The Unthinkable – What If Russia Wins?

Date: 6/14/2022
Author: Mr. X

At a recent summit in Singapore, Ukrainian President Volodymyr Zelenskyy made a fire and brimstone speech, warning the world of dire consequences if the Russian invasion continues. He’s probably right. However, the conclusions some may draw from his speech are not what he intended.

It’s hard to overstate the severity of what President Zelenskyy said. “The world will face an acute and severe food crisis and famine,” he intoned. “The food [crisis] touches Asia, Europe and Africa. Russia has blocked the Black Sea. Prices are rising. Russia is violating international law.”

The takeaway is that the world should want the war to end as quickly as possible. Yet President Zelenskyy has elsewhere admitted that “we are inferior in terms of equipment and therefore we are not capable of advancing.” He continues to plead for military equipment but the cracks are now starting to appear in the Western alliance.

President Zelenskyy has even referred to this:

“We need abiding interest from the west, western support for Ukraine’s sovereignty. There cannot be talks behind Ukraine’s back anytime. How can we achieve a ceasefire on the territory of Ukraine without listening to the position of this country? This is very surprising.”

This is a blockbuster confession and a major public relations disaster. It’s a catastrophe for Ukrainian morale if the West starts looking for a way out, but that may be happening. In fact, President Zelenskyy’s own rhetoric hints at this. If the world truly faces “famine,” other nations may choose peace at any cost, even if it’s at Kyiv’s expense. Ukrainian’s could claim – with justice – that this is a stab in the back.

Archetypal master of realpolitik Henry Kissinger has called on Ukraine to cede territory for peace, something President Zelenskyy forcibly rejected. “It seems that Mr. Kissinger’s calendar is not 2022, but 1938, and he thought he was talking to an audience not in Davos, but in Munich of that time,” he fired back in late May. Yet the Ukrainian military situation has declined since then. Russian troops control most of Sievierodonetsk, with many Ukrainian troops and civilians reportedly trapped in an industrial complex. Of course, this is essentially what happened in Mariupol, where Ukrainian fighters held out and disrupted Russia’s invasion plans but were eventually forced to surrender.

Among those who surrendered were two British fighters, whom the Donetsk People’s Republic has sentenced to death. No Western nations recognize the DPR, but that is going to make it hard for the British government to plead for the release of their citizens. One might suggest that’s the reason why the DPR sentenced them to death in the first place. Prime Minister Boris Johnson can either talk to the DPR, essentially recognizing them, or stand by while British citizens are killed.

Flag of the Donetsk People’s Republic

The British seem to have a more optimistic and bullish view of Ukraine’s chances of holding onto the east than the United States. “Russia will likely have to rely on new recruits or mobilized reservists to deploy these units to Ukraine,” according to British intelligence. In contrast, an unnamed “senior U.S. defense official” quoted by The Washington Post predicts Russia will capture all of Luhansk within a few weeks. It’s also clear Russia has no intention to giving back any of the territory it’s captured. In Mariupol, a city sign has been repainted into the colors of the Russian flag; in Kherson, city officials celebrated “Russia Day.” Social media reported that police even have new uniforms.

There’s also an interesting blame game surrounding intelligence warnings. President Joe Biden claimed “Zelenskyy didn’t want to hear it” when the United States tried to warn Ukraine that Russia was serious about invading. Ukraine pushed back, saying that the country “understood the intentions of the Russians, expected one or another aggressive scenario, prepared for it, [and] sharply broke the original Russian plans.” Such squabbling suggests deeper tensions under the surface.

Russian propaganda notwithstanding, it’s clear President Putin did not expect Ukrainian resistance and wanted an essentially bloodless conquest to cap off his (until this point) successful career as Russia’s leader. Miscalculations and wishful thinking got Russia, Ukraine, and the United States into this mess. The danger is assuming that the wishful thinking has ended.

President Zelenskyy’s comments came in the context of arguing for weapons for Ukraine to bring a swift end to the war. Yet analyst Edward Luttwak has argued that Ukraine should try to retake Kherson and, following a ceasefire, agree to a referendum for Donetsk and Luhansk. Actually reconquering these areas, he argues, would be extremely difficult for Ukraine, weapons or no weapons. If anything, he may also be underestimating Russia’s willingness to compromise on Kherson. There’s also no way Russia would relinquish Mariupol, which it considered the hub of the nationalist Azov Battalion. This controversial military formation, heroes to some and “Nazis” to others, has had a starring role in Russian propaganda campaigns.

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Western sanctions were supposed to put political pressure on President Vladimir Putin and his regime. However, even The New York Times admits sanctions may have backfired massively. It recently reported that revenues from fossil fuels “soared to records in the first 100 days of its war on Ukraine,” and that this windfall more than compensated for reduced export volumes.

It’s possible that President Putin is in poor health and that his regime may be shaky because of that. If we assume he’s not on the brink of death, President Putin may outlast both President Joe Biden and Prime Minister Boris Johnson. Democrats are reportedly floating alternatives to a Biden 2024 re-election bid and Prime Minister Johnson barely survived a leadership challenge from his own Conservative party. Rising energy prices are also putting massive pressure on Western governments. It’s almost impossible to know what ordinary Russians “really” think about their regime, but what data we have show President Putin has become more popular since the war started, not less.

Even if Putin really is dying, there’s a strong chance his successor may try to prove his legitimacy by intensifying the war.

What if Ukraine turns it all around and starts driving the Russians back? Foreign Affairs noted that a Ukrainian military victory “will spur more Russian intransigence in its wake” and that it’s likely anyone who would succeed Putin will double down on conflict to prove his power and legitimacy. For now, Russia may be trying a “stealth mobilization” to try to hide the cost of its military adventure from its own people. Yet if pushed to the brink, it retains the theoretical option of escalating, though it is politically risky. Still, any leader would choose risk over certain defeat.

Russia would be especially willing to use every conventional means to hold onto Crimea. If we take some of President Putin’s threats into account, it may even be willing to use nuclear weapons if things truly start to fall apart.

We should be clear about the situation. The first stage of the war was an embarrassing failure for Russia. The second stage is not. President Putin’s “special military operation” hasn’t gone the way he has planned but he currently holds Kherson, a land bridge to Crimea, and most of Donetsk and Luhansk. The Russians are very close to holding the entire Donbas region.

Russian troops appear to have learned from their mistakes and are overwhelming the Ukrainians in what has essentially become a slow-motion artillery duel. Western aid to Ukraine isn’t even close to making up the difference and Ukrainian soldiers report they are running out of ammunition.

Meanwhile, President Zelenskyy is calling for a fight to the finish for every meter of Ukrainian territory, including Crimea. Yet the West has already shown it won’t risk open war with Russia. While governments may be willing to provide weapons, angry voters could demand Western governments focus on domestic economic problems. Outside of Eastern Europe, Western populations may not be willing to sacrifice for another nation’s war of reconquest, especially when it comes to territory Russia seized almost a decade ago.

Other nations are also not taking the West’s side. China hasn’t directly supplied Russia, but its state media has taken a generally pro-Russian line. India has bought large quantities of Russian oil. Pakistan is in chaos after the government fell in what the former Prime Minister charges was an American-backed coup.

The United States is also facing problems in its own backyard, with Mexico’s president calling NATO’s policy in Ukraine “immoral” and Nicaragua potentially allowing Russian troops into its country. Turkey, which is a NATO member, is also independently hosting talks with Russia, opposes Finnish and Swedish membership in NATO, and is using the opportunity to attack Kurdish militants in Syria.

NATO Secretary-General Jens Stoltenberg reportedly said, “Every peace agreement involves compromise, including territory.” This is a firebell in the night for Kyiv. He further said that NATO is providing weapons to “strengthen their [Ukraine’s] hand when a peace negotiation is eventually reached.”

In more optimistic comments published by RadioFreeEurope, the Secretary-General alluded to a “war of attrition” that could go on for some time, but then rather bafflingly declared that the best way to reduce the global food shortage is “for President Putin to end the war.”

Why should he? According to even the Western press, he’s winning.

As of this writing, the last bridge to Sievierodonetsk has reportedly been destroyed. While Ukrainian forces are resisting, it seems extremely likely that they will meet the same fate as those in Mariupol now that they are cut off. Unless Ukraine can launch a successful counteroffensive elsewhere to open a new front and relieve some of the pressure, President Putin will have what he can plausibly call a victory… and a strong position to permanently threaten Odesa.

Meanwhile, Ukraine will be in an almost impossible situation. Especially after the Western media has turned President Zelenskyy into an icon of defiance, it will seem like utter betrayal for Western countries to quietly pressure Zelenskyy into offering terms, even extremely limited ones like formally relinquishing Crimea. President Zelenskyy might not even have that option domestically, as nationalists within the country could accuse him of betrayal if he concedes any lost ground. Ukraine will continue to call for total reconquest, which it cannot accomplish without massive Western aid. If the West was willing to provide it, it would have done so by now. Of course, we should assume Russia is doing the best it can to promote disinformation and division within Ukraine, adding to the confusion.

Why does this matter to us as investors? The West’s all-or-nothing moral campaign against Russia will make it very difficult to lift sanctions in exchange for peace, but without those sanctions being lifted, supply chain disruptions and rising food prices are likely to continue. The West also does not have the political will to provide enough resources for Ukraine to reconquer its territory… assuming Ukraine is even still capable of large scale offensive operations. 

Wishful thinking about Putin ending the war is just that. It’s now Western governments who face angry populations. They are more concerned about the falling stock market, the crypto wipeout, the soaring cost of living, and the skyrocketing gas prices than the collapse of Sievierodonetsk, a place most Americans didn’t know existed until a week ago. Barring a pro-Western government taking over in Moscow and somehow avoiding civil war, this war will continue indefinitely… unless Russia declares victory.

That may be closer than we think. What if Russia takes Luhansk in the next few weeks, declares the special military operation over and offers a peace deal that requires Ukraine to cede some territory and the West to lift sanctions? President Zelenskyy can’t accept such a deal, but some Western policymakers will be tempted, especially as recession and possible stagflation loom. That raises the unedifying spectacle of NATO stabbing Ukraine in the back.

It’s unthinkable today, but unless Western weapons start turning the tide of the war in the next few weeks, it will be inevitable tomorrow. If Ukraine does regain the initiative, it means that the war (and economic chaos) will continue for years. It’s questionable whose political system will prove more durable in that situation – that of Moscow or that of Washington.

Assuming that the global economy will return to normal soon because Putin or his successor is just going to give up is delusional. Investors should consider this the new normal, not a temporary exception.

Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for to bring you news on what those with power are debating, planning, and doing.

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