Ukraine: a new narrative as Europe unravels?

May markets are finishing on a dead-cat bounce - things could get more unstable through June. The outcomes in Ukraine are looking less favourable, and Europe will struggle with sanctions. The weakest link is unsurprisingly Italy. A bigger crisis in terms of famine will shortly become apparent in North Africa.  

Blain’s Morning Porridge, May 30 2022 – Ukraine: a new narrative as Europe unravels?

“When Italy tells you it is irrevocably committed to the relationship, it’s time to hire divorce lawyers..”

This morning: May markets are finishing on a dead-cat bounce – things could get more unstable through June. The outcomes in Ukraine are looking less favourable, and Europe will struggle with sanctions. The weakest link is unsurprisingly Italy. A bigger crisis in terms of famine will shortly become apparent in North Africa.  

There is a famous song that suggests “things can only better”. What if they don’t?

Europe failed to agree new sanctions on Russia over the weekend. Talks will continue this week, but Hungary is stalling about quitting Russian oil. Sanctions are one of the aspects of its’ non-statehood the EU needs unanimity upon.

The US is closed today. Stocks bounced back last week, but it had the whiff of a deceased feline. I suspect May 2022 will still go down as the month the Market Bubble popped. It’s easy to blame Central Banks for not acting earlier to hike rates to combat inflation. Hah. Their attempts to paint inflation as transitory now look laughable – but the reality is there is little central banks could have done earlier to combat galloping inflation pressures and inflationary shocks from sweeping across the economy.

All they can do now is go with the flow and try to moderate the effects of the inflation tsunami: higher raw material and commodity prices, higher transport costs, higher energy costs, higher producer prices and, coming soon, rising social unrest and strikes as pay demands heat up. Worse is yet to come. Next month the UK will be effectively closed as the rail workers strike. Germany and France are both heading towards industrial relations crisis as the unions demand large wage hikes which could further crush their already lethargic economies.

Policy is in disarray. In Germany, the government has given into demands for a massive hike in minimum wages. In the UK, Rishi Sunak is belatedly learning that popular chancellors garner popularity from giving away money. Trying to take it back… less so. He looks like he’s been bounced into the Windfall tax and consumer energy handouts – with the Labour Party looking likely to get much of the credit.

Inflation, recession and negative growth are all on the cards. In such a situation its hardly surprising the temptation to try to lessen the economic damage being done across Europe by soaring energy prices on the back of Russian sanctions is rising. The edifice of a solid and united Europe standing firm behind the plucky Ukrainians is only a couple of microns deep. There is a very real chance it will crack in the coming weeks.

June could be the month it happens and becomes apparent, potentially making a bad situation dramatically worse.

The news out of Ukraine is not good.

Russia has a history of starting wars badly. The parallel everyone cites is the Winter War against Finland in 1940. They lost thousands of men unprepared for winter or the Finns, were forced to retreat before effectively starting again and forcing Helsinki to concede. There is no doubt the Russians have taken a pasting in Ukraine as a result of flawed intelligence, the corruption of the FSB (where the team charged with a $2 bln hearts and minds campaign simply trousered the money themselves), and a lack of logistics planning.

Umpteen generals later, and they are learning the hard way. They are now focused. The recent advances in the Donbas are still plodding, costly, slow and utterly destructive, but they are being described as solid by the military commentators who know these things.

The Ukrainians are exhausted after 3 months of intense conflict. Trying to keep the economy going, and harvest crops is a significant call on manpower. They are desperately short of basic war stocks. Much of the aid promised by the west has been delivered, but troops then need to be trained to use it when they are needed on the front lines. And, many weapons promised to Kyiv have simply not arrived or are so old and worn out as to be unusable. Ukraine needs more modern weapons now to simply to hold the line – but the West remains frightened of escalation.

The pendulum is swinging to Moscow. After their initial surprise, befuddlement and lack of a war-plan, the Russians now see a way to win.

If they can keep Ukrainian defending forces pinned in place on the Donbas lines, then there is the possibility of encircling them to win a massive propaganda victory. The alternative is for Ukraine is to retreat – giving up the ground they’ve held at such high cost since 2014 – which again would be a massive propaganda coup for Moscow.

The Russians don’t care whether Ukraine retreats or suffers a battlefield defeat. It’s all about the optics and the narrative. If they can score a propaganda win, it will reinforce calls from Europe’s weak links for an immediate ceasefire and negotiated peace.

Italy is the weak link. But, also watch Greece and Hungary.

Since Putin jailed the FSB’s leadership for their light-fingered approach to Ukraine, their successors have been spending Russian’s black propaganda money more carefully, targeting Italian politicians and looking for delivery on the “special relationship” they’ve been paying for decades. Berlusconi has failed to directly criticise his good old buddy Putin, and even said in Naples: “Europe should try to persuade Ukraine to accept Putin’s demands”, before backtracking the statement. Matteo Salvini’s League has condemned the Russian invasion, but Salvini himself has not named Putin in any of his bland statements.

Italian media has proved unwilling to challenge or counter many of the outrageous statements peddled by Moscow about their “special military operation” – appearing to give Putin’s mouthpiece Sergeio Lavrov as much credence as statements out of Kyiv. It reflects the ownership of the media, its closeness to political interests and the fact much of the Italian establishment finds itself kompromated.

Italy’s Confindustria business group is forcasting a 2% hit to Italian GDP in the back of slowing gas imports from Russia. 40% of Italy’s gas comes from Russia. Attempts to negotiate new supply and sources will take years to deliver. How easy it would be to turn the gas taps on.

The US and UK will be watching carefully – explaining the rising number of stories in Italy about US spies active against Italian interests. If Italy cracks, then what’s to stop the German’s following them, taking to opportunity to relight its industrial pre-eminence with Russian Gas?

Whatever the stories and the narrative being spread about Putin being ill, or of regime change in Moscow, it all hear-say, and unlikely according to the spooks. That leaves the possibility of a less than committed Europe and the Russian narrative to the rest of the World (which is largely unbothered about Russia’s invasion of a European neighbour) that it’s fighting a defensive action against the bellicose Anglo-Saxons being strengthened.

However, although the current ructions in Europe are all about Energy, that is likely to be overwhelmed in June as the North African food crisis becomes very real. Without Russian and Ukraine food exports, famine is pretty much nailed on, triggering political upheaval, and critically for Europe (Greece, Hungary and Italy) a renewed refugee crisis.

In short, June is looking… troubling.

Five Things to Read This Morning

BBerg – EU Yet to break stalemate on Russian Oil Embargo

Guardian – Negative views of Russia limited to western liberal democracies, poll shows

FT – The Bank of Viktor Orban

Torygraph – Sunak to forge ahead with “NFT for Britain” despite plunge in markets.. (Oh dear…)

WSJ – How to weather this stock market storm

Out of time, and back to the day job..

Bill Blain

Strategist – Shard Capital


  1. “The news out of Ukraine is not good.”
    1 week in and Russia had won this thing. Ukraine had no Navy, no air force, no air defence and no mobility.
    The armed forces were all lined up in Mariupol and outside the Donbas (ready for the invasion of Donbas planned for some years – the US prediction was of a False flag Russian invasion to trigger, but a real one was the surprise – hence no Ukrainian force on North or south border).

    It has been slow but one way traffic as Media talk non-stop about Russians killing civilians and Russia act slowly since they consider the civilians as their allies.

    Anyone who has been telling you (and I know that means almost everyone) that Ukraine had a chance in this thing without direct Nato intervention (and the risk of nuclear war) has been either stupid or deliberately dishonest (the media being in the latter group).

    The standard rule of divide by 2 or 3 the success claims of you own side was true for Kiev back in 2014 and 2014 when loudly heralded advances took them straight into cauldrons and the reversals were so great that the world believed Russia intervened directly although there is still no photographic evidence of a Russian presence.

    This time round Ukrainian success claims should be divided by a factor of 20-30.

  2. And American heavy weapons have arrived – and are being used to shell more civilians more effectively in Donbas. Seems Lavrov and the Italians read it right.

  3. Well said Mr. Blain. Russia always starts slow. But I might point out, NO ONE has fought a land war against a peer opponent since World War 2. But now Russia is doing what Russia does. Win land wars in adjacent territories. On another note, speaking of Germany. The EU is not a happy little family. France and Italy would love to see Germany deindustrialize. They are the only ones that make quality products in the EU. Hence, the German dominance in trade. So, the oil sanctions. France has nuclear power and can bake baguettes. Oil sanctions would cripple Germany, however. Which is what France, Italy, and the US want. There are Russian eggs in Russian eggs in Russian eggs in this story. And there are no “good” guys.

  4. I suspect you are right about June, Bill. Probably understated. For an American perspective, I suspect Europe and GB are getting bad intelligence from the US media. Briefly, while Biden disgraced himself with the withdrawal from Afghanistan (he was right to leave, but not so ham-fistedly), he now is in full compensation mode, but still a moron. And the media is all “Rah, Rah! Ukraine, Go Biden Go”, fighting in his corner, making every effort to raise his historical tanking numbers. And of course the rest of Europe is going along with America’s new great president like a bunch of drunken flunkies. “Hello”, this man is an idiot! But the silent majority in America is starting to pay attention to the people who are saying that there isn’t a nickels difference between Ukraine and Russia. A pox on both their houses. If we survive until the mid-term elections, this war will be over for America. You can bank on that.

    When Trump began to run for president, I had great hopes that we could work something out with Russia. Both sides were making noise to that effect. Something long overdue. American simply doesn’t share the feud with Russia that the Brits do, going back to the Great Game when the British Admiralty decided that oil was better than coal for her ships and decided to poke around in Russia’s backyard. Of course, we all know now that the Russia-gate accusations were a political hoax and scandal and the Democrats who are immoral and ammonal when it comes to getting elected, opened Pandora’s box with their little dirty trick. The damage from their idiocy has just begun to play out.

    Add to that the fact that the newly forming Eurasian Economic Union will almost certainly force Europe completely into the Anglosphere after Ukraine. Like it or not. And the prospect of the new eastern alliance being comprised of nuclear armed Christians, Jews, Muslims, Hindus and Buddhists . . . and Communists, all speaking different languages with wobblily borders, should strike horror in the hearts of every European. Stocks and Bonds could be the least of Europe’s worries.

  5. The wheat supply out of Ukraine/Russia seems to be stable to growing, so look elsewhere for the causes of the price increases and shortages.
    🇷🇺⚡The Times: Russia takes control of the global wheat market.
    According to the British publication, Russia’s goal to increase agricultural exports by 50% by 2024 is quite achievable. An important factor in the growth of Russian exports is wheat, the world export of which Moscow has already taken under control.
    In April alone, Russian grain exports increased by 18%. Significantly increased world grain prices have allowed the Russian budget to receive $1.9 billion in tax revenues on grain exports since the beginning of the year.
    In addition, the publication notes that the export of wheat from Russia covers the deficit formed in the world grain market, including a drop in supplies from Ukraine by 32%.

  6. Who, in their right mind, would voluntarily cut themselves off from energy and other resources that they crucially need to uphold the right of Ukraine to threaten Russia and to continue shelling civilians in the Dombass area? Why didn’t Ukraine chose neutrality and a semi-autonomous Dombass area within Ukraine instead of the destruction and permanent loss of soveign territory we see now? Nuts.

    Sooner or later individual member states of the EU will start to break ranks and Ukraine will be left high and dry by the US, a broken Nation.

    • Elegantly put.
      Europe has become irrevocably detached from Russia/China trading block – which explains the why “Ukraine” didn’t chose neutrality.
      So the breaking ranks will come from the other three quarters of the world, where India, Brazil and even Saudi are pondering whether it is safer to be a US enemy than its friend.

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