With inflation still strong in most advanced countries, central banks raising interest rates, and oil and gas prices surging – there has been a sell-off in many shares, with oils and banks offering the best havens for investors. Equities rallied on the news put out by Russian leader Vladimir Putin that he is withdrawing some troops, despite NATO scepticism over the extent of that. oil came off its recent highs.
NATO makes clear is not going to war with Russia over Ukraine. This, our base-case view, has been underlined by President Joe Biden amidst all the words and fears expressed in recent days. The West, led by the US, is constantly warning of an imminent invasion of Ukraine by Russian forces, but also reminding us that NATO itself will not send its own troops or planes or ships to fire on Russian forces.
Ratcheting up the pressure
The NATO response will be much tougher sanctions than used before. The aim is to deter Russia from aggression by stressing the way Ukrainians would fight to keep their homeland – and underlining the impact tough sanctions could have on the Russian economy. It is true some NATO members have also sent weapons to Ukraine and have trained Ukrainian forces. NATO would be supportive of the Kiev government’s resistance to Russian invasion.
So far, it has been a one-sided set of exchanges. NATO claims an invasion is close and tells the world what it sees by way of troop and armament concentrations near to Ukraine’s borders. Russia says it and Belarus are holding military exercises and have no plans to invade Ukraine. Yesterday, Russia claimed to have withdrawn some troops, though reaffirmed the intention to press on with more exercises.
Russia will not accept the twin pillars of NATO.
Russia also says it wants NATO to rule out Ukraine joining the alliance and wants the US and allies to stand down troops currently placed on NATO’s eastern borders in NATO states – and withdraw missile systems NATO members deploy. Instead. NATO has been reinforcing these positions.
The Russian case claims to feel pressured by NATO forces. Russia will not accept the twin pillars of NATO, that it is a defensive alliance and that it only increases membership if it allows volunteer states to join. Russia sees the steady expansion of NATO since the Berlin Wall fell, with three new Eastern European members in 1999, seven more in 2004, two in 2009 and one more in 2017 and in 2020.
NATO has advanced close to Russia’s borders. Russia argues it cannot trust the West because Germany invaded Russia in 1941 and other western powers intervened during the civil war after the communist takeover in 1917. The West, for its part, repeats that NATO has no territorial claims on Russia and would only use force in Europe to defend a member state against attack.
Full invasion unlikely
It seems unlikely that Mr Putin would gamble and seek to invade and occupy all Ukraine by force. Most Ukrainians have no wish to be governed by Russia. There would be plenty of casualties in seeking military control, and plenty of continuing opposition to Russian rule where an occupying army tried to govern. NATO would impose substantial sanctions and would probably offer assistance to Ukrainian forces, falling short of committing troops to fighting themselves.
How far will Russia go in destabilising the two eastern provinces of Luhansk and Donetsk further and infiltrating troops and weapons there? Has President Biden weakened the West by hinting at a different response to a limited incursion before his staff corrected the record? Yesterday, the Russian Parliament raised questions about moving to recognise the self-declared independent states of Luhansk and Donetsk in East Ukraine which would be a very provocative gesture.
We anticipate continuing tensions and disturbances in eastern Ukraine.
How far will Russia pressure the West into making an offer over Ukrainian membership of NATO and over NATO troop dispositions in eastern Europe? So far, the movement has been for Western politicians to attend on Mr Putin, though usually only to repeat NATO’s current stance. The military display by Russia may well be designed to extract movement on both these issues from a West that includes European allies that are dependent on Russian gas and wish to find a diplomatic solution.
We anticipate continuing tensions and disturbances in eastern Ukraine. Meanwhile, the tensions help keep gas and oil prices high given the uncertainty over the new Russia to Germany gas pipeline and future gas supplies. France and Germany seek to revive the Minsk 2 Agreement, which sought Russian withdrawal from eastern Ukraine in return for devolved government in Donetsk and Luhansk.
This never worked as the two sides disagreed about withdrawal and about the extent of devolution. France and Germany will try again as they are keen to avoid wide ranging sanctions that would undermine their Russian trade.
In practice, NATO is not going to let Ukraine join any time soon, given the current tensions and risks. It remains to be seen whether it can reassure Russia about that situation without removing its fundamental principle that membership is a matter for NATO and the applicant state. Markets are unlikely to fall away on this scenario, though they have other more worrying things like inflation, energy prices and rate rises that could damage equity markets further.
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