Ukraine – how will it finish? How badly will Russia lose?

Nearly a year on Ukraine is unbeaten. How will it end, and how will markets react? Putin is upping the stakes, hoping he can bluff and threaten his way to a result. It’s not about Ukraine surviving, but what happens if Putin loses badly and Russia collapses as a failed state. Sanctions don’t work – what else can the West do?

Blain’s Morning Porridge Feb 23rd: Ukraine – how will it finish? How badly will Russia lose?

“Total War and Total Economics – no one can hide, we are all in it.”

This morning: Nearly a year on Ukraine is unbeaten. How will it end, and how will markets react? Putin is upping the stakes, hoping he can bluff and threaten his way to a result. It’s not about Ukraine surviving, but what happens if Putin loses badly and Russia collapses as a failed state. Sanctions don’t work – what else can the West do?

Everyone knows not to fight Central Banks, but how many times do Central Banks have to say interest rates are going higher before markets listen? The answer to that, and all the other great questions of the day will be delayed till early March. I am taking a holiday next week and will be hitting the slopes of La Thuille in Italy – so organise your own healthy market breakfast.

While I’m out try not to break anything…

Markets continue to argue about inflation, why rates have to rise, why they’d like them to fall, energy prices and what the next supply-chain/strategic good disaster will be (clue: probably not semi-conductors, because that is what everyone is worrying about). It’s maybe worth reflecting on the market perspective to the root cause of much of the current market instability – Ukraine.

Слава Україні! Героям слава!  [Glory to Ukraine!  Glory to the heroes!]

Tomorrow is the first anniversary of Putin’s War. Like everyone else I got it badly wrong expect a roll-over. (See my comment: Blain’s Morning Porridge, 23 Feb 2022: All Eyes are on Ukraine, but perhaps the market should look elsewhere – to Turkey? I must have got the date wrong that day.)

At the human level Ukraine is an absolute tragedy. (I’m not interested in debating the War with Russian troll-bots, apologists, or the treasonous shills devoid of morality who believe Putin’s invasion of an independent, democratic nation justifies the death and destruction he’s caused. What has been done to Ukraine makes my blood boil in fury.) The rights, wrongs, the inevitable restitution of Ukraine and the uncertain fate that undoubtedly awaits Russia as a pariah state, are all topics for another day.

For markets the issue is now one of timing: when will Ukraine become a resolved uncertainty. It will happen and markets will down-weight the Ukraine consequential effects. (Although, it has changed geopolitics forever.) We will see a bounce back and put the direct instability behind us. As gas prices tumble, and inflation expectations are downscaled, it feels like the moment to start discounting Ukraine risks is approaching.

But, in war, the enemy also has a vote. Thus far, Ukraine has trumped Putin on every hand. Maybe Russia will still surprise us – but I doubt it.

Putin’s strategy has been all about bluff and bluster.

His war plan was founded on his premise Energy Insecurity would force European nations, dependent on Russian Oil and Gas, to look-the-other-way as his tanks rumbled down the road to Kyiv. Didn’t happen. He never planned for the rising degree of Western military aid. A relatively warm winter, and plenty of gas in storage, means European gas prices are well below the frightening levels governments feared would cripple the Western Economy. Of course, he also massively underestimated the resilience and strength of the Ukrainians.

Now Putin’s strategy is the long-game – hoping to chip away support as his recent speeches and rallies in Moscow aim to convince Europe it will become an endless war and drag on Europe. He hopes voters will lose interest in supporting Ukraine’s resistance as recession, immigration fake-news, and propaganda bite. His policy is supported by the armies of Russian bots and shills…

He will lose that battle as well. Putin underestimates the people of Europe – after watching Ukraine suffer for a year, does Putin think we turn our backs on them now? And, Europe’s expectations of a deep recession are now much milder – even a mild economic recovery.

Putin’s second front is to convince the West that Russia is experiencing an economic boom because of the war – again to chip away support for Ukraine. Look how many nations have declared themselves Neutral and are now buying Russian oil. Russia claims it shows the resentment against the West.

The reality is Russia is scrabbling to export oil, gas and coal to anyone willing to pay the deeply discounted price – and to whom it can deliver. If the West wants to cripple Russia back into the stone age it could be done without bombs in a relatively bloodless manner. Sanctions only work to a limited extent. I’ll come back to that below.

The third front is the threat of escalation. Keep dropping the N word into the conversation. Keep the West scared he’ll drop nuclear bombs on Kyiv. Mad dogs are dangerous when cornered – but it’s a tough hand to gamble that Putin won’t.

The Munich Security Conference over last weekend was fascinating. I got an inside briefing yesterday. The Russia shills will argue it’s all propaganda – but the reality is an insight to what the West and its intelligence services really think about the Ukraine War. Over 100 nations participated.

Perversely, one of the fears at Munich is the high risk of Russia losing the war decisively and becoming a deeply unstable failed state – not a good thing when it’s a nuclear power. It’s a lesson the Americans were taught (but seemingly failed to learn), in Iraq and Afghanistan. China will be watching very carefully, perhaps planning an “intervention” to ensure stability in the East of Russia (where all the resources are) if there was a break-down. Something worse than Putin could follow him.

Were Russia to lose Crimea, then the consensus is a palace coup or worse will see Putin ousted – leading to the scenario above. (Ukraine’s success in Crimea would require a level up of Western arms; aircraft, more advanced rocket systems, and more ammunition.)

The consensus at the conference was clear. Despite Russia’s call up of reservists, the Red Army in the is struggling to field men and material in the field. The meatgrinder battle for the town of Bakhmut is costing both sides dear, but is attriting the Russian reserves at a sickening rate – over 200 dead per day. Its sucking in all the forces and logistics Russia will require for a meaningful Spring Offensive. Even the mighty Wagner mercs are complaining they are being abused as cannon fodder and not getting properly supplied.

Meanwhile, Ukraine holds firm – at a terrible cost. Its troops are being trained in the West on how to use NATO tanks and new artillery – building up strength for its own offensives. That may be for show – aside from propaganda it’s hard to see what difference a single battalion of Leopard 2s and a handful of Challengers (and their appalling battlefield reliability) will really make, but it will worry the Russian generals. It takes time to train tankers, and even longer to train pilots of the F-16s the Ukrainians are asking for.

The debate in the West has switched to arming Ukraine for short-term gains. Presently they have the deadly accurate HIMARS short-range missile system. Soon they could get ATACMS (Long Range to threaten the whole Donbas and Crimea). But war stocks are scarce across NATO, and have already been severely depleted by weapons sent to Ukraine.

While Russia bombs hospitals and schools across Ukraine, there have so far only been targeted strikes at Russian installations in occupied territories. What if NATO was to widen the economic war? Sanctions are slow and are avoidable. Stifling Russian trade would have consequences, but one way to start would be by clamping down on the rogue fleets of Russian Oil Tankers, transhipping Russian oil illegally into Europe.

Closing the sea lanes to Russian shipping is another economic threat – effectively a blockade or embargo. Navigation on the high seas should be free and unimpeded. Any threat to Russian trade could be seen as escalation – not just by Russia, but by China increasingly dependent on Russian energy.

Commodity trader Trafigura reckon Russian interests have assembled a fleet of over 400 oil tankers and 200 bulk carriers. Since the war started there has been a boom trading older haulers, up to 12% of the global fleet. It’s all been purchased by new owners protecting their real domicile in secrecy. The ultimate owners are most likely to be Russian.

These ships are expensive to operate, and have to sail further to deliver cargos to South East Asia – where the buyers are. Russia’s tanker purchases have pushed up freight rates for bona fide trade. Last year it cost $10k per day for a tanker across the Atlantic. Today its $55k for refined product and $100k per day for crude carriers.

NATO could get even more direct on the Russian economy. While the Nord2 pipelines were state of the art, the rest of Russia’s oil and gas infrastructure is antique and in a terrible state of repair as years of corruption has syphoned off maintenance monies. Exporting oil to China is not a simple matter of flicking a switch to redirect flows from West to East. An oil executive tells me in the absence of decent maps and blocked GPS, Western Oil firms’ Helicopters in Russia navigate their way cross-country by following the trail of leaking oil puddles from rusting pipelines. Closing them off would not seem beyond the abilities of western espionage – or maybe they just break by themselves?

Just thinking out loud….

Five Things To Worry About Today

BBerg              Bird Flu Kills 11-year Old Girl in Cambodia, Officals Say

BBerg              The Economic War Against Putin Has Only Just Begun

FT                    How Putin blundered into Ukraine – then doubled down

FT                    US Stocks fluctuate as investors assess rate rise talk in Fed Minutes

WSJ                 US Considers Release of Intelligence on China’s Potential Arms Transfer to Russia

Out of time and back to the day job

Bill Blain

Strategist – Shard Capital


  1. Putting aside for one moment the horror of war and all of the patriotic tub thumping. Do we not need to consider the motivations of the main protaganists when trying to work out what will happen?

    To whit:

    1. Putin has consistently said he doesn’t want NATO on his doostep and specifically not in Ukraine.
    2. The US has been pushing to get NATO into Ukraine for at least two decades.

    Call me a Russian shill by all means, but it doesn’t take a genius to realise that Putin’s red line was crossed well before February 2022. But if people in Munich fear that he / Russia might collapse and become “worse” then they need to give him a way out on that red line.

    Which brings us to the US. Why have they been pushing for NATO into Ukraine for so long?

    And even if we can’t answer that, what is going to make them change their mind?

    The US Military Industrial Complex is making a tonne of money out of this war; trebles all round. The US population is not suffering that much compared to the Europeans, mostly because the US is energy independent.

    So what is the US incentive to change course? That is what I would like answered.

    Because without a way out (i.e. a solution to his red line) Putin won’t be changing his in my humble opinion. So the people in Munich you met should perhaps quite rightly be careful of what they wish for?

    I believe it was Seneca who said “Be wary of the man who urges an action in which he himself incurs no risk.”

  2. Being of Slavic descent I am continually amazed at the ability of my peoples to inflict and endure pain. I thank God that my grandparents on both sides decamped Austria-Hungary just before the demise of the Hapsburgs.

    On a more pleasant note enjoy your holiday. No doubt something monumental will transpire in the markets whist you are on the slopes.

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