How a war of conquest has become a contest of pain

I received considerable feedback from readers in response to my publication, Bearishness, begone!. They expressed concern over the terrifying spike in European natural gas prices. In response to the EU’s support for Ukraine, Russia has weaponized its energy exports. Gazprom has already reduced Nord Stream 1 gas flows to 20% of capacity. What happens this winter? What are the consequences for the region’s economy? How will the ECB cope in light of inflationary pressures from rising energy prices?


The root of the surge in energy prices is the Russia-Ukraine war. In response to the aforementioned questions, I discuss:
  • The state of the battlefield and its outlook;
  • The hybrid war beyond the battlefield; and
  • The contest of pain between Russia and the West.



A battle of exhaustion

The relative position of each side ultimately depends on what happens on the battlefield. The Russia-Ukraine war, which was originally conceived by Moscow as a quick Blitzkrieg to conquer Ukraine, has turned into a World War I style battle of exhaustion. After a failed assault on Kyiv, Moscow pivoted to focusing on taking ground in the Donbas by concentrating its troops in that region. While Russian forces has had some success, the advances were minuscule World War I style victories. The Pentagon put the Russian victories into context by stating that, in the space of about four months, Russian advances amounted to 4-10 miles, or 7-16 km, while suffering grievous losses of personnel.


The NY Times reported that American intelligence estimates Russian losses to be more than 75,000 dead and wounded. Britain’s MI6 concurs with that assessment. The loss estimate is astounding when you consider that the initial Russian invasion force was about 180,000 troops, not all of which were combat formations.


Russia has tried to replace the losses in a number of ways, such as mandatory conscription in the breakaway Republics, the use of mercenaries such as the Wagner Group and Chechens, and the formation of new brigades by offering lavish signing bonuses and salaries in the more isolated and poorer regions of Russia. There are several challenges in forming new units. First, how well will they be trained and who will train them? Most of the officer corp has already been committed to the front lines. There are unconfirmed reports that some soldiers are being rushed into combat with as little as 1-4 weeks of training, which is just enough to train someone to handle a weapon. Artillery troops are rumored to have as little as 2-3 days of training. (see Twitter thread)


As well, what equipment will the new troops have? There are reports that the Russians are resorting to 70’s era tanks and fighting vehicles for the new troops. At best, the new troops can hold ground but they will be hard pressed to effectively conduct offensive operations.


Ukrainian losses are more difficult to compile, but they are considerable. In a War on the Rocks podcast, Michael Kofman of CNA’s Russia team said that Ukraine concentrated its best and most experienced troops in the Donbas region, which it defended well. It can only muster about five experienced brigades for a counterattack. The rest of Ukraine’s forces are mostly territorial army units with little experience and can only hold ground. Trapped Ion compiled a list of Ukrainian brigades and concluded, “There truly is no ‘reserve’ army. At best, there are a few brigades that can be used for offensive action and rotation. Ukraine is throwing in what they got. There has already been a ton of rotation and many units are absolutely mauled…I truly believe Ukraine only has enough reserves for one major counteroffensive.”



Ukraine’s Kherson offensive

Here is my assessment of the battlefield. The long-range artillery provided by the US and other NATO countries has turned the tide. The Ukrainians have used them effectively attack the weakest physical support systems of the Russian forces, namely communications networks, logistic supply routes, artillery, and command posts. The Russian offensive advantage rests on massive artillery barrages and, with the loss of the supply depots and ammunition, the artillery strikes have greatly diminished.


The Russian Donbas offensive is stalled. The Ukrainians are preparing for a counterattack in the south with a focus on the Kherson region. Kherson is important for a number of reasons. The city lies just west of the Dnipro River and it’s a Black Sea port. Retaking Kherson will show that Ukraine can show some success on the battlefield, and thwart Russia’s stated plan to annex the region by holding a September referendum. More importantly, Kherson Oblast controls Crimea’s water supply.


In the battle for Kherson, Ukrainian artillery has taken out two major bridges across the Dnipro river, which leaves the Russian army on the west side of the river isolated. While Russians have laid a pontoon bridge adjacent to the destroyed rail crossing, supplies are only trickling in. Russian forces are being starved of food, ammunition, and fuel.



Phillips O’Brien, professor of strategic studies at St. Andrews University, assesses that the Russian offensive is stalled because of a lack of artillery ammunition from Ukraine’s effective use of long-range artillery to interdict ammunition supply. Ukrainian forces are making probing attacks against the isolated Russian forces west of the Dnipro:


The Ukrainians seem to be carving the Kherson front into separate districts for the Russians, which will have huge difficulties supporting each other. This is why they have been cutting the bridges over the Dnipr river, but also the rivers dividing the areas on the west bank. Having made these areas non-supporting, and also reduced Russian ranged fires, they are now probing it for weaknesses without taking massive risks. Its not glamorous, but its smart. They seem to be sending small units to find weak points. So while the Ukrainians seem to be advancing in Kherson about as slowly as the Russians advanced in the Donbas, they are doing is far more intelligently. 1) they are not risking suffering major losses. 2) They are doing it not just by blasting the land in front of them that they want to take (making their plans obvious) but by severely hampering Russian abilities to fight back through the logistics and command/control attacks.

If Ukraine is successful in its Kherson counteroffensive, it will be a major victory for Kyiv, both on the battlefield and strategically. Make no mistake, the Kherson counterattack may be the last attack by Ukrainian forces. Both sides are exhausted. The war is resolving into a World War I style stalemate.



The hybrid war

Some defense analysts are already forecasting a frozen conflict in the manner of the Donbas in 2014, as well as the ones in Tranistria, Nagorno-Karabakh, South Ossetia, Abkhazia, and Crimea. However, the war extends well beyond the actual battlefield. The West has already imposed a series of sanctions on Russia. Russia, in return, is using energy and food as weapons against the West.


In particular, the EU faces the prospect of a Russian gas cutoff, a cold winter, and a recession. I already pointed out that the European Commission has estimated that a full cutoff of Russian gas during an average winter could reduce the EU’s GDP by 0.6-1% if no action is taken in advance to conserve energy. In a cold winter, a cutoff without preparation could lower GDP by an average of 0.9-1.5%. The IMF also modeled the effects of a Russian gas cutoff. Its effects would depend on two assumptions: “An integrated-market approach that assumes gas can get where it is needed, and prices adjust…[or] a fragmented-market approach that is best used when the gas cannot go where needed no matter how much prices rise.” The magnitude of effects of the IMF model are broadly similar to the European Commission’s model.



However, , a research paper by Sonnenfeld et al at Yale found that sanctions are crippling the Russian economy. The risk/reward for Europe is asymmetric. Russia is more dependent on Europe for natural gas exports than vice versa.



Russia faces steep challenges executing a “pivot to Asia” in commodity exports.



Russian imports have largely collapsed, and the country faces stark challenges securing crucial inputs, parts and technology from hesitant trade partners.



Russian domestic production has come to a complete standstill because of sanctions. Reports that Russia is in discussion to buy Iranian UAVs, or drones, is testament to Russian industrial capability.



Inflation is rising, especially in sectors dependent on foreign inputs.



In short, the Russian economy is collapsing.



Even the foreign reserve account is falling in spite of the spike in energy prices.



In summary, while a gas embargo will cost the EU up to -1.5% of GDP growth, which will be painful, the Russian economy is undergoing a post-Soviet-style collapse. The scenario of a frozen conflict by military analysts, while theoretically possible, is unlikely. The war has become a contest of which side is willing to bear more pain. If Russia has to continue to endure sanctions and an economic collapse, Putin faces the rising risk of political instability because of the tanking economy. This analysis by Kamil Galeev of Russian losses indicates that the Russian military is mainly recruiting in the less populated and poorer regions. It also explains why Putin has labeled the conflict a “special military operation” instead of a war. A war would triggers mobilization and conscription, and there would be far more casualties among the Moscow and St. Petersberg elite, which would be politically expensive. His only hope is to engineer sufficient pain in the West and to try to influence upcoming elections, such as in Italy and the US midterms, to effect changes in government policy that are more friendly to Moscow.



Which side can bear more pain? When both sides eventually reach the negotiation table, which will hold the better hand? The recent cover of The Economist may hold some clues as a contrarian magazine cover indicator. I recently observed that stock prices are inversely correlated to oil prices. If the war is resolved and energy prices slide, the stock market could rocket upwards.



Stay tuned.


15 thoughts on “How a war of conquest has become a contest of pain

  1. Hello Cam, informative insight. Could it also be that the recent drop in energy along with most other commodities is forecasting a deeper corporate earnings recession than you are interpreting?
    Also, it seems that the recent bias towards the fed turning more dovish by many investors sounds and feels similar to the same crowd that followed the fed into the “inflation is transitory” storm?
    Be well.

    1. I think you are right. Falling energy is reflective of the anticipation of slower growth.

  2. The crucial difference in such a war is one of motivation and execution. There are numerous stories of how a small squadron held off or defeated the enemy.
    What is a Russian soldier fighting for? Putin? His homeland?
    What is an Ukrainian soldier fighting for? To avoid Russian tyranny and to preserve their way of life.

      1. I can guarantee you the storm is from Russian cells in Western countries, if not outright from their operation in Moscow. Soviets and Russians have planted many cells and bought off many people over the years in Western countries, many in media business and colleges. The operation is to relentlessly drive wedges anywhere opportunities present themselves. The goal is to erode social cohesion and subvert value systems. Since 60s any social movements have them in there to fan the flame. Today with the Internet it just gets so much worse,

        Who are these people embedded in our Country? Just a very small partial list contains names which probably will shock you.

    1. You’ve addressed the motivation issue, but what about execution. As I pointed out, the Ukrainians have few veteran units able to mount an attack.

      The UK is training fresh Ukrainian recruits and cycling through in three weeks. UK Army basic training is 14 weeks, after which the soldiers receive further training in their specialist role. Officer training is 44 weeks. US Army basic training is 9 weeks, just to produce an infantryman.

      Sorry to say it, but a poorly trained territorial army is just cannon fodder, useful for holding ground. Even if the Ukrainians were to successful in retaking Kherson, they’ll need more trained troops to mount proper offensives.

      1. Russians are just as depleted based on the analysis above. Recruiting from impoverished areas to build forces. They are most likely being forced into service, poorly trained and no motivation to fight. Russia failed to take over Kyiv when they had overwhelming advantage.
        West was slow to provide needed arms and ammunition. Germany has still not fulfilled it’s promises. Maybe it will get better.
        And who has friends that matter? Would China step in to help? They have other territorial ambitions.
        None of this negates the hypothesis but makes it much weaker.

  3. Cam- I notice that you don’t list the long ZROZ trade in the Inner Trader section – so it’s probably more of an off-the-beaten-path type trade. Just wondering if you plan to send an alert when you close the trade, and whether you have a target price in mind. Thanks.

  4. For what it is worth, if anyone is in the long duration bonds trade such as ZROZ or just TLT, it may be a while before it is more bullish as the Smart Money Flow index for either of them looked nothing like the $SPX which has a free live chart link in previous posts. This is the picture of SMF index for ZROZ:

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