by Greg Valliere, AGF Management Ltd.
Insights and Market Perspectives
THERE ARE MANY REASONS why Putin’s invasion will fail, but in a word, it’s about morale — rock bottom among Russian conscripts. Ukrainian soldiers are willing to die for their country; Russian conscripts, who were deceived about the war, are not willing to die for Putin.
UKRAINIANS MAY LOSE THE MARIUPOL STEEL MILL, but the brave holdouts will be Ukrainian martyrs for ever. Ukraine will inflict huge losses on Russian troops, which have suffered several thousands of dead and wounded, with seven or eight generals among the fatalities, as its flagship naval vessel rests at the bottom of the Black Sea.
IT HAS TAKEN WEEKS TO CRUSH MARIUPOL, and the pace will be equally glacial as Russians move inland. Huge new Western arms deliveries could effectively halt the Russians before they get close to the Dnipro river and western Ukraine. Occasional missile attacks on Kyiv are likely, just to keep the populace nervous, but country’s capital will not fall.
THIS RAISES THE SECOND MORALE PROBLEM for Russia: a growing realization among its people that this is not a “Limited Military Operation.” Morale has plunged as Russian funerals increase, and the impact of sanctions are starting to bite.
BLOOMBERG REPORTS THIS MORNING THAT a small but growing number of senior Kremlin insiders “are quietly questioning his decision to go to war.” These dissenters believe the invasion was a catastrophic error that will cripple the Russian economy for years to come. But the officials see little chance of dissuading Putin any time soon.
A FEW WEEKS AGO IT WAS FASHIONABLE for some commentators to proclaim that sanctions were having little impact on Moscow. But the impact of sanctions take some time, and now it’s sinking in that Russia’s standard of living is plunging; a great Russian Depression is still likely, with double digit inflation and deeply negative GDP.
WHAT’S THE END GAME? There’s no question that Ukraine will face difficulties: their troops took great advantage of forests and hills around Kyiv; but the fighting now will be on flat land in the east. And the Russians are far closer to supply lines than the Ukrainians.
BUT THE U.S. IS WORKING WITH NATO ALLIES to send artillery, howitzers, rockets, antiaircraft and anti-artillery radars and missiles, antiship missiles, and tanks — in addition to the Javelin antitank weapons and Stinger antiaircraft missiles that made a huge difference as the assault on Kyiv failed.
THE RUSSIAN ADVANCE IS LIKELY TO STALL before reaching the middle of the country, and Putin will be under increasing pressure back home later this spring. A renewed effort at peace talks, possibly jump-started if Emmanuel Macron wins re-election this weekend, could lead to fresh negotiations.
THE TORTURE AND KILLING of civilians has made it less likely that Volodymyr Zelensky will negotiate with the Russians, so it’s unrealistic to expect a truce any time soon. That means instability will persist for many key markets, including the energy and grain markets, both of which may keep upward pressure on inflation.
BOTTOM LINE: We think there are only two likely scenarios: a stalemate, with Russia gaining some territory that has been reduced to rubble, at great cost to its military and its economy; or a clear victory by Ukraine, which will soon have the firepower to drive Russia out of all but a sliver of land in the eastern Donbas.
WE REITERATE: Russia cannot win this war. It has become a pariah state, probably for decades to come, with a greatly diminished economy and military. Equally important, Putin will have to deal with his own impoverished citizens, who cannot be deceived indefinitely about the horrors of this war.
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This post was first published at the AGF Perspectives Blog.
