The Tide Turns in Ukraine

Reportedly advances in a Ukrainian counteroffensive are being met with little Russian resistance. On the dark side, a disappointed Russia seeking a buffer state may pursue a scorched-earth policy on the way out, including use of thermobaric or nuclear weapons. China and India would have to stop buying Russian oil, leading to catastrophic shortages. Regime change in Russia could lead to even more brutal leadership. A Russian defeat leaves it no military leverage in negotiations to have sanctions removed. On the lighter side, Russia can still use access to its gas as negotiating leverage – and Germany and Poland can avoid freezing this winter. This is helped by the European Parliament’s decision to designate gas a sustainable fuel. Cessation of hostilities would remove one supply-side risk from the calculus of central bankers obsessed with inflation fighting. Equity risk premia across Europe are the widest in the world, so in the best-case there is value to be captured; in the worst there is a value-cushion.