A burst of Russian brutality
Ukraine has since mid-March faced unprecedented air raids targeting energy infrastructure, unlike anything seen since the start of the war. In previous years, such as 2022-2023, Russian strategy focused on disrupting energy supplies, to cause nationwide blackouts. But now the focus has shifted to the outright destruction of energy facilities. Up to 80% of Ukraine’s thermal power stations (in terms of power production capacities) have been completely destroyed, as of this writing. The delay in military aid and the depletion of air defense missile stocks provided the aggressor with this opportunity. These power stations are beyond repair, and we expect systemic blackouts through summer. Moreover, the heating season of 2024-2025 is expected to pose significant challenges.
Long-distance bombing with guided aerial bombs, initially tested by the Russians in Avdiivka, is now being employed in Kharkiv, Ukraine’s second-largest city, which had a population of 1.4 million before the full-scale invasion. Currently Ukraine’s air defenses are struggling to protect the city from these bombing raids, due to a shortage of air defense missiles and a U.S. prohibition on attacking Russian forces on their territory using Western equipment. Consequently, the Russians have completely destroyed Kharkiv’s energy infrastructure, and are systematically targeting social facilities, including schools and communal buildings. Their apparent objective is to render the city uninhabitable for civilians.
From a military perspective, the destruction of energy infrastructure and the intense bombing of Kharkiv are strategically perplexing. The primary objective appears to be to escalate social tension amid narratives of “perpetual war,” and “betrayal by the West.” Despite intense combat and some territorial advances, Russia's military gains have been remarkably modest, particularly given the substantial losses they’ve suffered. The strategy of achieving only minor territorial gains at a significant cost in manpower and military equipment is not likely to be perceived as a victory by the Russian public. This is why we are witnessing desperate attacks on civilian infrastructure, especially after the six-month delay in military support provided an opportunity for such tactics.
But there is still bad news for the Russians. We have not observed any significant shifts in sentiment toward making concessions. The prospect of “perpetual war,” which weighed heavily on society in winter, has now become a sort of new normal. The EU and other non-U.S. countries have stepped up efforts to provide supplies to slow Russian advances. The severity of the attacks on civilian infrastructure has highlighted the need for more advanced air defense systems. Moreover, potential military support from the United States could not only enhance Ukrainian defensive capabilities but might also facilitate a new counter-offensive, assuming sufficient equipment and ammunition are available.
Despite all the destruction Ukraine has endured, economic performance remains strong. Inflation continues to slow, dropping to +0.5% m/m or +3.2% y/y in March. Fiscal authorities successfully mobilized enough revenue during Q1 2024 to meet needs while waiting for Western bureaucracies to process financial support decisions. By the end of March, Ukraine had received significant financial injections totaling $9.3 billion, which increased gross international reserves by 18.1% to $43.8 billion (equivalent to 5.8 months of future imports). The trade deficit widened in March due to a rapid revival of imports. Consequently, the hryvnia fell below 40 per dollar. But with the resumption of foreign currency inflows, a recovery of the currency is likely.
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