Ukraine War: Changes from the Base Case

Russia’s poor performance thus far in the war raises risk of resorting to a chemical or nuclear attack

By and large, MNCs are coming to terms with the need to leave the market in light of extreme pressure from the government, an understanding of the severe and long-term drop in demand, and inability to operate in the market amid such harsh sanctions set to remain permanently. Threats of expropriation and criminalizing compliance with Western sanctions (though recently rescinded) have also permanently stained the investment story. To date, the majority of firms are waiting to make any critical decisions until roughly June/July. Beyond supply chain and logistics, MNCs are forced to deal with severe reputational risks for investing in the Russian market, onerous regulatory/compliance issues, difficult pricing negotiations with local partners, and deterioration of demand.


The massacre at Bucha, bombing of civilians at the Kramatorsk train station, and other atrocities have increased the resolve of the Ukrainian side. Russian President Vladimir Putin has declared peace talks were at a “dead end.”

Following defeat north of Kyiv and stalled advances in southwest Ukraine, the Russian military has regrouped forces to concentrate for an upcoming battle in the Donbas. Russia has also threatened to attack foreign arms supply chains and has increased attacks in Western Ukraine targeting them.

Senior Russian officials warned of placing nuclear weapons in the Baltics (in reply to Finland’s plans to join NATO) and of a rising risk of the use of nuclear weapons in light of the West’s support for Ukraine.

Our View

The battle for the Donbas has begun and should not be underestimated in its scale. With tens of thousands of Russian and Ukrainian troops squared off, matched with large tank divisions, artillery, and air power, the battle is set to be the largest battle in Europe since World War II and largest in the world since the Korean War. Having failed to seize Mariupol and instead blockading it, Russian forces are set to start their campaign, driving up north from the Azov Sea and Crimea, and south from Kharkiv to envelop Ukrainian forces in the Donbas. The casualty rates and humanitarian crisis that will emerge will dwarf what has already been seen thus far in the first two months of the war. Russia enjoys major advantages in terms of air power, materiel resources, as well as wide-open terrain, which far better suits more formalized, conventional tank and infantry attacks. While this phase of the war looks more encouraging for Russia compared to the initial phase, its forces will still struggle with very low morale and poor logistics that will inevitably stymie some of their advances. Ultimately, peace remains farther away than ever. Russia very well may not succeed in its short-term military objectives, while the Kremlin has indicated a push for more should these objectives be achieved. Likewise, following the Bucha massacre and other atrocities, Ukraine is unlikely to agree to any peace treaty, reducing the prospects for peace even after this battle in the Donbas. As Russia continues to struggle to achieve its goals in Ukraine, the risk of a chemical or nuclear weapon has risen drastically, because Putin needs to extricate himself from the humiliation of a failed advance and break the stalemate.

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