The impact of a Russia-Ukraine peace deal

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The consequences of a peace deal

With US President Donald Trump pushing for his latest peace deal, it is possible that the Russia-Ukraine war could soon enter a different phase — hopefully a less violent one. The economic and market impact is perhaps not the most important aspect of whatever deal the parties and their allies eventually reach. But it is an important aspect.

A compromise favouring Russia could involve Kyiv ceding territory in eastern Ukraine and receiving little to no security guarantees in return. While this would reduce Ukraine’s overall reconstruction costs (estimated at $524bn by the World Bank), it would also deter investment into postwar rebuilding efforts, if the compromise looked unstable. “If you are looking at a peace you don’t believe in, a private company isn’t going to put in money for new capital reconstruction or greenfield projects that have a lifetime of maybe a couple decades”, points out Jacob Kirkegaard of the Peterson Institute for International Economics. In such a scenario, a continued European defence build-out would be bigger and more likely. 

An agreement that contains enforceable security guarantees for Ukraine would be better for the country’s economy and that of broader Europe. Less uncertainty and the prospect of reconstruction projects will certainly be a tailwind for several European industries. Kirkegaard believes that the benefits of such a deal would outweigh the costs of relinquishing some territories, which, while heavily damaged from the war, offer strategic Black Sea access, industrial assets and natural resources: 

It’s often an under-appreciated fact what a positive shock to the entire European economy a peace that is credible and favours Ukraine would be. It would yield an independent Ukraine that could be credibly defended even if it didn’t get all its territories back. The rest of Ukraine not controlled by Russia could join the EU and be fully integrated with the rest of Europe. With EU membership, Ukraine would attract a very large amount of FDI, because it is the last frontier for the EU, and it is a relatively poor country relative to the rest of the EU

A peace deal might subdue but is unlikely to reverse the rising trend in European defence spending, which has lifted stocks in the sector to new heights:

 “A lot of people think . . . that peace would stop the European defence rebuilding effort. We don’t think that’s the case,” said Davide Oneglia of TS Lombard. Despite the recent rise in defence spending, it accounted for just 1.9 per cent of Euro area GDP last year, which is still a long way from its 5 per cent target for 2035. “There is still a very strong incentive to continue, as there is a feeling, especially from the Baltic countries, that [Vladimir] Putin might wish to try again, and Europe is not quite ready,” Oneglia said. Ukraine has already emerged as a defence innovation hub with secret manufacturing plants — and without the prospect of attack, production can expand.

Contrary to some hopes, however, peace is not likely to have much impact on the oil market. The outbreak of the war and the subsequent price shock to oil prices has convinced the rest of Europe to pursue energy independence from Russia. “As a result, the impact of a peace agreement on energy prices would probably be small. Oil flows have largely been resilient to sanctions anyway because India and China stepped in as buyers of Russian crude,” noted William Jackson at Capital Economics. Although Russian sanctions relief from a peace deal could reduce the risk premium on oil prices, the expected offset is modest. 

“We should certainly hope for peace, for humanitarian reasons and for Ukraine’s sake. But even if peace were to break out tomorrow, it wouldn’t change much in terms of European policy, because the real issue for Europe, first and foremost, is to militarily deter Russia and weaken its economy,” Kirkegaard said. “The cynical truth is that from a European perspective, continued war is better than a bad peace.”

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