The full-scale war that began with Russia’s invasion of Ukraine is barely six weeks old, and it does not look like it will end anytime soon. As we noted two weeks ago, Russia was unsuccessful in achieving its initial objectives – the overthrow of the Ukrainian government and the defeat of its armed forces. It now appears that Moscow is repositioning and reconstituting its forces to focus more combat power on the eastern portion of Ukraine – the Donbas – plus the coastal area that could connect Donbas to Russian-occupied Crimea. While this takes place, Moscow is escalating its long-range artillery, air, and missile strikes against Ukrainian cities and infrastructure such as airfields and rail junctures/stations. In the meanwhile, Western countries are stepping up their military and economic assistance to the Ukrainian government. All of this points to a significantly longer war that may not “end” in a clear and unambiguous way.
As a result, we expect Russia’s oil sector to remain under pressure from sanctions and lack of investment for an extended period of time. After hitting a post-pandemic high of 10.4 million b/d in November, Russian crude oil production has remained around 10.1 million b/d though March and will fall only modestly, if at all, in April. After April, we do expect lower exports and production. If this war drags on, however, and more atrocities are discovered, the prospects for Russia’s long term crude oil output are quite pessimistic as the ability to generate investment to stem decline, let alone develop new production would require a very different political environment in a post-Putin Russia.
Despite early setbacks in the fighting and significant economic and political sanctions levied by the West, there is no sign that the Russian government is interested in seeking a negotiated settlement with the Ukrainian government. At the very least, it does not appear that it would stop fighting until it achieved at least two military objectives. The first would be the complete occupation and control of the Donbas (the Luhansk and Donetsk regions) as well as a defensible land corridor from that region to Crimea.
The second would be a significant degradation of Ukraine’s military as well as its civilian defense, economic, and possibly also cultural infrastructure. While the first would be easier to observe and measure by looking at the front lines of the fighting and possession of territory, the second will be more difficult to assess. How much destruction of Ukraine would be enough for the Russian leadership to call a halt to fighting or at least agree to a cease-fire? In fact, even if fighting were to stop due a stalemate on the ground in the east – Russian forces unable to advance but Ukrainian forces unable to dislodge them from their territorial gains – Moscow may choose to continue its long-range strike campaign against the rest of Ukraine. Even a “peace” may be punctuated by periodic Russian kinetic strikes and cyber attacks on Ukraine designed to keep Kyiv politically and economically destabilized or simply to destroy stockpiles of military equipment delivered by the West.
The United States and European countries are stepping up their material support for Ukraine, including weaponry such as tanks and surface-to-air missiles. While Russia will retain a significant material and manpower advantage, the combination of ongoing outside supply of Ukraine and attrition of Russian forces likely means that the war will grind along slowly for a considerable period of time. Finally, even if Russia and Ukraine were to reach a ceasefire, Russian atrocities, revealed this past week at Bucha and almost certainly more broad-based, mean that Western countries will be reluctant to ease sanctions on Moscow anytime soon. It will become a long, and intermittently bloody, contest between Ukraine moving closer to the West and Russia doing everything it can to prevent that from happening.