Russia and Ukraine: what does Putin want?

What’s the Ukraine conflict about?

In the long run, it’s about Russia’s traditional fear of encirclement and perceived need for a “sphere of influence” as a buffer and Vladimir Putin’s stated belief that Ukraine is “not even a real country”. It is also, some analysts think, about Moscow’s fear of a good example in the form of a modernising, democratic Ukraine.

Putin’s Russia has been waging hybrid war on Ukraine since 2014, when it annexed Crimea (which has a large proportion of Russian speakers and is home to Russia’s Black Sea fleet at Sevastopol) and backed armed pro-Russian separatists in the east of Ukraine. That followed the ousting, in a popular uprising, of a pro-Russian president. Moscow has ramped up the pressure since Volodymyr Zelensky’s government moved to counter Russian influence. Moscow has also calculated that now is a good time to up the ante.

Why is it a good time?

No one yet knows whether Putin’s amassing 125,000 troops on the border is the precursor to a large-scale invasion aimed at regime change in Kiev, a more limited military campaign in the east and south-east, or simply leverage aimed at extracting concessions from Nato.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

But it’s happening now due to Nato’s relative weakness and Russia’s relative economic strength and energy leverage, says Ambrose Evans-Pritchard in The Daily Telegraph. “European Nato disarmed through the austerity years and is now near rock bottom, while Russia has been rearming for a decade.” Europe’s politics are in flux, with a lack of unity over how to respond. The US is deemed to be a “pushover” that signalled its own post-Trump weakness with a chaotic retreat from Afghanistan.

What does Moscow want?

It says it wants “legal guarantees” of Russia’s security, in the form of draft treaties with the US and Nato that would dramatically scale back Nato’s reach and in effect create a recognised Russian sphere of influence in eastern Europe. Nato would rule out further expansion, stop any military co-operation with Ukraine or other states in the ex-Soviet space, and withdraw troops and weapons from ex-Soviet states.

Of course, Moscow knows that none of this would be acceptable to Nato, hence the view that its demands are performative and unserious – and that the likelihood of military action is genuinely high. Moscow’s strategy, says Fiona Hill in The New York Times, is to further weaken Ukraine’s sovereignty, and also to weaken Nato, divide Germany (very dependent on Russian gas) from the UK and US, and destabilise the Baltics.

Ultimately, its aim is to push the US out of Europe altogether – and complete what it sees as the unfinished business of the Cold War. That’s a big gamble since it may well have the effect of unifying and strengthening Nato, and encouraging the likes of Sweden and Finland to finally join.

Can Russia afford it?

Some of the gloss has come off Russia’s economy since 2014, says Adam Tooze on his Substack blog. Yet it remains a “strategic petrostate” which has built up significant foreign reserves and economic power. Russia accounts for about 40% of Europe’s gas imports, and is “too big a part of global energy markets to permit Iran-style sanctions”.

Currently, the state’s budget is set to balance at an oil price of only $44. “That enables the accumulation of considerable reserves”, says Tooze – and since 2014 these have risen from less than $400bn to more than $600bn (among the largest in the world, after China, Japan and Switzerland). “This is what gives Putin his freedom of strategic manoeuvre. Crucially, foreign-exchange reserves give the regime the capacity to withstand sanctions on the rest of the economy” and slow a run on the rouble.

Could Russia turn off the gas?

Yes, it could – and might, depending on what sanctions the West tried to impose. But it would end up hurting Russia more than the West, says The Economist. Russia’s deep foreign-exchange reserves mean it could withstand a brief energy shock, and a total shutdown is not as unthinkable as it once was. That would be unpleasant for Europe, but it would mean economic pain (in the form of spiralling prices as markets scramble to access alternative sources) rather than an actual inability to heat homes.

However, “a bigger price would be paid by Russia over the longer term”, as European markets (and indeed China) adjusted to “such a display of aggressive unreliability”. Seriously tough financial sanctions (such as cutting Russia off from the Swift international payments system, or export bans) currently look unlikely, says Hamish McRae in The Independent. But in the long run Russia’s position is weaker than it seems now. The global transition away from fossils will diminish its economic clout, as will its already falling population.

What about the short run?

Even in the short term it has a lot to lose, says Lex in the Financial Times. Yes, Russia has bolstered its reserves, and has a strong trade balance. But “jittery markets represent a greater threat to Russia” than its neighbour’s desire to get closer to the West – and an invasion of Ukraine would inevitably incur sanctions that would make things worse.

As an emerging economy, Russia is “already exposed to disinvestment triggered by US rate rises”. Inflation is surging and the Bank of Russia has doubled its key lending rate in the last year to 8.5%. The rouble has lost a tenth against the dollar in the past three months, and the stockmarket is down 31% in the same period in dollar terms.

Is this a buying opportunity for hardy contrarians? After all, at about ten times estimated earnings, the market valuation is nearing the lows of 2015, and the dividend yield has hit 7%. The answer is no: “if a conflict cut off Russian oil and gas flows, the risk-off switch would become a rout”. Even very brave investors should “stay clear when nationalism rather than national prosperity propels events”.