The fighting evolves into a protracted war of attrition in 2024, with neither side making notable advances
While Ukraine’s counteroffensive failed to achieve even its minimal objectives (advancing to cut off the land link to Crimea via artillery shelling), much less its maximalist objectives (advancing to Crimea by the year’s end), it severely depleted Russia’s manpower and material resources. Nevertheless, Ukraine was unable to strategically shift the war in its direction—but neither did Russia. FrontierView sees the war settling into an intense war of attrition throughout 2024, with neither side gaining a strategic advantage: Russia is limited by inadequate manpower and poor command and control; Ukraine is limited by its disadvantage in artillery and ammunition.
Under our base-case assumption, the ongoing war and sanctions will continue to weigh on the growth perspectives of the Russian economy, potentially resulting in stagnant growth at best. Businesses should expect higher tax rates to address the budget deficit in 2024. In Ukraine, growth is clearly reviving and is expected to remain consistent through 2024, rising by over 5% YOY this year and next. If Russia experiences accelerated battlefield losses or if frozen Russian assets are utilized in Ukraine, multinationals should anticipate further seizures of foreign businesses/assets from “unfriendly” nations.
Overview
- Recent significant developments relate to Russia’s huge losses of manpower and equipment for very mild gains in Avdiivka to date, as well as in Luhansk and Bakhmut to a lesser degree. None of these fronts allow Russia to strategically shift the balance of the war, but rather indicate Moscow’s continued intention to win the war and make gains ahead of March elections.
- On the Ukrainian side, mild advances have occurred along the Dnipro, which looks to be an area of focus in early 2024 with the provision of F-16s. Due to terrain and limited supply lines, logistical support is difficult for Russia, leaving its forces vulnerable.
- In recognition of the inability to advance, President Volodymyr Zelenskiy has publicly noted a turn in strategy for the coming year that involves Ukraine taking a more defensive posture. This ensures the war is prolonged well into 2025 and likewise raises the likelihood of this evolving into a frozen conflict situation.
- President Joe Biden’s efforts to secure a US$ 61 billion Ukraine aid package in 2023 are failing, as negotiations on border and immigration policy changes are expected to extend into the early next year. Despite delays and political turbulence in US politics, the package is likely to be agreed upon in early 2024.
- At the summit of the EU leaders on December 14, Hungarian PM Viktor Orban vetoed the EUR 50 billion, four-year financial aid package for Ukraine. However, it remains highly likely the EU will provide, at a minimum, the required funding to Ukraine for 2024.
- On December 18, the EU adopted its 12th sanctions package, which includes import bans on Russian diamonds, raw materials for steel production, processed aluminum products and other metal goods, new export controls, and export bans on EU industrial goods. The new package also tightens the existing oil price cap to tackle the “shadow fleet” used by Russia to bypass the price cap.
Our View
Russia-Ukraine war scenarios for 2024
- Base case scenario (65%): This scenario assumes that both Russia and Ukraine engage in multiple mobilizations throughout 2024, yielding no substantial strategic advancements but only marginal progress for each party. After the weariness sets in on both fronts in H1 2024, the conflict persists into the latter half at a diminished intensity. Despite the ongoing hostilities, achieving a ceasefire remains challenging; Russia is hesitant, anticipating the possibility of former President Donald Trump’s re-election in the US, while Zelensky perceives ceasefire talks as detrimental to his regime, meaning that the war protracts into 2025.
- Key drivers: For this scenario to unfold, certain key drivers must come into play. Within this context, we anticipate that Western support persists, yet it proves inadequate and/or is delayed in supporting significant advances on the Ukrainian side. Simultaneously, we expect a more stringent enforcement of sanctions against Russia, which, in turn, contributes to the diminishing availability of parallel imports that are crucial for military equipment, hampering Russia’s substantial progress on the battlefield. The cumulative fatigue resulting from mobilizations on both sides transforms the conflict into a protracted war of attrition, further complicating the resolution of the ongoing hostilities.
- Signposts to monitor: The front line in Ukraine stays mostly the same in the first half of 2024; the US and EU approve aid packages for Ukraine in early 2024, suggesting support will come in a piecemeal fashion; secondary sanctions keep affecting new companies in third-party countries; Western allies subtly push for talks around mid-2024; and both Russia and Ukraine soften their rhetoric by late 2024, signaling a willingness to negotiate. Under this scenario, doing business in Russia remains challenging amid rising market uncertainties.
- Downside scenario (20%): This scenario assumes significantly delayed and much smaller-than-anticipated US military aid packages for Ukraine in 2024. As the anticipated military support from the US faces setbacks, European nations attempt to fill the void, albeit with limited success. The consequence is a substantial reduction in Ukraine’s military capabilities, leaving the nation struggling to make any significant progress in the conflict. This gives Russia an even greater advantage over Ukraine and creates far worse outcomes for Ukraine and the West. This shifting dynamic prompts Ukraine to reluctantly consider negotiations with Russia. Protracted peace talks ensue, stretching well into 2025. The eventual settlement, forged under the strain of diminished Western support, sees Russia maintaining control over some Ukrainian territories, including Crimea, marking a significant geopolitical shift.
- Key drivers: Several key drivers contribute to this scenario. The Ukrainian military, deprived of the expected support, finds itself on the defensive without the means to mount successful offensives or even defend itself. In the US, growing pushback from the Republican opposition against aiding Ukraine gains momentum. Former President Trump, eyeing a potential return to office, explicitly expresses his intent to cease military support and pursue a settlement with Russia, a sentiment that resonates with an increasing portion of the electorate as the 2024 elections draw near. Despite efforts to fill the gap, European nations struggle to provide the necessary weaponry, further hampering Ukraine’s ability to withstand Russian advances. As Russia seizes the opportunity, deploying additional manpower, it advances on multiple fronts, capturing strategic territories, including Avdiivka and expanding its control in the Donbas region.
- Signposts to monitor: Multinationals will see rising support for Trump in US polls, increased Republican calls to cease aid, legislative delays in the US House, internal strife in Ukraine, and Russia’s successful mobilization efforts. Under this scenario, businesses in Ukraine should prepare contingency plans for funding delays/reductions, as sizable budget cuts to non-defense areas, such as business support programs and capital expenditures, will hurt investment and employment, while the central bank over time would resort to printing money, driving up inflation and weakening the hryvnia.
- Upside scenario (10%): This scenario assumes that President Biden tenaciously advances the US government’s support package for Ukraine in full in January 2024 at the latest. This infusion of support proves pivotal as Ukraine, armed with state-of-the-art Western weaponry, effectively repels Russian forces across various fronts, including Avdiivka and deeper into Kherson. The strategic success enables Ukraine to execute more potent missile attacks into Crimea, marking a significant turning point in the conflict. The triumph encourages further Western support for Ukraine in 2025 and beyond. Under this scenario, the Russian economy faces severe setbacks, leading to a marked depreciation of the ruble and labor and product shortages, while inflation soars to alarming levels. These economic challenges make it extremely difficult to fund the war going forward and weakens Russia’s position.
- Key drivers: As a series of military setbacks befall Russia, both the US and the EU decide to step up support for Ukraine significantly. Recognizing the urgency, they provide expedited and substantial direct military aid, including artillery, long-range missiles, air defense, and tanks, to bolster Kyiv’s offensives in 2024. Simultaneously, Ukrainian intelligence amplifies its sabotage operations, strategically targeting Russia’s crucial military and export infrastructure. These operations not only deal substantial blows to Russia’s capabilities but also have a profound psychological impact on the determination of both civilian and military populations. Stricter control over the sanctions and price cap limits Russia’s ability to use its shadow fleet to circumvent oil price cap. Combined with a drop in oil prices, this results in a significant reduction in Russian oil revenues, exacerbating the economic challenges faced by the nation and depleting funds for its military operations. Amid these challenges, Russia finds it difficult to maintain a defensive stance on multiple fronts. Chain-of-command breakdowns, the surrender of some battalions, and low morale among the military contribute to the overall strain on Russia’s defensive efforts. The situation becomes increasingly complex as internal issues exacerbate the external military challenges faced by the country.
- Signposts to monitor: Under this scenario, we would see military support bills for Ukraine gaining momentum in the US House and the West issuing assertive statements, emphasizing Kyiv’s imperative to secure victory and dismissing the feasibility of a peace deal. However, Ural oil prices dip significantly, averaging well below ~US$ 60/bbl., driven by a recession in the eurozone and sluggish demand in China. In response to geopolitical tensions, a broader and more severe set of secondary sanctions is imposed on third-party countries, hindering Russia’s capacity to procure essential components for large-scale military production.
- Note: While the likelihood of this scenario materializing in 2024 is currently low, the probability could significantly increase if Western support proves to be more resilient and for longer than initially anticipated.
- Nuclear scenario (5%): In this low-probability scenario, a direct confrontation unfolds between Russia and NATO, triggered by a tactical nuclear strike in Ukraine. The prolonged conflict leads to internal strife in Russia, culminating in Putin’s removal from power. The resulting power transition is chaotic, leaving Russia weakened and fragmented. Trade disruptions and damaged infrastructure impede high-level oil production and exports, exacerbating economic fallout, product shortages, and hyperinflation.
- Key drivers: These encompass Ukraine’s persistent advances beyond 2024, pushing Russian forces out and bringing international sanctions that impair parallel imports to Russia and reduce oil revenues. Domestically, increased instability and elite dissatisfaction contribute to the political turmoil. Furthermore, terrorist and missile attacks within Russia, supported by Ukrainian forces/intelligence, escalate.
- Signposts to monitor: These include the frequency of nuclear rhetoric within Russia, Ukrainian forces nearing Crimea recapture, intensified Western support to Ukraine, and the emergence of political competition for Putin from high-level figures, marking a significant shift in the political landscape after more than two decades.
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