Trump’s turn on Russia sanctions marks a new stage in the war
U.S. President Donald Trump has finally taken a step toward tightening sanctions on Russia, after nine months of flip-flopping, by slapping sanctions on Russia’s two largest oil exporters, Lukoil and Rosneft. We are not overly enthusiastic about this move, since it’s quite possible that within a week Trump will change his mind again, after yet another conversation with Russian President Vladimir Putin. Still, it seems the honeymoon in relations between Trump and Putin has ended. Should we now see the “offended narcissist” scenario -- where Trump feels slighted by Putin’s reaction, after offering him unprecedentedly favorable terms for ending this shameful war -- then tougher measures may soon follow, unless Putin quickly de-escalates. We consider that outcome highly unlikely.
The war meanwhile grinds on, with Russia intensifying strikes on energy infrastructure ahead of the heating season, betting that the collapse of heating, water and electricity supplies could force Ukraine’s leadership to surrender. In return, Ukrainian forces continue to target Russian oil refineries, production facilities and energy infrastructure. As expected, the fighting is escalating, and growing even more brutal, with no end or even a pause in sight.
The Ukrainian economy is cooling, in the fourth year of intense fighting. Hefty injections from Western partners are still enroute, and we expect $54.3 billion in financial support to arrive by the end of 2025, which would boost Ukraine’s gross reserves to more than $53 billion in 2025. However, industrial production is slowing, consumption is easing and 2025 crop results look unimpressive. Since the economy remains heavily dependent on external support, modest performance in the real sector (that’s natural, under daily air strikes) is neither a major issue nor a surprise. But keeping the economy afloat will require further injections. A “reparations loan,” backed by at least €140 billion in frozen Russian reserves, is under discussion, and we expect a decision to be approved in one form or another, allowing Ukraine to sustain its resistance for the next two to three years.
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