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UKRAINE CRISIS: what are the possible scenarios?

It is difficult to think about what the world will be like in 3 months. Just as it was difficult at the start of the Corona crisis. The lesson of a crisis is that the future does not only get worse during a crisis, but that solutions, and counter-reactions, gradually emerge.

Let’s start with Sun Tzu. His insights remain valuable today in assessing Russia’s chances in Ukraine. Tzu stated that there are 5 essential conditions for winning:


The one who knows when to fight and when not to fight will win.
He who knows how to deal with stronger and weaker forces will prevail.
Whose army can generate the same fighting spirit in all ranks will prevail.
The one who can attack the enemy by surprise will win.
The one who has a military clout that is not led by the head of state za win.


If we are to evaluate Putin on these five conditions he may be failing on all counts. He is directing too much of the army himself, the enemy was properly prepared, his army is not motivated in all ranks, the Russians always have trouble with guerrilla and motivated but poorly armed popular armies, and Putin should also have realized that he could never win this conflict with fighting. This is a war that Putin can start, but if you follow Sun Tzu can never win.

Ukraine is also a very large country, you can realize it when you put it on a map of Western Europe (see below). You can take the country, but that doesn’t mean you can occupy it for a long time. The 100 to 150,000 Russian troops are up against 400,000 Ukrainian soldiers fighting for their lives. In Chechnya, the Russian army of 80,000 troops and allied Chechens bit down on 25,000 separatists. The population of Russia then was 150 mio and that of Chechnya 1 mio. Today there are 44 mio inhabitants in Ukraine.

Meanwhile, the counter-reaction from the West is beginning to take hold. The sanctions announced by Europe, the UK and the US are today primarily aimed at the Oligarchs. By freezing their assets and curtailing their visas, they are putting pressure on them to make Putin see reason. The Oligarchs lose in a Western seizure of assets as much as they lose in an emergency nationalization of activities by Putin. They are only winners in a normalization and thus a diplomatic solution. This pressure cannot be underestimated. The West is holding back even more sanctions. But a complete financial dry-up (via Swift and the financial channel) would also dry up the energy tap from Russia. An estimated 750 mio euros flows to Russia every day these days, and in return Russian gas keeps Europe warm (or the electricity going). It is paradoxical that under war conditions these activities continue for the time being as if nothing is wrong. More to the point, that gas leaves from Ukraine….

The First Gulf War from August 1990 to February 1991 was a similar regional conflict, with the potential for huge escalation as well as impact on energy markets. The evolution of the markets during that period is therefore interesting. The graph shows us that the markets went into freezing mode during the conflict, but after 6 months they returned to what we called yesterday the “undercurrent”, namely the underlying economic trends.

However, at the start of a crisis, it is impossible to predict perfectly what will happen. Remember February 2020, the very start of the Corona crisis, now 2 years ago. We talked about the “Corona Valley” and the two sides of the valley that would look completely different. That seems to be repeating itself. This Ukraine crisis is once again going to fundamentally change Europe. It is the 3rd shaping crisis since the start of the euro:

  1. 2008: Financial crisis forcing Europe to reform the financial sector and reboot the euro.
  2. 2020: the Corona crisis that is pushing Europe to accelerate digitalization and think about better cooperation.
  3. The Ukrainian crisis that is prompting Europe to tackle defense and especially to seriously reform its energy policy and especially to diversify and derisk.

How long this crisis will last is impossible to predict, it is much better to think in scenarios. At the moment, our schema looks like this:

In addition to pessimistic scenarios, a better one should not be ruled out. Putin may well choose to consolidate quickly after some initial successes with diplomatic talks. Given the tensions in Russia itself, among the population and the ruling class, a change of course cannot be excluded either.

We see three major trends emerging for the financial markets:

  1. Europe is underperforming, as well as the euro. The U.S. is stronger, and is feeling this crisis much less in all areas.
  2. Energy and alternative energy are getting a boost from higher cash flows and investments out of necessity and large public programs. Expect to see a catch-up in renewable energy but also nuclear power. It could also well be that climate ambitions will be put on hold for a while under pressure from “Yellow Vests” and a groaning population (under expensive energy bills). 
  3. Pressure on European consumers pinched under high inflation and a drop in confidence.

In many ways, the economic winners of this crisis are the same from the corona crisis: big tech and big government. The reason is logical: big thriving tech companies suffer little from higher inflation and disruption of logistics chains or flows with Russia.

A recession is not the big problem for our economy. Perhaps it is already there: the last quarter of 2021 was somewhat weak, and the first of 2022 will be impacted by the Ukraine shock. The big problem, however, is inflation, which is worsening in Europe. Year on year we already have >7% inflation. But the problem is that it’s very broad, and continues to grow. Ukraine, of course, will not do much good about that. The ECB will shelve its plans to aggressively raise interest rates, but that means Jan Modaal’s savings will continue to melt away. If there is another 5-10% inflation this year, you have a 15-20% erosion of the saver’s purchasing power in two to three years. That is like a stock market crash that does not recover later but leaves permanent damage. It’s a big difference from the Gulf War when Belgian interest rates were… 10%. The risk-free alternative of that time: government bonds to protect purchasing power, is no longer there today.

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