War in Ukraine: Turning to Stalemate
Russia’s failure to gather sufficient forces for a spring major offensive in Ukraine is an indication that attacks into Ukraine may have reached culmination without the realization of a significant offensive. An increasing fiscal burden on Russia and absence of meaningful support from China along with strengthening Ukrainian forces due to unwavering Western support led us to shift our main case from a prolonged active war to stalemate and frozen conflict. In our alternative scenario, we add the possibility of a Ukrainian strike into Russian controlled territory.
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. 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. | 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. Market implications: European growth concerns and adverse scenario continue through 2023 and into 2024. This restrict the rebound in EZ equities and the EUR. | 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 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.
No Russian Major Spring Offensive
Russia has failed to gather its forces for a major offensive into Ukraine. The winter months had already marked a freeze in military activity. Yet, Putin’s fixation on anniversaries and attempts to build-up a campaign that started with the partial mobilization back in September 2022 have so far failed to produce a significant offensive into Ukraine. Russian forces did conduct numerous attacks in the Bakhmut area on March 19 as part of its strategy to take control of Ukraine's eastern Donbas industrial region. These attacks either made marginal gains or in most cases were fended off by Ukrainian counter offences. For several months now, the advances by either sides have been measured by mere meters on daily basis. War fatigue and Russia’s deteriorating fiscal balances make further significant advances unlikely going forward. Russia – China relationship remains unaffected, as Chinese President Xi is on a 3-day visit to Russia starting on March 20. That said, China has so far refrained from supplying Russia with weaponry and equipment, instead it chose to assume the role of a peace broker albeit with an initial bias towards Russia.
In our alternative scenario, we add the case for a Ukrainian counter offensive. Ukraine has started to receive military equipment from the Western countries from late February onwards. The time passed should have allowed for Ukrainian forces to be trained to use the said equipment. Ukrainian forces’ solid defense in Bakhmut also indicates their willingness to give up their territorial gains. 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 may decide to push forward.
Figure 2: Ukraine occupied by Russia forces
Source: Institute for the Study of War
The deadlock that set in in winter months will continue going forwards, as per our new main scenario. While Turkey is busy with upcoming elections in May, China’s role as a broker could increase. The 12-point peace plan is a starting point, yet it overlooks Ukrainian conditions for starting peace talks. Since Putin will not accept restoring Ukraine’s borders willingly, peace talks are still a long way ahead. Thus, we are looking into several quarter long stalemate / frozen conflict in the region.