What is the endgame in Ukraine? The conflict has already lasted longer than most had anticipated. With Russia making (slow and grinding) progress in the Donbas region, the war looks set to continue for the foreseeable future. Like most military conflicts, this one will end with a negotiated settlement, but when?
At present, it is difficult to construct a scenario where Russia (read President Putin) returns any of its recent territorial gains. It is equally difficult to conceive of a scenario where Ukraine (read President Zelensky) would agree to compromise sovereign Ukrainian territory in exchange for halting hostilities.
With each passing week, the economic pressure on all parties increases. The West has most likely applied the maximum amount of financial pressure on Russia, and Russia (despite experiencing a decline in annual GDP) appears to be managing the situation reasonably well, principally due to the support of China and India. The financial pressure on Europe, however, is expanding and will reach its zenith in winter as energy supplies become increasingly scarce and more expensive.
While credit must be given to European leaders for proactively taking steps to lessen the impact of the growing energy crisis. The truth is Russia holds too many cards – Europe has become overly reliant on Russia as an energy supplier over the past decades, which cannot be unwound in the span of months. The European economy, which is only starting to show the impact of high energy prices, will worsen. Electricity prices across Europe for CAL23 are trading between €250 and €350/MWh, and natural gas is €100/MWh. Putin (provided his military holds out) will wait. Europe is most likely heading into a deep recession which will be made worse by the enormous amount of debt it has amassed since the great financial crisis. If one had to predict the endgame – it just might be the West, in the depths of winter, applying pressure on Ukraine to enter into an unwelcome compromise to avoid an unprecedented energy and economic crisis.
The situation is fluid and highly unpredictable – but today, this appears to be a likely (but distasteful) outcome.
More: Energy Market Commentary, Natural Gas, Ukraine Crisis