Almost a year after Russia invaded Ukraine it is hard to see Vladimir Putin winning his war. But a lasting peace is not on the cards either.
Europe seems destined for an arms race and further economic decoupling from its neighbour, which could drag on even if the Russian president goes. Still, the costs of extra defence spending, lost business and rebuilding Ukraine are much better than a Russian victory.
There are many possible scenarios for how the military conflict will evolve. The most probable is that neither Russia nor Ukraine prevails on the battlefield and there won’t be a formal peace deal for a long time. After all, that would involve either Ukraine surrendering land, which it cannot accept, or Russia giving up all the territory it has occupied including Crimea, which Putin won’t do.
This means that the two sides will either keep fighting or there will be a frozen conflict like the one between North and South Korea. Either of these outcomes will not just impose big costs on Ukraine and its adversary, but on the rest of Europe too.
Russia’s war economy is increasingly churning out tanks, missiles, ammunition and planes. The Kremlin, whose budget deficit soared to $25 billion last month, will soon find it impossible to shield ordinary Russians from these costs. The population will pay with higher taxes, lower welfare spending or inflation. Meanwhile, Putin will throw more young soldiers at Ukraine’s battle lines.
As a result, the brain drain that started a year ago will continue. Russia’s economy is set for stagnation or decline, says Tim Ash, a strategist at BlueBay Asset Management.
Ukraine will bear the brunt of the conflict in terms of lost lives, destroyed buildings and economic hardship, as it has for the past year. The European Union and United Kingdom will also share some pain. They are already having to find alternatives to Russian gas. Although gas price futures for next winter have fallen from last year’s peak, they are still four times higher than two years ago. This has boosted inflation and undermined industrial competitiveness. Meanwhile, by shunning Russian oil, Europe is paying more for crude imports while China and India buy the black stuff at a discount.
Further economic decoupling is likely. The EU is discussing tightening sanctions on Russia. European companies see less benefit in doing business in the country and are under pressure from customers, employees and shareholders to disengage.
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