Welcome to the long war: Why a Ukraine deal was never realistic

Diplomatic efforts to resolve the Ukraine conflict have failed, indicating the war will be decided on the battlefield as Russia seeks to eliminate Ukraine's sovereignty, a goal incompatible with Ukraine's desire to exist as an independent state. Despite heavy casualties and limited territorial gains, Russia aims to decouple the war from relations with the U.S. and normalize relations to alleviate sanctions, while Ukraine focuses on domestic arms production, particularly drone warfare, to compensate for potential weapon shortfalls, highlighting the ongoing military adaptation and resolve on the Ukrainian side.

Analysis

The ongoing conflict in Ukraine is set to be determined militarily, as four months of diplomatic efforts, including interactions between US President Trump and Kremlin leader Vladimir Putin, have failed to produce a ceasefire due to Russia's irreconcilable maximalist objective of eliminating Ukraine's sovereignty and statehood, which directly opposes Ukraine's desire for continued independent existence. Analysts like Andreas Umland assert that Russian imperialism cannot be neutralized by negotiation, a sentiment reinforced by Putin's framing of Ukraine's existence as the "root cause" of the war, consistent with his long-held views, such as his 2008 statement that "Ukraine is not even a state." Despite Russian pronouncements of readiness to "fight forever," exemplified by Vladimir Medinsky's reference to the 21-year Northern War, the military reality presents significant challenges for Moscow. According to the Institute for the Study of War (ISW), Russia advanced only 1,627 square kilometers in eastern Ukraine in early 2025 at a cost of 160,600 casualties, or ninety-nine casualties per square kilometer, projecting that seizing the remainder of the four claimed oblasts would take approximately 3.9 years, and nearly a century for most of Ukraine, incurring almost fifty million casualties. Economically, Russia faces severe strain from Western sanctions, growing deficits, unsustainable subsidies, and rising debt servicing costs, with recent research suggesting its perceived economic resilience is a mirage partly sustained by non-market, concessionary loans to defense contractors. Consequently, a key Kremlin strategy is to decouple the war from US-Russia relations, normalize ties with Washington, and secure sanctions relief, evidenced by Putin's overtures for economic cooperation in rare-earth minerals and energy, an idea President Trump appears open to. However, this is countered by bipartisan efforts like the Sanctioning Russia Act of 2025 and new EU/UK sanctions enacted on May 20, alongside European pledges to increase military aid to Ukraine, though European unity faces challenges from countries like Hungary and Slovakia. Ukraine, facing an existential threat, has innovated its domestic arms industry, particularly in drone warfare, becoming a pioneer in this domain since 2024 and reducing reliance on external aid. The overall sentiment surrounding these developments is "strongly negative" and the tone "pessimistic", reflecting the entrenched nature of the conflict and its profound geopolitical implications.

Key Decisions for Investors

• Given the protracted military conflict and "strongly negative" sentiment, investors should exercise caution with assets directly exposed to Russia or Ukraine, and those highly sensitive to geopolitical instability.
• Monitor the passage and impact of the Sanctioning Russia Act of 2025 and recent EU/UK sanctions, as these could further constrict Russia's economy, impacting commodity markets (especially energy) and companies with Russian operations.
• Consider potential growth in the defense sector, particularly in companies specializing in drone technology and advanced military systems, driven by Ukraine's innovations and increased defense spending in response to the conflict.
• Evaluate the long-term sustainability of Russia's war financing, as unsustainable economic pressures identified by analysts could lead to significant market disruptions or changes in Russia's strategic approach.
• Factor in the significant market volatility that could arise from any shifts in US policy towards Russia, particularly concerning economic normalization or sanctions relief, as indicated by President Trump's recent communications.