Of course, the war between Ukraine and Russia was routinely mentioned in the many lists of geopolitical market risks in 2024. Most military experts see 2024 as a kind of transitional year for Ukraine in which the country will refresh and increase its military clout to possibly have a chance to push Russia on the defensive in 2025.
However, without continued large-scale military and financial support from its allies, Ukraine does not stand a chance. The Russian economy is many times larger than the Ukrainian economy, the Russian armed forces dwarf the Ukrainian army in numbers and weapons systems, and the Russian population is three times that of Ukraine.
In the U.S., new support for Kyiv is struggling to get off the ground, and in Europe, too, enthusiasm for aid to Ukraine has dampened in several places. The support programs are unlikely to come to a halt, as most policymakers in the U.S. and Europe are sufficiently aware of the risks for the West in a scenario in which Ukraine is forced to succumb to Russia. However, it will take some doing to keep money and arms flows going and to increase these flows.
For example, additional U.S. aid is currently stuck in Congress, and Europe is creating shortcuts through which aid can be funneled to Kyiv outside the usual routes stipulated by Brussels. There are fears that the European elections in June will give the populists more wind in their sails, and many of these populist politicians are regularly more critical of aid to Ukraine. On top of this, Trump has a decent chance of becoming U.S. president again, and he has proven in the past that his difficulties with Putin are few and far between.
The most important question for markets and businesses regarding the Ukraine war is whether there is a likelihood of another disruption of supply lines and the energy market such as the one two years ago. While the intensity of attacks back and forth has increased in recent months, including Ukrainian attacks deeper behind Russian lines and on Russian territory, I see no signs that the coming quarters will experience an escalation to the point where freight and/or energy supplies will be substantially affected again.
Moreover, over the last few years, countries and companies have shown — following initial shocks — that they can work well around Ukraine. In line with this, the rest of the world’s dependence on Ukraine has been significantly reduced. For example, Europe still buys Russian gas, but the amount is only a fraction of what it used to be, and it continues to decline. With liquefied natural gas, the U.S. has shown itself to be a good alternative source.
In short, I do not expect the war to escalate to the point where it will have a direct, massive impact on financial markets. The markets have adopted a similar stance, so we expect little reaction once this scenario unfolds. However, this does not mean that escalation is ruled out.
Russia is currently the most likely to ramp up its offensive — perhaps partly in the run-up to or following the Russian elections in March. Moreover, Kyiv’s allies are struggling with their military aid: American and European supplies are running low or have already been depleted, many policymakers in Western countries — understandably — want to prioritize their own armed forces, and the defense industry is reluctant to expand production capacity in the absence of long-term order commitments. Because of all this, Putin might reason that now is the right time to press on.
Should the war intensify, this does not necessarily mean that freight rates and/or oil prices will immediately go through the roof — although we will certainly see price hikes, as this scenario is far from priced in — but it could fuel investor mistrust of Europe, thereby contributing to the weakness of the euro against the dollar. As mentioned, this scenario cannot be ruled out.
As Philip Zelikow wrote about the West’s opponents in Foreign Affairs:
“The default assumption of most Western policymakers is that these rivals are led by fundamentally rational regimes that will not court the risks of seeking violent change. That was the default assumption a year before Russia invaded Ukraine. It was the default assumption the day before Hamas invaded Israel.”
Andy Langenkamp is a senior political analyst at ECR Research and ICC Consultants.