- Russian troops entering eastern Ukraine under the dubious guise of ‘peacekeepers’ is sufficient to meet the lower boundary of the partial invasion scenario that we flagged last month as the most likely pathway for how the Russia-Ukraine crisis would play out
- Putin’s move is triggering coordinated sanctions from the US, UK and EU (alongside other Western states). Despite repeated rhetoric that an invasion is an invasion, Western leaders will adopt a phased approach
- This is clear from UK’s first tranche of sanctions, which have been limited given they only target five small Russian banks and three individuals. None of the big state-owned Russian firms with listings in London have been targeted
- This is not all that surprising. London, Washington and Brussels need to keep a deal of powder dry or risk losing any remaining leverage to prevent more widespread Russian military incursions into Ukraine
- While additional Western sanctions are certain and will further complicate doing business with Russian entities, they won’t negatively impact Russia’s performance. However, this is only because Russia is already under a slew of US and EU sanctions and scores the worst possible 0.00/10.00 in our index in 2022-Q1; a showing that puts the sanctions risk of trading with Russia alongside that of trading with other international pariah’s such as Belarus, Iran, Syria and Myanmar (see chart below)
- Russia’s decision to recognise the independence of the two breakaway regions effectively kills the Minsk Agreement, which Moscow had nominally supported until yesterday. The Minsk Agreement was a peace plan to end fighting in the Donbas signed in 2015 that – amongst other things – called for greater decentralisation in eastern Ukraine under a federal constitution
- The price of oil is likely to breach the USD100 a barrel threshold over fears of supply disruption amid an escalating conflict in Ukraine and retaliatory Western sanctions against Russia, the world’s second largest exporter of crude after Saudi Arabia. The price of other commodities of which Russia is a major exporter – from natural gas to wheat to palladium – are also likely to spike amid the geopolitical uncertainty
Outlook
- The deployment of Russian troops onto Ukrainian territory is likely to add further fuel to the fire of a separatist conflict that has already claimed an estimated 15,000 lives since 2014. The most likely scenario is that this serves as a pretext for Russia to seize further territory in eastern Ukraine; for example, by expanding the borders of the self-styled republics to mirror those of the provinces of Donetsk and Luhansk or carving out a land bridge to the Russian-held Crimean Peninsula
- The potential for this to be the opening salvo of a full-scale Russian invasion of Ukraine and overthrow of the Zelensky government is a plausible alternative scenario pathway that remains very much in play. The news that 30,000 Russian troops sent on exercise to Belarus last month will remain indefinitely stationed in the Russian satellite state is an ominous sign, as an invasion from Ukraine’s northern neighbour would confirm that Moscow’s ambitions extend beyond simply seizing territory in eastern Ukraine
- There is of course an outlier scenario whereby Putin proclaims the independence of the two breakaway republics as the geopolitical win he was seeking and steers a course towards a de-escalatory off ramp, for example via a summit with US President Biden. However, this scenario pathway looks remote at this juncture