Ukraine peace talks: nervous investors plan to boost European equity portfolios

Analysts are split on whether talks between the US and Russia can achieve peace in Ukraine and improve market fortunes, while Kyiv and Europe are frozen out of negotiations.

As delegations from the US and Russia convene in Saudi Arabia to begin negotiations for a peace settlement in Ukraine, parties with the greatest stakes are left watching from the sidelines.

These include: a Ukrainian people and government under relentless attack by Russia for three years; international investors plagued by trade restrictions and sanctions resulting from the conflict; and leaders of a European continent, fearing marginalisation on the world stage, while dreaming of revitalisation of their beleaguered economies.

Most economists are sceptical over possibilities for a lasting peace in Ukraine, bearing in mind Vladimir Putin’s regular claims that Ukraine has historically been part of Russia.

They also feel the US negotiating position is music to Moscow’s ears. This follows Washington’s announcements that it wants a new economic relationship with Russia, that it is unrealistic for Ukraine to join Nato or reclaim territory invaded by Russia, leaving Kyiv and western allies with a disadvantaged negotiating position.

President Donald Trump has further riled Ukrainians by suggesting Ukraine started the war with Russia and that its president, Volodymyr Zelenskyy is a dictator with marginal public support, echoing Moscow’s long-term propaganda. These stark claims have led President Zelenskyy to describe the US as “living in a disinformation space” created by Russia.

Conceded leverage

The belief in Ukraine is that its closest ally is fast becoming hostile. “The only logic is that Trump is an asset of Putin, and he is now delivering that agenda,” says Timothy Ash, senior emerging markets sovereign strategist at RBC BlueBay Asset Management. “Europe now has to stand up for Ukraine and forget about Trump.”

In a deeper analysis of the peace talks, Mr Ash, along with most commentators, claims President Trump has given away much of the leverage the West held over Putin: Nato membership, territorial concessions, and US security guarantees for Ukraine or for a Western peacekeeping force for Ukraine.

“It is hard to see what Trump can deliver which will now ensure Ukraine’s security,” writes Mr Ash in his blog. “What is Putin going to give as a concession? So far, from the Trump administration, it is a one-way stream of concessions to Russia. Putin will surely see Trump as a soft touch, a weak, incompetent negotiator, and will push for maximum concessions from Ukraine,” says Mr Ash, one of few economists to predict Russia’s full-scale invasion of Ukraine in February 2022.

These concessions, believes Mr Ash, who has also worked closely with Ukraine’s financial institutions, are likely to include limitations on Kyiv’s future military capability, regime change in Kyiv, or even constitutional changes in Ukraine to essentially ensure Russia’s veto on its future orientation.

This, he says, would prove “a recipe for state failure in Ukraine”, creating a “nightmare” scenario in the European Union, whose economic, political and social fabric would be severely stretched by “tens of millions” of Ukrainian refugees. Mr Ash’s view is supported by John Herbst, former US ambassador to Ukraine, currently senior director of the Atlantic Council’s Eurasia Center, who believes “Putin has no interest in accepting compromise; he wants total control of Ukraine.”

Russian manpower shortage

While most expect Ukraine to walk away from a “peace deal” straight from Russian president Vladimir Putin’s playbook, analysts are by no means united about today’s power dynamics. Some believes Ukraine is in a much stronger position — and Russia in a weaker one — than currently accepted by international negotiators and world leaders.

Speaking on a call with investors organised by the Eurasia Center, Russia’s former deputy energy minister, Vladimir Milov, described a Russian National Wealth Fund “nearly out of cash”, reduced to “about one third where it was when Putin invaded Ukraine full scale three years ago”, compounded by “a wild shortage of manpower, both in the labour market and military on the battlefield in Ukraine”.

Combined with “exhausted” manufacturing capacity failing to substitute supplies of critical technology sanctioned by Western markets, the problems have left Russia with severely restricted ability to advance on the battlefield.

Western partners coming to the negotiating table with President Putin today are missing a major trick and would be making a “premature” offer which delights Moscow, believes Mr Milov.

“Just a few more months with this extreme resource depletion and exhaustion on all fronts, and Russia would have been in a much more vulnerable negotiating position, and it would have probably agreed to give away major concessions, because it cannot advance militarily, cannot sustain the war effort for much longer,” he told investors. “We're just nearing the critical resource depletion levels on the Russian side: financial resources, manpower, military production.”

‘Civil war’ among Moscow elites

Stephen Frederick Starr, who has advised several US presidents on Russian and Eurasian affairs, speaks of a “civil war within the absolute top of the elite” in Russia, with commentators prepared to criticise President Putin by name, rather than vague admonishments of “the leadership”.  Although he believes Russia has lost the military, economic and ideational struggle, both domestically and on the battlefield, he points to a “giddy euphoria” currently infecting Moscow, encouraged by Mr Trump’s peace plan and US policy failing to emphasise strategic goals, such as maintaining control and navigation of the Black Sea.

“If Crimea ends up in Russian hands, we can forget south-east Europe. They've been absolutely neutered in their international effectiveness,” says Mr Starr, who fears an economic “body blow” to Turkey, a Nato member.

Panelists on the Eurasia call agreed that markets “are moving on sentiment, rather than fundamentals”, because of the discussions in Riyadh.

Long-term impact of these discussions on investments and economies is a matter of debate, with differing views of the chances of a lasting peace and resulting boom for European markets.

“A ceasefire that remains in place is a reasonable probability in the end, as there is a way to go with these talks to get to that conclusion,” says Edmund Shing, global chief investment officer at BNP Paribas Wealth Management in Paris, suggesting a 40 per cent “ballpark” figure.

Reconstruction dividends

During reconstruction of war-damaged Ukraine, Mr Shing suggests allocation to European industrial goods and services plus steelmaking, financials and building materials.

Energy-intensive industries like chemicals, including fertiliser making, could also benefit. Mr Shing also backs travel companies such as Wizz Air to potentially perform well if traffic to and from Ukraine increases substantially.

But it is lower energy prices and recovery in consumer confidence which he expects to have greatest impact. “We would expect that the risk premium in oil and gas prices — and thus indirectly in electricity prices — should come down,” he says.

Defence stocks are also expected to benefit as demands on European Nato members to increase spending significantly intensify, particularly if Europe is to provide a peacekeeping force.

“The talks could influence everything from trade policies to defence budgets,” says Nigel Green, CEO of Dubai-based financial advisory firm deVere. “If there are signs of progress, risk assets like European equities and emerging market currencies may strengthen. However, continued deadlock or an escalation in rhetoric could push investors further toward safe-haven assets, intensifying pressure on bonds and gold.”

There are also long-term issues which the war can amplify. “Markets love stability, and this meeting at least opens the door for negotiations,” says Mr Green. “But without Ukraine and the EU at the table, there’s every chance that this turns into another geopolitical standoff with no real economic relief” and markets left “on edge” for the foreseeable future.

“This isn’t just about Ukraine, it’s about the balance of power in global markets,” he believes.

Ukrainian compromises

A much more optimistic view comes from Sharmila Whelan, global macro strategist at Westbourne Research, formerly an economist with Merrill Lynch and BP in Asia, who believes the Saudi talks have a “100 per cent chance” of achieving lasting peace.

“For Russia and Putin, this is not about empire expansion, but creating a buffer in Europe against Nato, and Russia’s sovereignty,” believes Ms Whelan. “Ukraine feels like it’s making all the compromises, but from Putin’s point of view, taking over Luhansk and Donetsk rather than all of Ukraine is already a compromise.”

There is little economic value for Russia, a huge country rich in mineral resources, in taking over Ukraine, she says. “For Russia, the purpose of Ukraine is geopolitical and strategic.”

Europe is ready for cyclical revival, she believes, now that savings are reducing and retail sales rising once more. While growth has been sluggish during the current tariff war, Ms Whelan expects European growth to take off in the second half of 2025, once the Ukrainian reconstruction programme gains momentum.

Defence stocks could be boosted, but increased spending on security could also cause fiscal problems, leading to reallocation of priorities in European economies. “The green transition may well have to be put on ice, as there will be a need to cut spending,” she says.

War crimes

President Trump has also spoken increasingly about economic and investment opportunities which can be shared by the US and Russia, once Moscow is re-integrated into the global political and financial system.

Although the US authorities are keen to sign an accord with Moscow, that would re-open the field to US institutional investors, a stark warning comes from Mr Ash at RBC BlueBay Asset Management, who finds it “amazing” at how many firms are excited about the prospect of getting back into Russia.

“Their institutions might sound the PR trumpets around ESG, but they are quick to forget the butcher of Bucha, war crimes, genocide and the fact that Putin has ripped the face off so many real investors in Russia over the past three years,” warns Mr Ash. “Good luck with those same investments in the future.”