Fog of war: scenarios and forecast implications

In Short

As the Russian war in Ukraine continues unabated, the toll of deaths, injuries and dislocations is rising fast. Negotiations even on most basic humanitarian relief have mostly failed thus far, frustrating hopes of a quick shift from military fights to the negotiation table. Meanwhile, Russian forces are encountering fierce Ukrainian resistance.


  • Russia’s war in Ukraine has turned increasingly bloody while meeting fierce military resistance. Talks between the two countries seem to be heating up, yet have not assuaged concerns that fights well extend for weeks if not months.
  • Sharp and far-reaching sanctions on Russia, soaring energy prices and mounting supply disruptions reverberate globally, but most so in Europe. The fog of war leaves high uncertainty about military, political and economic outcomes.
  • Our updated central scenario assumes prolonged fights and persistent sanctions. We assume the price of oil and gas to settle at even higher levels for longer. Stagflation pressures will be particularly acute in Europe: we cut our euro area growth forecast further to 2.2% (from 3.7% before the invasion), with the economy likely at the verge of recession over spring and summer. US growth will suffer less severely given the lower energy import depend-ency, while strong domestic stimulus in China will keep the fallout there contained (though the zero-Covid policy remains a drag).
  • We see no rush in re-risking and recommend a minor underweight in Equities. Yields are set to rise mildly, with safe-haven bids and economic woes largely offsetting the upside push from inflation and withdrawal of monetary accommodation.
  • A less likely favourable scenario sees an earlier ceasefire and a return to diplomacy. Sanctions would still be eased only very gradually. But deescalation would also help to bring down energy and commodity prices faster, keeping the global stagflation damage much more limited. Equities would then bounce quickly, while the faster recovery and unwinding safe-haven flows would push yields visibly higher – taming the equity rally in the process.
  • The risk scenario of a further marked military escalation and punitive sanctions including significant parts of Russian energy exports would send oil and gas prices soaring further. The euro area would face a sizable spring/summer recession. Amid soaring inflation, cornered central banks will see their hands largely tied. Ex-tended fiscal support would only partially mitigate the drag. Equities would sell off further, with safe-haven flows pushing Bund yields well below water again.

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Fog of war - scenarios and forecast implications

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