black Sea Grain Deal on July 17 poses further threat over Ukraine’s earnings and financial stability. For global markets, the Ukraine war is now a secondary issue and only become important with a severe escalation or effective peace deal.
Figure 1: Possible Scenarios
Baseline — 50% | Alternative — 30% | Worst Case — 10% |
Stalemate and Frozen conflict | Prolonged War, and Ukraine Strikes Back | Cyber Warfare on NATO country, political meddling or Small Tactical Nuclear Device |
Pause on territorial advance by Russia, exhaustion on both sides, only moderate military and financial Western support for Ukraine, terminated Black Sea Grain Deal as well as the cost of war on economies brings military conflict to a halt. This could be a pause and a frozen conflict with or without a ceasefire talks for a long time. Peace deal remains more difficult. | Current grinding military action continues in 2023 and extend into 2024 as Putin tries to break the Western alliance. The termination of Black Sea Grain Deal was a sign of Putin putting pressure on Western alliance, and could be considered as an attempt to achieve economic concessions from the West. Despite Ukraine continues its counter-offensive which is not yielding significant gains so far, we think an effective aggressive and strong counter-offensive is unlikely without larger military and financial aid from the West. If Western support will increase, Ukraine can regain control of some lost territory. Under this scenario, this would prolong the Ukraine war, with Putin hoping that the November 2024 presidential election will see a return of Donald Trump that could split Western support and back a peace deal based on current territories. | 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, including 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.This risk increases if a Ukraine counteroffensive threatens to retake Crimea. |
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, and the parties reaching a ceasefire agreement.
No Effective Russian/Ukrainian Major Offensive, Black Sea Grain Deal Termination and Wagner’s Mutiny as Recent Developments
So far, Russia has failed to gather its forces for a successful major offensive into Ukraine. It appears partial mobilization back in September 2022 have so far failed to produce a significant offensive into Ukraine. Ukraine forces could also not make a major summer offensive that yielded significant gains as the Western world was expecting. We expect the approach autumn/winter months will mark a freeze in military activity, and stalemate will likely to extend into 2024.
When we look at latest developments from the battle ground, Russian forces continued offensive operations in the Kupyansk direction (Kharkiv Oblast) from Svatove area in Luhansk Oblast and made unconfirmed limited gains on August 1 as they also conducted limited ground attacks in the Kreminna area in Luhansk Oblast. Ukrainian forces continued limited offensive operations in the Bakhmut direction and reportedly advanced on August 1 as the Ukrainian officials reported that Russian forces are unsuccessfully defending against Ukrainian attacks. According to sources, both Russian and Ukrainian forces continued offensive operations in the Donetsk-Zaporizhia Oblast border area and did not make any confirmed advances on August 1 (here).
These attacks did not offer marginal gains for both sides, as Russian attacks were fended off by Ukrainian counter offences. After one and a half year now, the advances by either sides have been measured by mere meters on daily basis. War fatigue, high military spending, sanctions, and Russia’s deteriorating fiscal balances make further significant advances unlikely for Russia going forward.
In addition to military aspects, the conflict recently was worsened by the expiration of the Black Sea grain deal on July 17 as Russia announced its decision not to extend it, arguing that Russia’s requests on removing obstacles to Russian agricultural exports was never fulfilled, and the grain exported from Ukraine. It appears Russia may have an incentive to agree a new grain deal with the UN and Turkiye, as otherwise it could hurt export revenue at a time when Russia exports and government revenues have fallen from the 2022 highs (here). While this is the central scenario, an alternative is that Russia take months to agree a deal to try and squeeze Ukraine revenue during a crucial phase of the war. Russia allegedly strike against Ukrainian port and grain infrastructure after the termination signaling that the Kremlin may be willing to strike assets to prioritize immediate economic concerns as an attempt to achieve economic concessions from the West.
Russia – China relationship remains unaffected, and continue to flourish. According to Chinese customs data showed on July 13, China's total trade with Russia rose to its highest level with $20.8 billion in June since the war started. China's imports from Russia soared by 15.7% to $11.3 billion, while China continued to buy discounted Russian oil, coal and some metals. China’s exports to Russia increased by 90.9% in June to a total of $9.6 billion. Russia is now China's top oil supplier in the 1H of 2023 and China provides equipment such as semiconductors and motor vehicles to Russia. That said, China has so far refrained from supplying Russia with weaponry and equipment, instead China is willing to position itself as a peace broker since the war began (albeit with an initial bias towards Russia). In addition to relations with China, Russian-Iranian relationship has been strengthening after the war. Russia uses Iran’s drones, which have played a significant role in Russia’s campaign against Ukraine, and Iran reportedly continues to construct drone factories in Belarus and Russia, which will help Russia acquire Iranian drones more readily to be used easily in the war.
Our baseline scenario, we see a pause on territorial advance by Russia or Ukraine, exhaustion on both sides, only moderate military and financial Western support for Ukraine, no early new Black Sea Grain Deal as well as the cost of war on economies brings military conflict to a halt. This could be a pause and a frozen conflict with or without a ceasefire deal for a long time.
In our alternative scenario, we foresee the case for a strong Ukrainian counter offensive. Ukraine already started to receive military equipment and financial aid from the Western countries from February onwards and Ukrainian forces allegedly continue advancing in the Bakhmut direction and performing offensive operations in the Donetsk-Zaporizhia demonstrate their willingness to build on 2022 territorial gains around Kharkiv. A condition for Ukraine in peace talks has been restoring the county’s borders to pre - Feb 24 2022. Thus, there is an undeniable chance that Ukrainian forces will try to push forward, particularly if Western alliance would provide stronger support.
Figure 2: Ukraine occupied by Russia forces, August 1
Source: Institute for the Study of War
The deadlock will hold in the upcoming winter months, and conflict will remain active through 2024 in this alternative scenario. The tension could remain heightened as UN and Turkiye may not be successful in bringing Russia to the negotiation table to extend the Black Sea grain deal. Despite Wagner Group’s rebellion on June 23-25 which seemed to have weakened President Putin’s hold on power as the Wagner forces marched through Moscow and took control of military facilities in two Russian cities, the political and military turmoil did not remain not so long. Considering Putin regained his power and he will not accept restoring Ukraine’s borders willingly, ceasefire agreement talks in this alternative scenario are less attractive than hoping President Trump is reelected U.S. president and splits western support and leading to a Russia friendly peace deal.