Strategy Note /

Russia-Ukraine War: Glimmer of hope amid scepticism, seismic changes to last

  • Dovish rhetoric from Russia and Ukraine after 3 weeks of war offers glimmer of hope but Russia's words lack credibility

  • Scepticism also due to huge variation in each side's interpretations of Ukraine's borders, 'neutrality' and government

  • Even if were to stop at this point, the seismic geopolitical and economic changes resulting from the war will persist

Russia-Ukraine War: Glimmer of hope amid scepticism, seismic changes to last
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
16 March 2022
Published byTellimer Research

Slightly more dovish public rhetoric from Russia and Ukraine and press reports on progress on a peace plan offer a glimmer of hope. In isolation, this a clear positive given the context of unrelenting violence, disparaging rhetoric and propaganda in the war, which is now three weeks old.

Markets are reacting accordingly: eg, at the time of writing, the Euro Stoxx 50 is up 3.3% (albeit the prior bounce in US and China indices is a contributing factor) and the oil price is back to US$99 (albeit the impact of Covid lockdowns in China is a significant factor).

However, the lack of credibility in Russia rhetoric (after all, it also said it had no intention to invade) and, more importantly, the huge variation in each side's possible interpretations of Ukraine's borders, 'neutrality' and government leadership give cause for much scepticism that negotiations will progress or that any ceasefire or peace will be lasting.

In any event, the die has already been cast in terms of the mainly negative changes for global geopolitical and economic risk resulting from the war.

Hope but scepticism

Ukrainian President Zelensky stated that Russia's "positions in the negotiations sound more realistic" and Russian spokesman Peskov stated a neutral Ukraine with its own armed forces "could be viewed as a certain kind of compromise".

But there are a number of risks to treating these comments positively:

  • The loss of credibility in Russia’s rhetoric — recent words from Russia have proved highly misleading (after all, it did say it had no intention of invading Ukraine).

  • The stability of any 'peace', let alone a ceasefire, is highly uncertain.

    • Borders. What does the sovereign border of Ukraine look like, eg does it include territory that Russia has claimed during the war (including areas around strategically valuable ports), does it only go up to Crimea and the Donbas region (and how far into the Donbas region), worse, does it only go as far as the River Dnieper, and does any new border constitute a permanent loss of territory?

    • 'Neutrality'. What does Ukraine neutrality look like? Neither membership of NATO (which President Zelensky appears to have accepted) nor the EU (which he has not), no military drills or foreign troops on Ukrainian soil (but what about foreign arms supply), a constitutional commitment to neutrality?

    • Security guarantees. Press reports suggest that the peace plan under negotiation may include guarantees for Ukraine security pledged by the US, the UK and Turkey. However, these guarantees may neither appear sufficiently distinct from the protection afforded by full NATO membership from a Russian perspective, nor carry sufficient weight, given the failure of similar guarantees provided in 1994 when Ukraine relinquished its nuclear arsenal, to be workable or credible.

    • Leadership. What does Ukraine's leadership look like? Is Zelensky still in power or does Russia insist he goes as part of its stated goal of "denazification" and a Russia-friendly government is installed (which presumably is totally unacceptable to most of the Ukrainian population)?

Lasting changes

Changes resulting from the war, even if it stops at this juncture, will persist.

  1. The destructive power of 'Western' sanctions has been demonstrated – ie the effective freeze on the war chest of foreign reserves built up by Russia in recent years over the course of a single weekend.

  2. But the nuclear nature of such sanctions has also been revealed because, in the long term, they persuade countries to locate their assets and conduct their payments in currencies outside the US dollar and euro.

  3. The removal of some of the neutral ground that many countries globally wish to occupy during conflicts involving major powers – as demonstrated by the abstention by 27% of countries, including India, from the UN resolution condemning Russia, and the resulting criticism they have received.

  4. Global non-coordination will continue, boding ill for future conflict management and combatting climate change.

  5. The EU will accelerate its transition to alternative sources of energy that wean it off its dependence on Russian gas, whether to other exporters (which likely requires years of LNG and pipeline-related investment) or to renewables (which likely requires government incentives and support).

  6. The EU, particularly Germany, will re-arm, with the US demonstrably less willing to intervene with its own military personnel and its cutting-edge military equipment. This will also force the EU to coordinate to a greater degree militarily, whether NATO publicly regains its unity of purpose or not.

  7. Globally, military spending will also increase, eating into the share of fiscal budgets left over in poorer emerging markets for upgrades needed to infrastructure, health care and education.

  8. The reminder of how difficult conventional, violent inter-state war can be (eg overwhelming military spending superiority is not enough to successfully occupy territory if others are willing to support the inferior power) and the ruinous financial consequences of attempting to do so likely dissuade China from accelerating its ambitions in Taiwan.

  9. The commodity spike, eg in oil and food, will add to the existing challenge of countries in the poorer parts of EM to return to economic normality post-Covid — for importers of these basic commodities, the risks of protests and challenges to incumbent governments have increased. The lag before any return of Russia and Ukraine commodities to global markets given both the disruption to physical supply routes, the sanctions that remain in place on Russia (what are the milestones for retraction of those sanctions?), and the disruption to seasonal planting in Ukraine's agricultural sector likely mean that high commodity prices will last for some time.

  10. The challenge for ethical investors and multinational corporates that wish to avoid badly behaved countries, in advance of being forced to do so by sanctions, is one that will weigh more heavily across the emerging and developed market institutional investment community.