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After a year of war in Ukraine, a swift resolution of the conflict seems a remote prospect. Neither Ukraine nor Russia is likely to emerge the clear victor. However, none of the other conceivable scenarios has a probability above 50% of materializing either. The armed conflict in the heart of Europe threatens to turn into a proxy war between the USA and China during the course of this year.

A year of war and no end in sight

Late February marked the first anniversary of the war between Russia and Ukraine. It by now unquestionably qualifies as the most cataclysmic military conflict since the Second World War, and it is bound to leave a lasting imprint and permanent changes on Europe and the world. A bloody war of attrition has been playing out on the battlefield for months now. Observers expect Russia to widen its current offensive in the Donbass region in the weeks ahead. Ukraine looks set to continue concentrating on defense for now and on planning a spring counteroffensive. The two diametrically opposed extreme scenarios of a victory by Russia or a triumph by Ukraine are both very unlikely to come true as things currently stand. Russia’s military capabilities have been weakened too much to conquer all of Ukraine. Ukraine, on the other hand, would need much more Western weaponry (and at a much faster pace) than the West is prepared to supply. However, none of the other conceivable scenarios has a probability above 50% of materializing either. The likeliest development over the course of this year is continued attrition on both sides without any decisive breakthroughs.

Russia and China versus the West?

Perseverance and external support are bound to be the clinching factors for success or failure in the long run. Russia is at an advantage in terms of population size (140 million vs. 40 million) and potential for recruiting soldiers. Moreover, the armed conflict is playing out exclusively on Ukrainian soil and is steadily degrading Ukraine’s industrial base and the country’s civil and military infrastructure. On the other hand, Ukraine’s population has very high morale, whereas another mass mobilization in Russia could spark growing public discontent. Ukraine can upgrade the quality of its armaments with help from the West, whereas Russia is (officially) barred access to Western technology. Furthermore, ever stricter sanctions have thrust Russia’s economy into a downward spiral with no foreseeable bottom. After the Western world had already pledged more than USD 155 billion worth of military and civilian aid to Ukraine, US President Joe Biden underscored that commitment during a visit to Kyiv in late February. Ukraine can continue to count on solid support from the West this year and next, but as the US presidential election in November 2024 draws closer, there is an increasing risk that Western countries may eventually lose patience and press for a resolution of the conflict. Recent news reports that China may be preparing to provide military support to Russia additionally heightens geopolitical risk both locally and globally. Protracted armed conflict in Ukraine could expand into a proxy war between the USA and China. That would further intensify and accelerate the decoupling of China from the West that is already underway anyhow.

The economic wreckage

After more than twelve months of war in the heart of Europe, the economic damage it has wreaked (on Europe) can be quantified by now, albeit only as preliminary rough estimates. The eurozone is facing drastically elevated general price levels particularly as a result of a huge spike in energy prices caused by radi- cally reduced natural gas imports from Russia. The inflation rate in the Eurozone at the end of 2024 looks set to be at least eight percentage points higher than under the scenario with no war. The adverse impact of the war is likely to shave around three percentage points off GDP growth over the period through end2024. The biggest negative effects on economic activity are probably already behind us or will be digested in the quarters ahead. However, Russia still has levers and ways with which to hit back at Western sanctions. A cutback in Russian petroleum production, for instance, could put upward pressure on world oil prices and stoke inflation in the Eurozone.

After more than 12 months of war in the middle of Europe, its economic damage can now be quantified

Margins remained under pressure accordinglysince a high of 13% in summer 2021, they have now fallen for the sixth time in a row (to 11.3%)