Ukraine’s battlefield gains are good for markets

The war in Ukraine is no longer in the headlines and most analysts believe the fighting will persist until 2023, if not longer.

What if the war ended sooner? What if Ukrainian forces push back the Russian invaders and end the fighting? That would be a major surprise for financial markets – and it might not be as fanciful as it once seemed.

Ukrainian forces have gone on the offensive in at least two different locations, and they appear to be routing Russian units that are even weaker than six months of botched operations would suggest. Near Kharkiv in the northeast, Ukrainian troops recaptured perhaps two dozen villages from the Russians and advanced towards the main logistics centers of Kupyansk and Izium, which they may soon capture. This would disrupt Russian supply lines to other key parts of the front.

“Ukrainian successes … are creating fissures in the Russian information space and eroding confidence in the Russian command,” the Institute for the Study of War reported September 8. “The relatively rapid speed of advance of the Ukrainian forces and their ability to bombard [Kupyansk] create panic in the rear areas.

There is another offensive near Kherson in the southeast, where Russia has been gathering forces in anticipation of a move that Ukraine has been telegraphing for weeks. Russian resistance may be stronger there, but Ukraine may still have trapped several thousand Russian troops on the west side of a river they cannot retreat to, due to Ukrainian strikes on the bridges and ferries. Ukraine ultimately aims to retake Kherson, which is a regional capital and a crucial foothold for Russia in its efforts to control Ukraine’s access to the Black Sea.

Changing dynamics could have big implications

These advances do not mean that Russia will soon withdraw from Ukraine. Russia still has tens of thousands of soldiers entrenched in eastern Ukraine, and its bloodthirsty leader, Vladimir Putin, will not easily relinquish his ill-founded claim on his neighbour. The Russians can still rain artillery on Ukrainian cities and reach just about anywhere in the country with long-range missiles.

Ukrainian President Volodymyr Zelenskiy meets with U.S. Secretary of State Antony Blinken during his visit to Kyiv, Ukraine September 8, 2022. Genya Savilov/Pool via REUTERS

But the change in momentum, if it lasts, could have several important implications. The first is that it validates billions of dollars in military aid provided to Ukraine by the United States and other allies. President Biden and other world leaders who endorsed such aid had no idea, especially at the start of the war, whether it would make a difference or simply delay an inevitable Russian takeover of Ukraine. US intelligence initially believed Russia would take the country within weeks. The current situation, with Ukraine regaining ground and Russia on the run, indicates that Western aid has been decisive and entirely appropriate.

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This will help keep the aid pipeline open and possibly bring more effective weapons to Ukraine, if it can help beat the Russians for good. Ukraine still has a lot of needs: tanks, fighter planes, more artillery and more precision ammunition. The United States and other donors have been reluctant to send their best, deadliest equipment for fear that it might trigger some kind of grotesque retaliation from Putin, with nothing to show for it on the ground in Ukraine. But Ukraine’s outperformance on the ground speaks for a spotlight: Russia remains the West’s most worrisome adversary, and if Ukraine’s armed forces can tear apart its army, it makes sense to rip them apart. help and encourage them.

The broader implication is a possible end to the war itself, sooner and on better terms than might have seemed possible just a month or two ago. Again, it would be foolish to infer that some quick Ukrainian victories against exhausted Russian frontline units will continue to unfold as the Ukrainians sink deeper and encounter stronger defenses. But it is also true that many analysts did not believe that Ukraine could even achieve what it is doing today: crushing Russian units despite their own shortcomings in training, – of work and armament.

The objectives of economic sanctions

The multinational sanctions regime against Russia serves two purposes: first, to punish Russia for its medieval behavior. Second, help Ukraine win by depriving Russia of the funds and technology it needs to continue the war. But the most effective way to achieve this second goal, to help Ukraine win, is military aid, and the more the better. If Ukraine defeats Russia militarily, the need for sanctions diminishes.

Russian President Vladimir Putin attends the Eastern Economic Forum (EEF) 2022 plenary session in Vladivostok, Russia September 7, 2022. Sputnik/Sergey Bobylev/Pool via REUTERS ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY.

Russian President Vladimir Putin attends the Eastern Economic Forum (EEF) 2022 plenary session in Vladivostok, Russia September 7, 2022. Sputnik/Sergey Bobylev/Pool via REUTERS ATTENTION EDITORS – THIS IMAGE WAS PROVIDED BY A THIRD PARTY.

Some sanctions are relatively easy to impose, as they cause little or no collateral damage and do not generate political opposition in the country. Limits on technology sales to Russia, for example, have no effect on technology buyers in the United States or Europe. The toughest sanctions are those that trigger Russian retaliation or require sacrifices in the countries imposing the sanctions, which, as we learned this year, primarily involve energy.

It’s easy for the US to ban Russian energy imports, as Biden did earlier this year, because we have plenty of domestic energy and easy access to global markets. But it is much more difficult for Europe, due to its heavy dependence on Russian oil and natural gas. Europe is on the brink of an energy disaster, as Russia has shut down its main gas pipeline to Europe and could completely halt gas sales over the winter. A plan for Europe to boycott Russian oil comes into effect on December 5 and could cause petrol and diesel prices to spike again. Putin is deliberately causing as much pain as possible in Europe, and it’s upsetting energy markets around the world. It is possible that the exorbitant energy prices in Europe this winter will cause a wave of bankruptcies and a sort of contagion from the energy sector to the banking and other sectors.

The sooner Russia loses, the sooner global energy markets can return to normal. If Russia pulled out tomorrow, some sanctions would remain in place, possibly for a long time. A major question at the end of this war, assuming Ukraine wins, is how Russia will pay reparations, which could total hundreds of billions of dollars, for all the destruction it has caused. The sanctions will likely be a way to divert energy revenues or other sources of cash from Russia’s coffers to Ukraine’s.

But the United States and Europe could quietly end sanctions that impose costs at home. Europe should reduce its dependence on Russian energy no matter what, and almost certainly will. But a return to some European purchases of Russian energy would lower record prices and calm global markets. Ending the war could also obviate the need for a complicated US plan to impose price caps on Russian oil, to reduce the energy revenues that Putin uses to fund his war. This plan could be the best way to keep oil markets supplied while limiting revenues flowing to Russia. Of course, Russia will undoubtedly resist and enforcement could be a nightmare.

The Russian-Ukrainian war may be far from over. But this could be the beginning of the end for Russia. The sooner this ends on the battlefields, the sooner the stress will lessen for just about everyone, including most Russians. Ukraine’s victory, whatever it is, will be the victory of all others who bear the price of Russia’s hostility.

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