War in Ukraine: No Light Yet at the End of the Tunnel
Bottom Line: Despite expectations from the 80th United Nations General Assembly (UNGA) held in New York were high, it did not yield a solution to the war in Ukraine, but an escalation between the U.S. and Russia. The claims by president Trump as he shifted his position on the war, saying for the first time that Ukraine could win all of its land back and Russia is a paper tiger pushed back by Kremlin. Russia continues to signal no movement in Russia's long-held demands, and president Putin maintains a hard line stance. Ukraine remains in a weaker negotiating place, and U.S. stays reluctant to provide full support to Ukraine. We think U.S. implementing secondary tariffs on Russia oil buyers could partly change the situation and push Russia for accepting a deal but this won’t likely happen soon. Current situation signals a prolonged negotiation process taking months/years for sealing a full-scale peace deal since ensuring and finalizing concessions will take time. The probability of war continuing remains at 70% considering peace negotiations continue to develop very slowly. Our second scenario is based on a Russia-friendly peace deal (30% probability) with Russia annexing areas in and around four Ukrainian oblasts that it occupied, securing no NATO membership for Ukraine and no foreign troops in Ukrainian territory.
Despite expectations from the 80th United Nations General Assembly (UNGA) held in New York were high, it did not yield a solution to the war in Ukraine, but rather an escalation between the U.S. and Russia.
Addressing the UN General Assembly, president Zelenskyy said president Putin will keep driving the Ukraine war wider and deeper unless he is stopped. Zelenskyy called for countries to work together as peace depends a joint effort.
Zelensky spoke after president Trump who shifted his position on the war, saying for the first time that Ukraine could win all of its land back. Trump added that Russia is in big trouble economically, and claimed Russia is a paper tiger. Kremlin pushed back saying Russia is a real bear. Kremlin spokesman Dmitry Peskov underscored that it was a mistake to believe Ukraine could win back territory, and denied Russia was in big economic trouble saying Russia’s economy completely meets the needs of the Russian army.
Despite Trump’s claims, we think it will be very unlikely for Ukraine winning all of its land back taking into account that 99% of Luhansk, and 75% of Donetsk and Kherson are now controlled by Russia. Additionally, we believe it is not possible to state that Russian economy is in big trouble. Despite Russian economy continues to face structural challenges; from sanctions and supply chain disruptions to demographic decline and fiscal pressures, inflation moderately edged down in Q3 and Central Bank of Russia (CBR) continued its easing cycle and reduced the key rate by 100 bps to 17% on September 12, highlighting inflationary pressures continue to decline. (Note: We feel a full-scale peace deal in Ukraine is required for a continued permanent inflation slowdown though, as a deal could lower Russia’s military spending and relieve price pressures. A surprise quick credible peace deal could also help soothe a path away from food and energy problems and geopolitical uncertainty).
Under current circumstances, the probability of war continuing remains at 70% considering peace negotiations continue to develop very slowly. A full-scale peace deal in 2025 is very unlikely due to president Putin’s stubbornness as he is insisting on his own peace terms. There are also no significant moves yet by president Trump such as implementation of secondary tariffs on Russia oil buyers while Putin maintains a hard line stance. (Note: We think U.S. implementing secondary tariffs on Russia oil buyers could partly change the situation and push Russia for accepting a deal but this won’t likely happen soon).
We believe Ukraine remains in a weaker negotiating place and, at some point Ukraine will have to admit giving up some land to Russia and stop insisting on joining NATO. Our second scenario is based on a Russia-friendly peace deal (30% probability) with Russia annexing areas in and around four Ukrainian oblasts that it occupied, securing no NATO membership for Ukraine and no foreign troops in Ukrainian territory. Current situation signals a prolonged negotiation process taking months/years for sealing a full-scale peace deal since ensuring and finalizing concessions will take time.