• Russia’s invasion of Ukraine has ruptured Russia’s relations with Western countries and accelerated the transition to a fragmented world

• In 2023 the war will continue, entering a transitional phase from a hot conflict to a protracted, lower-intensity stalemate

• Peace negotiations are unlikely, as both sides perceive the war as existential, but neither will be able to gain a sustained advantage on the ground

• The Russian economy’s decoupling from Western countries will deepen, and growing ties with China will not make up for lost market access to Europe

• Russia’s influence in the post-Soviet space will wane, but the country will succeed in widening a rift between Western countries and the Global South

As we entered 2022, we were all looking for signs of recovery from the pandemic and COVID-19. Yet, Russia's invasion of Ukraine on the 24th of February really took us on a separate trajectory for the year. Where does it stand today, and what is that view for 2023?

February 24th 2023 marked one year since Russia launched its invasion of Ukraine. Over the course of 2022 the conflict underwent several phases, from sweeping Russian gains in the first weeks to successful Ukrainian pushbacks later in the year. This year, Ukraine appears committed to pushing the Russian army out of the territories occupied since February 2022, and to regain some control over Donetsk, Luhansk and Crimea, which Russia has illegally occupied since 2014.

Global economy shows resilience, pain 1 year since the start of Ukraine war

One year after Russia invaded Ukraine, and caused widespread suffering, the global economy is still enduring the consequences - crunched supplies of grain, fertilizer and energy along with more inflation and economic uncertainty in a world that was already contending with too much of both.

As dismal as the war’s impact has been, there’s one consolation: It could have been worse. Companies and countries in the developed world have proved surprisingly resilient, so far avoiding the worst-case scenario of painful recession. But in emerging economies, the pain has been more intense.

In the United States and other wealthy countries, a painful surge in consumer prices, fueled in part by the war’s effect on oil prices, has steadily eased. It’s buoyed hopes that US Federal Reserve inflation fighters will relent on interest rate increases that have threatened to tip the world’s biggest economy into recession and sent other currencies tumbling against the dollar.

China also dropped draconian zero-COVID lockdowns late last year that hobbled growth in the second-largest economy.

Some good fortune has helped, too: A warmer-than-usual winter has helped lower natural gas prices and limit the damage from an energy crisis after Russia largely cut off gas to Europe. Still, oil and gas prices were high enough to cushion the impact on the energy-exporting Russian economy from the international sanctions imposed after President Vladimir Putin’s invasion.

The war “is a human catastrophe’’ but its impact on the world economy is a passing shock.

Still, in ways big and small, the war is causing pain. In Europe, for example, natural gas prices are still three times what they were before Russia started massing troops on Ukraine’s border.

Punishingly high food prices are inflicting particular hardship on the poor. The war has disrupted wheat, barley and cooking oil from Ukraine and Russia, major global suppliers for Africa, the Middle East and parts of Asia where many struggle with food insecurity. Russia also was the top supplier of fertilizer.

The war will enter a transitional phase in 2023

Exhaustion and heavy losses will make carrying out large-scale offensives increasingly costly and difficult for both sides. Both Russia and Ukraine are preparing for a new push in the spring, but both sides will struggle to gain a conclusive advantage on the ground. Russia’s military problems will continue, including heavy damage to troops and equipment. At the same time, Ukraine’s war efforts will continue to be constrained by equipment and personnel shortages.

Russia’s plans to mobilise anti-Ukrainian sentiment in Europe will fail and Western support for Ukraine will continue. This was indicated by generous military assistance pledges from the US in December 2022 and from some European countries in January 2023. Financial and humanitarian aid will continue uninterrupted and will prevent a total collapse of the Ukrainian economy. The biggest risk to support for Ukraine comes from donors’ declining arms and ammunition stockpiles. Still, Western support will ensure that Ukraine has the means to keep fighting in 2023 and to proceed with planned counteroffensives to challenge Russia’s positions.

Peace negotiations are unlikely to take place

Both Russia and Ukraine perceive the war to be existential, and we do not expect either side to agree to concessions in 2023. Ukraine has presented a ten-point peace plan, including the restoration of Ukraine’s territorial integrity (to the country’s 1991 borders), which Russia has dismissed. If any talks do occur, they will be limited in scope, along the lines of the talks that led to the grain deal signed in mid-2022. The lack of meaningful talks is in line with the expectations that this will be a protracted conflict without a clear-cut resolution.

What will 2023 hold for sanctions on Russia?

2022 was a year defined and shaped by sanctions on an unprecedented scale. Following Russia’s invasion of Ukraine on February 24, the most comprehensive sanctions were imposed against a major power since the end of the Second World War, with the US, European Union (EU), and others coordinating their actions in new ways. Western sanctions against Russia are likely to remain and tighten further in 2023. Before the invasion in February 2022, western countries had varied sanctions in place against Russia in response to a range of issues, including its abuse of human rights, regime corruption, and cyber-attacks. But the invasion changed this situation dramatically. Although the most substantial sanctions were imposed in the first few months after the invasion, new packages were introduced across the year as the invasion continued.

Source: BIMB Securities Research - 13 Mar 2023