The Putin Effect (Stage 1): So what about Stage 2?

Alastair Winter

(Hay una versión en español de este artículo aquí.)

Stage 1 seems to be taking a long time, with mayhem and misery on the rise. On paper, the Russian forces should be strong enough to re-group and overwhelm the Ukrainians, but on current form the best they can probably do is hold on to their current conquests and settle for a campaign of attrition. However, maintaining an occupying force of tens of thousands would be prohibitively expensive, even before counting in the munitions needed to keep at bay an increasingly well-equipped Ukrainian army. The occupation and the inevitable casualties would also be hugely unpopular back home. Using mercenaries would add to the financial cost and their capacity for committing atrocities would rapidly become counter-productive. Meanwhile, sanctions would be biting harder and revenues from oil and gas starting to dip. Even then, Mr Putin may be prepared to test the resolve of the coalition against him.

The EU has been remarkably supportive in its response on many counts. However, a lot more is required to keep Ukraine armed and fed, and this is likely to require not just money but also institutional change. A European army will need political rather than bureaucratic control, and wannabes like Viktor Orbán need to be ostracised. Mr Macron seemed set, with unprecedented Italian support, to become the head of a core Europe, but a more likely outcome now is that Germany will emerge as the leader (and principal funder) of an EU that will become increasingly integrated, if not yet federal.

Somewhat more in doubt is the resolve of the US or rather the Republican Party in Congress, especially if it takes control after November’s mid-term elections. There will be those who are more interested in impeaching Mr Biden than in combatting Mr Putin’s aggression and who believe that Mr Zelensky is the greater villain for having failed to dish dirt on Hunter Biden. The emergence of an illiberal isolationist regime in the US would be a rich and darkly ironic prize for Mr Putin, but it is more likely that the bipartisan consensus on Russia and China will deepen, Mr Putin will blink first, Mr Xi will give him only that support which avoids sanctions and costs no money.

Meanwhile, we face a global economic slowdown and possible recession in several countries, and inflation will remain uncomfortably high for at least the next two years. Bond yields (as well as official interest rates) have further to rise before they peak, while equity markets are will not make a lot of progress until investors see a way through the geopolitical turmoil and macroeconomic challenges.

It would certainly help if the Putin Effect had run its course and both he and his version of Russia had become marginalised.