War in Ukraine: Five observations on recent developments

Gillian Edgeworth, Macro Strategist
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1. The conflict is still escalating

The bombing of a military training facility in western Ukraine close to the Polish border is significant and follows Russian warnings to the West about its delivery of military equipment to Ukraine. The conflict is also moving closer to Kyiv. With most Russian troops at the border now engaged, Russian President Vladimir Putin is enlisting military support from Syrian and Chechen mercenaries.

In parallel, there is mounting evidence that Putin intends to use a similar strategy to that applied in Crimea to establish control, at least in areas in the south of the country. That would include the appointment of Russian representatives to replace local mayors, followed by some form of “vote” or “referendum” on Russian governance. However, in my view, this approach would require Russia to commit significant military resources for an indefinite period. Moreover, Russia took Crimea without firing a single shot and support for Russian governance in that region was much higher than in those areas currently in direct conflict with Russia.

...Russia has the capability to inflict significant infrastructure damage and loss of life but maintaining day-to-day control of large cities would be a very different challenge.

Gillian Edgeworth
Macro Strategist

2. Diplomacy continues but, at best, will take time

There is modest evidence that both sides are slowly edging towards a deal. We are in a phase where Russia sees benefits to continued escalation to secure more concessions and territory. At the same time, polls from Ukraine suggest that President Volodymyr Zelensky has little to no domestic political space for compromise. German Chancellor Olaf Scholz and French President Emmanuel Macron held another call with the Russian leader over the weekend, this time running for two hours. The subsequent read-out from the French government suggested no progress. However, statements from Russia and Ukraine provide a chink of light. Zelensky’s team noted that there are “non-stop” negotiations via video conference, with working groups established to cover different issues, while Putin on Friday commented on negotiations taking place almost daily. Security guarantees for (parts of) Ukraine will be the most difficult part of any peace deal. Russia is moving towards heavy bombardment of Kyiv and Odesa (Odessa). As sadly demonstrated in recent weeks, Russia has the capability to inflict significant infrastructure damage and loss of life but maintaining day-to-day control of large cities would be a very different challenge.

3. Within Russia both the repression and the economic downturn intensify

The level of repression is increasing rapidly. This includes a ban on Facebook and Twitter, the departure of most, if not all, foreign reporters and the closure of any remaining independent Russian news agencies. The Russian parliament has also approved a new law threatening to jail anyone deemed to have spread “fake” news on the invasion.

There are reports of changes to personnel in the security services. Last week, central bank Governor Elvira Nabiullina tended her resignation, but this was refused by Putin. The ratcheting up of sanctions continues apace, including the US ban on imports of Russian oil, liquefied natural gas and coal. I think the withdrawal of brands such as Coca Cola and McDonald’s is significant symbolically. Counter-sanctions have also begun, including a ban on exports such as wood. Given Russia’s dominance in many commodities, there is significant scope for escalation. In addition, the Putin administration has drawn up plans to allow for the nationalisation of businesses that are partly owned by foreign entities. Finance Minister Anton Siluanov also indicated that Russia envisages repaying its debt in roubles if the freezing ban on its external reserve assets is not lifted.

4. Expect sanctions to keep coming

Assuming increased conflict in Kyiv, I think we can expect the West to impose further sanctions. My sense is that the US and the EU have not included entities such as Sberbank or Gazprombank on the Specially Designated Nationals (SDN) list to date in part to leave room for escalation. And while both institutions are important for facilitating energy trade, there is scope for more sanctions against the banking system. On the energy front, the EU’s current plan to reduce its dependence on Russian energy appears ambitious, but a multiyear plan to gradually decrease imports of energy from Russia may be announced in the coming weeks.

5. Even in a low-probability positive scenario, sanctions will take years to reverse

Even in the unlikely event that we end up with an immediate and positive regime change in Russia and a lasting ceasefire, this sanctions package is unusual in that it provides no detail on what is required to reverse sanctions. I believe that Ukraine would play a significant role in determining when and how these would be lifted, with any roll-back done in stages. I see it as unlikely that controls on technology exports for military equipment would ever be reduced. Moreover, while central bank reserve assets benefit from immunity in the US and the UK, Ukraine has begun to argue that Russia’s central bank assets should be used for reparations.

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