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by  BlueBay Fixed Income teamT.Ash Oct 7, 2022

It seems to me that Putin is now acting quite logically. He appears to be losing the war and he knows that he could face a humiliating defeat in Ukraine. He cannot match Ukraine in terms of motivation, cause, or now, technology and arms - thus he is using threats around nuclear weapons which would be a lose-lose situation. The offensive in Kharkiv has proven that he cannot keep, or will struggle to keep, what he currently controls.

The strategy to force negotiations is likely to build a range of pressure points:

  • The referenda in occupied lands and the hint of the use of nuclear weapons is to signal that these lands are Russia’s. Putin is implying that it’s his red line, that he will not back down at all, and would resort to the nuclear option to defend them. The 90+ percent approvals (in the recent rigged elections) coming through are to hoodwink the world that somehow the annexation of these territories is popular.
  • The mobilisation of Russians is about signalling that Russia is in this conflict for the long haul. However, the chaotic nature of the mobilisation reveals that Russia cannot sustain a long war - putting more untrained, poorly armed Russians in harm’s way risks massive casualties and lots of disgruntled troops coming home. This idea that Russia can sustain hundreds of thousands of casualties, like WWI or WW2, is just not credible in the social media world. The longer this conflict goes on, the bigger the risk of mass social unrest - Putin is breaking the social contract here.
  • The October heating season is kicking off in Europe and energy will be a continued pressure point. From the Nord Stream attacks, cutting flows through Ukraine, and with the Gazprom - Naftogaz spat kicking off there is a difficult outlook. Here, I think that Putin is trying to maximise pressure on Europe through the energy channel to get them to cave in and push Ukraine to the negotiating table.

There is also concern that Russia might threaten Western underwater telecommunications cables. It should be noted that the UK head of the armed forces met with Russia’s military attaché to the UK over the past week, and warnings were given of the consequences of such action.

Putin wants to negotiate, and he is using whatever bluffs he has available to him. In my opinion, mobilisation is a weak bluff, for energy - I think that Europe can weather the storm, but is the nuclear threat real?

“So, the strategy now is to try and force Ukraine and the West into negotiations. Putin wants to keep what he has, which is Donbas, Crimea and the land corridor to Crimea. He thinks he could sell that as a win at home.”

Will Ukraine and the West blink? For me, the key decision makers are the Ukrainians, who are doing the fighting, and the US, which is providing most of the equipment and financing.

I don’t think they will blink.

Please note that the opinions in this article are those of the author.

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