Sixteen months after the invasion of Ukraine, headlines have captured the attempt at an armed uprising against Russia’s military command by the paramilitary organization Wagner Group. Although the confrontation was short lived, many questions on the stability of Russia are brought into question.

On the 23rd of June 2023 Yevgeny Prigozhin, the leader of the Wagner mercenary group, ordered his fighters to March on Moscow to allegedly demand that Russia’s defense leaders explain why they had prosecuted the war so ineptly. The action came on the back of Prigozhin’s months-long campaign aimed allegedly at ousting Russia’s minister of defense Sergey Shoigu and Chief of General Staff Gen. Valery Gerasimov. The mutiny was shortly called off, after Belarussian President Alexander Lukashenko negotiated a deal between Prigozhin and Putin.

Despite these developments the situation in Russia remains unchanged, however it does underscore potential Russian instability. Russian instability and insecurity underscore that geopolitical risk and uncertainty remain extremely elevated and pose a threat to global risk assets.

The Ukrainian counteroffensive that began on June the 4th, although only showing modest gains so far, may be boosted by the sign of internal divisions in Russia. Ukraine’s progress has been slow and the level of success an open question. The destruction of the Kakhovka dam, the lack of air power, shortages of materiel, and the refusal of other nations to send their own troops have proven a headwind for Ukraine.

Until such a time that there is a resolution to the war, geopolitical risk will remain high. Investors will be eager to anticipate the timing of the ceasefire as the geopolitical risk posed by the war has an impact on the investment landscape through increased uncertainty and the heightened possibility of market disruption. See figure 1.

figure 1

BCA Research has argued that November 2023 is the earliest possible ceasefire, although 2024 is more likely. There are many ways that the war can play out and so at best it’s a calculated guess. If the current Ukrainian offensive becomes blocked (meaning prevented from progressing further) as winter sets in, the Europeans may taper their support for Ukraine on the basis that best opportunity has passed. If the Ukrainian counteroffensive proves successful the war could drag on into 2024, but at some point, in 2024 should run its course. Although Putin has not yet announced his intension to run for re-election on March 2024, if he is re-elected, he may be willing to consider a ceasefire despite outright victory. Figure 2 shows Putin’s historic approval rating contrasted against various key decisions taken by Russian government.

figure 2

The US has been committed to supporting Ukraine and so their continued support may motivate Ukraine to continue fighting for a prolonged period. The chance however of the war dragging on into 2025 is less likely given the pressure on Russian resources. For one oil prices have continued to fall since the onset of the war which is a drag on Russia’s economy. Russia is one of the world’s largest producers and exporters of oil and is therefore heavily reliant on a strong oil price. See Figure 3.

figure 3

The full impact of the mutiny is yet to be seen, however should it aid Ukraine’s efforts, then the timing of a ceasefire will be pushed back, and which increases the likelihood of a potential overreaction by Russia ahead of the 2024 election.
China sits in an interesting position. China is not overly excited about the war; however, they will not reject Russia’s orientation toward the East. China needs to balance Russian support without sacrificing major European trade and investment. China would also want to avoid a situation where Russia acts in desperation or self-interest, like a Russian oil embargo or use of nuclear weapons, which will ultimately hurt China.

From a currency perspective, the geopolitical risk posed by the conflict in Ukraine dampens investor confidence and appetite for risk. This risk-off environment acts as a headwind to emerging market currencies, like the rand, as investors rather turn to safe haven assets. An escalation in the conflict or an increase in Russian instability will see risk assets sell off further. Investors will need to keep a close eye on developments in Ukraine and Russia in the coming months, as the run up to the Russian election could see an increase in the chance of a major risk event.