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Afghanistan in Europe: Why investors should be cautious of the peace rallies

  • Russia will decide when the war ends – there are obstacles to a peace agreement and the West has blown up the exit paths

  • This means that, despite news of peace talks and possible concessions, a durable near-term peace agreement is unlikely

  • Instead, a long conflict is likely, combining fighting across a line of control with a protracted insurgency

Afghanistan in Europe: Why investors should be cautious of the peace rallies
Paul Domjan
Paul Domjan

Senior Contributing Analyst

Tellimer Research
2 April 2022
Published byTellimer Research

This is the final instalment of a series of reports about the war in Ukraine. The first looked at the conflict’s geopolitical implications, the second at energy security, the third at sanctions (and football) and the fourth at the impact on the arms trade. This final report assesses the long-term repercussions and possible outcomes of the war. 

I’ve spent much of my life working in and on the discipline of scenario planning, from my early career in the scenario planning team at Shell and the US European Command to my more recent work with governments, militaries and corporations. In embarking on scenario exercises, people often focus on the excitement of the future possibilities, and the critical uncertainties that will cause the scenarios to diverge. While these are surely important, the most valuable consequence of scenario thinking is often actually clarity about the drivers: what are the underlying forces that will shape the future across all possible scenarios? 

In looking at discussions about the war in Ukraine, I worry that commentators are making this mistake, focusing too much on the possible future events: Will there be a peace treaty? Could Putin be deposed in coup? Would Russia attack NATO? Will Ukraine suffer a shortage of materiel or soldiers? These questions are undoubtedly important, but they risk distracting from the underlying drivers that will shape the future. 

The war is Russia’s to end

The poor performance of the Russian army in the early days of the war led to schadenfreude across the Western world. After years of menacing its neighbours, Ukraine’s battle-hardened military leadership, unexpectedly Churchillian president and patriotic reservists were successfully beating Russia back. The jubilation at seeing Russia put in its place is understandable and reflects the West’s fetishisation of Russian military strength and supposed superior strategic ability of a chess-playing nation as much as it reflects Ukraine’s heroism. Russia continues to operate under a fundamentally flawed Soviet doctrine, and Putin’s centralisation of power has surely undermined the quality of military decision making, just as it has undermined the quality of political decision making. 

Russia made three miscalculations early in the war:

  1. It underestimated how much Ukraine’s military capability had improved since its 2014 invasion of Crimea;

  2. It overestimated its own military capability; and

  3. It underestimated the strength and cohesion of the West’s response to the invasion. 

Lack of materiel, difficulty replenishing its ranks, or the death of key leaders could degrade Ukraine’s capability. Russia could learn from its early mistakes, and perhaps provide local commanders with greater leeway to implement these lessons. Economic hardship without a clear path to end the war is already beginning to impact Western cohesion. A change in any of these factors in the coming months could precipitate a Russian victory, although, for reasons I will explore shortly, such a victory would likely be as pyrrhic as Bush’s 2003 declaration that the US’s mission in Iraq had been accomplished. 

Furthermore, as long as NATO continues to abide by its red lines to avoid direct conflict and the supply of offensive weapons, Ukraine’s military capability will be essentially constrained. NATO will not enforce a no-fly zone over Ukraine, nor will it supply Ukraine with the planes to enable it to do so itself. While a modern missile defence system would be transformative for Ukraine – and surely a missile defence system is a defensive weapon – it appears improbable that NATO countries will supply one, for both political and practical reasons. Instead, NATO countries will provide Ukraine with the armaments of resistance and insurgency – man-portable anti-aircraft missiles, anti-tank weapons, drones, small arms and, crucially, battlefield intelligence – but not the armaments of conquest – aircraft, tanks and heavy weaponry. 

This means that the war in Ukraine is likely to take the shape of many past occupations and insurgencies. Ukrainian forces will hold off Russia for as long as possible and then continue a guerrilla war that will inflict high and sustained casualties on the Russian army. However, as with virtually all such conflicts, from the Bar Kokhba rebellion to the US withdrawal from Afghanistan, the conflict can end in one of two ways: a decisive victory by the occupier or an eventual decision by the occupier to withdraw, unwilling to continue to expend blood and treasure sustaining the conflict. 

Even if Ukrainian forces were able to push Russian forces back to the Russian border, Ukraine lacks the capability, desire or political support to push into Russia in order to inflict a decisive defeat on Russia and dictate terms peace terms, as Winfield Scott did to Mexico. Instead, even in the best scenario, any Ukrainian advance will stop at Ukraine’s 2,000-kilometre border with Russia. Even if Ukraine regains full control of its territory, Russia will have a free hand to continue to bombard and infiltrate Ukraine across the border, or indeed across a line of control should such a de facto border emerge between Russian- and Ukrainian-controlled areas. Even following a Ukrainian victory, the war is still Russia’s to end. 

Peace is much further away than it seems, would likely mean Ukraine’s partition and would fundamentally undermine the possibility of a future EU defence framework 

There has been a great deal of breathless enthusiasm for peace talks over recent weeks, but the fundamental nature of the conflict makes a successful peace agreement extremely unlikely in the foreseeable future. Most importantly, this conflict is fundamentally about Ukraine’s right to exist as a sovereign nation within its borders. Early indications are that Ukraine will accept some limits on its sovereignty, for example committing to remain militarily neutral and repealing the commitment to NATO membership in Ukraine’s constitution. However, there is no clear route to resolution of where those borders are. Some have suggested that the issue of Ukraine’s breakaway regions could be “compartmentalised”, but I do not see how Ukraine could enter into a peace treaty that leaves its boarder undefined, nor how such a treaty could be implemented if it is not clear from what territory the Russian army is committing to withdraw. Similarly, Ukraine has insisted that any peace treaty respects its internationally recognised borders, but it is hard to imagine Russia relinquishing Crimea, which was only transferred within the Soviet Union from the Russian Soviet Federative Socialist Republic to the Ukrainian Soviet Socialist Republic in 1954.[1] Neutrality could support a ceasefire, but I do not see how neutrality alone would be sufficient for a peace treaty. 

Ukraine has asked that any peace treaty be supported by “legally binding” security guarantees to accompany its neutral status. However, Ukraine has twice previously received security guarantees. The 1994 Budapest Memorandum saw the country relinquish its nuclear weapons in return for security guarantees. The 2015 Minsk agreement that ended Russia’s last war with Ukraine did not include explicit security guarantees, but it did require the withdrawal of Russian forces from Ukraine and breakaway regions, which never took place. Furthermore, any legally binding security guarantee would require the US to commit to respond militarily to a future invasion: a red line that the US will not cross

A peace treaty based on neutrality will also nail shut the coffin or any future role of the EU in defence. Such a peace treaty would probably see Ukraine fast-tracked for EU membership at the same time as it abandons any aspiration for NATO membership. Such a compromise is only credible if the EU accepts that it will never play a role in defence to rival that of NATO. NATO itself will be left at an awkward crossroads if the US progressively withdraws from European engagement after the early stages of the war have played out. 

Given these complications, it is understandable that President Zelensky has insisted that any peace treaty be confirmed in a referendum. This opens the door for the partition of Ukraine, whether de facto or legal, if Russian-controlled regions accept the peace treaty, but the rest of the country does not. Such a partition would likely create a line of control, as discussed above, across which the war would continue until Russia chooses to end hostilities. 

Ukraine has heroically blown up its bridges, but the West has foolishly blown up the off-ramps 

US diplomats frequently describe conflict as like a motorway with diplomatic “off-ramps” that can facilitate a peace agreement. However, in the Ukraine conflict, rapid escalation of sanctions and rhetoric against Russia appears to have blown up many of those exit paths. First, Biden and others have branded Putin a war criminal and have begun discussing how best to establish a war crimes tribunal. Biden has asserted that Putin “cannot remain in power”, although the White House has, rather implausibly, clarified that the US is not calling for regime change. While the Minsk agreement provided for “pardon and amnesty” for those involved in the conflict in Donetsk and Luhansk, this war is now too morally charged for such a resolution. 

Second, while sanctions may strengthen Putin’s control of the Russian economy, punishing oligarchs by seizing their assets, although morally satisfying and economically crippling, may actually backfire politically. Just as US rhetoric appears focused on regime change, the sanctions programme also appears to be focused on regime change. The contrast with sanctions against Iran is notable. Iranian assets and transactions were frozen, but not seized, subject specifically to Iran verifiably ending its nuclear weapons programme, but not ending its other weapons programmes, ceasing its mischief in the Middle East, or improving its human rights records. Moreover, while I very much doubt that Putin cares if Alisher Usmanov is forced to sell his London home or Roman Abramovich loses his football team – indeed, the oligarchs are a legacy of the Yeltsin era who depend on Putin far more than he depends on them – Usmanov and Abramovich surely do care. 

I think that a coup against Putin is extremely unlikely. Russia is a large country, making it difficult for plotters to effectively seize control, and Putin’s KGB background leaves him extremely well equipped to prevent a coup. Nevertheless, were one to occur, the West must hope that the oligarchs would support the plotters, and a clear route to regaining their property would be a strong incentive for them to do so. 

Finally, ambiguity over Western red lines actually increases the incentive for Putin to test those red lines. Early in the conflict, Biden made it clear that it would not take any action that would see US and Russian forces “shooting at one another”. More recently, however, he has both indicated that the US expects Russia to use chemical weapons and that this would be a red line that would force the US to respond in kind. In Syria, Obama drew the same red line against chemical weapons, but then failed to retaliate even though doing so would not have risked World War III, which Biden believes intervention in Ukraine would risk. Even if Putin wishes to begin serious peace talks, I would not be surprised if this ambiguity gives him an incentive to first use chemical weapons in Ukraine, even if only to demonstrate US impotence and its unwillingness to follow through on its promises to defend Europe. 

Afghanistan in Europe 

These three drivers define the possible outcomes of the war: 

  1. Russia’s ability to choose when the war is finished;

  2. The obstacles to and downsides of a near-term peace agreement; and

  3. The lack of obvious diplomatic off-ramps. 

We can think about these drivers as defining a cone of probability within which the actual future will sit. Russia could continue to fight until Ukraine’s cities are rubble and the Russian army occupies most or all of Ukraine. It might use chemical weapons in the process. Either way, Russian conventional military success would likely lead to a protracted Ukrainian insurgency to overthrow Russian rule. 

It seems more likely that a line of control will emerge. This could happen in any number of ways. The two armies could eventually fight to a standstill, creating an effective line of control across which they exchange fire and occasional sorties. Or Russia might pull pack its forces to define a line of control while limiting its losses. A Kremlin coup could lead Russia to withdraw, or Putin might choose to do so as the costs of the war escalate. Once a line of control is established, it might be legitimised through a referendum on a peace agreement that would effectively function as a plebiscite on regional autonomy. 

Whether the Russian army controls all of Ukraine or a line of control emerges, one thing appears inevitable: the conflict will not be resolved swiftly. It will either smoulder on as a long-term insurgency or through fighting back and forth across a line of control. Ukraine may be partitioned, but it is unlikely that both sides would accept the new border. 

On the first day of the war, I had lunch with an ex-special forces friend who is a bit older than me, and he said, “My generation fought in Northern Ireland and the former Yugoslavia. Yours fought in Iraq and Afghanistan. Our children will be training and equipping Ukrainian partisans”. Nothing that has unfolded over the past month has led me to believe that he isn’t still right.

Investment implications: Don’t buy the peace rallies

Given this outlook, investors should be very cautious about market rallies following news about peace talks. There will be plenty of false dawns as the world valiantly seeks to end this war. When you see discussion of peace talks, ask yourself whether they will be able to change the three drivers discussed above. Unless they do, treat any rally that follows with caution, as it is likely to be short-lived.

[1] Neither Russia nor Ukraine can claim a historic right to Crimea, whose native population, the Crimean Tatars, were expelled by Stalin and Beria.