Rabobank asks whether 'off ramp' in Ukraine-Russia crisis has been missed

Some strategists are asking themselves whether an 'off ramp' from the current crisis has been missed following recent developments around Ukraine, especially Moscow's decision to recognise the entire territorial claims of Ukraine's breakaway regions.

According to Michael Every at Rabobank, initial Western sanctions in response to the recognition of the Donetsk and Luhansk People's Republics were - except for Germany's move to "pause" NordStream 2 - "milquetoast".

Critically, however, Putin later said that Moscow was recognising the territorial claim of the breakaway Donetsk and Luhansk People's Republics to the entirety of their two namesake regions and not just the 30% of their territory that they currently controlled.

Every also referenced the Financial Times, which said that Russian President, Vladimir Putin's remark that "[the] Minsk [peace agreements] were dead" was "about as close as you can get to declaring war".

"Why wouldn’t Russia pause to see if it can get by threat of force, for free, what it would otherwise have to fight for? Yet as I stressed yesterday, Russia’s maximalist demands --partition and Finlandisation-- are not going to be met by Kyiv," the strategist said.

"There is no Minsk framework to stall with. If Russian demands aren't a bluff --and why would they be?-- then logically it will take war to achieve them."

Nevertheless, he said there was a possibility that a "sudden mass" Russian troop movement deeper into Ukraine might not occur.

Instead, what might transpire is a "constant economic war aimed at destabilisation".

"[...] A constant attempt to wear Ukraine down; and a constant attempt to try to weary the easy-to-tire West from standing behind Kyiv to 'just make this all go away and let markets ramp up'."

Waiting however could mean that Ukraine was better organised and armed.

All told, Every said he wasn't surprised that the S&P 500 equity benchmark had entered correction territory despite financial markets starting to price out some of the Fed hikes that had been previously factored-in.

"[...] But US futures were trying to ramp up as usual at time of writing, assuming weak sanctions mean 'less risk' rather than flagging to Russia that it is low cost for them to continue moving forwards."

Every also noted reports overnight of Russian forces shelling a power plant in Ukrainian held Luhansk, followed by other reports in the morning of a "massive explosion" in Russian-held Donetsk.

Regarding the latter, Russian state-owned news agency Tass later said that a blast, attributed to a self-made explosive device, had hit a four-story building of the television centre's editorial facility in the Leninsky district.