Ukraine’s successful counteroffensives - Putin has exhausted his use of the gas weapon, leaving cuts to oil exports as his main point of leverage against the West

Ukraine’s successes open up several downside risks

Firms need to prepare for a very difficult winter, the extent of which is generally underappreciated by the market. Not only will input cost pressure remain elevated, with firms also needing to manage a historically weak euro, the primary risks to the outlook are far from improbable and could be extreme. Pressure will remain high on energy prices, which is already driving Europe into a recession and demanding gas rationing this winter (whether state-mandated or otherwise by private sector response). In retaliation for losses in Ukraine or tightening sanctions, Russia could cut oil exports, use an unconventional weapon in Ukraine, or end the grain export deal, massively worsening the currency and inflation outlook.


  • In a single week in early September, Ukraine launched successful simultaneous counter-offensives in the north in Kharkiv and the south in Kherson.
  • Ukraine succeeded in advancing over 40 miles in the Kharkiv region, freeing 40 villages and rapidly reversing gains Russia had made in two months of fighting. Ukrainian forces now threaten areas in the Luhansk oblast.
  • Steady advances also occurred in Kherson, with at least 10,000 Russian soldiers trapped in the area west of the Dniepro.
  • To date, Russia has not been able to resist these advances with a counteroffensive.

Our View

In a surprising development, Ukraine was able to alter the strategic direction of the war over the course of a single week. With the earlier stalemate now broken, the situation becomes much more unpredictable and opens up many potential scenarios in terms of both Russian retaliation as well as Ukraine’s ability to advance further on other fronts (in Luhansk and Donetsk), seize more territory, and force Russian surrenders.

Ultimately, the advantage has shifted dramatically toward Ukraine, as the import of Western weapons has helped counterbalance Russia’s earlier extreme advantages in artillery and air power, while Kyiv’s higher levels of manpower and morale were clearly decisive in these counterattacks. As Russia cannot address these core shortcomings in the near or medium term, the war has reached a culmination point, raising the potential for either extreme escalation (e.g., use of unconventional weapons, major conventional bombings of infrastructure and cultural/heritage sites, or crimes against civilians) as well as possible de-escalation (ceasefire talks forced upon Moscow), as Russia’s military advantages have evaporated and Moscow cannot respond with advances on the battlefield. Through the end of the year, Ukraine will remain on the offensive, with gains limited only by supply chain over-extension, movements of manpower as weather deteriorates, shortages of Western military equipment, and Russian resistance. The most critical point is whether these setbacks for Russia mark the point where Putin realizes that Russia is objectively losing this war and he no longer operates under the assumption that his military will ultimately win (or needs to win regardless of the cost). If not, then escalation becomes more likely.

While the latest polling suggests continued popular support for the war, the unconcealable turnaround on the battlefield and heavy casualties are sparking signs of dissent and frustration with the prosecution of the war. Particularly as the economic duress becomes more clear, pressure will accumulate on the regime over time from both nationalist elites upset with the hesitant approach to the war as well as those angry at Russia’s loss of international prestige and economic future. Questions will eventually arise over regime stability, assuming the base-case scenario of further Ukrainian advances the rest of the year, continued Russian surrenders, and increasing economic trauma in the country that eventually is felt more clearly in Moscow and St. Petersburg.

As the situation deteriorates on the battlefield, Moscow will be increasingly tempted to call for national war mobilization to address its manpower shortage, though this would not only be extremely dangerous politically and potentially destabilizing, but also likely far too late and ineffective.

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