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Central banks around the world aren’t done tightening yet. Rationalizing their continued rate-hike decisions, bank chiefs are seen giving a similar list of inflationary charge-sheet heading into 2023: i) Covid-era supply-chain bottlenecks in production that refuse to resolve fully, ii) post-pandemic consumer rush in mid-late 2022 to enjoy previously-restricted services (e.g. tourism and hospitality) while service providers faced capacity issues, and iii) the war in Ukraine that has roiled energy and food markets.

While the first two challenges are expected to moderate next year due to structural reasons (increase in production and service capacities) as well as the dampening impact of high-interest rates and tighter financial markets on aggregate demand, the third challenge does not appear to be on the mend.

Nearly ten months into its blatant aggression, Russia has weathered global sanctions, but it hasn’t quite met the objectives of the war. Still, it does not appear in the mood to retreat completely and salvage its reputation.

What might completely resolve the Russia-Ukraine conflict (and consequently lead to normalization in commodity prices) is a negotiated settlement that leads to long-term guarantees to secure peace and quiet at the edge of Europe. Instead, what we have is a situation where both sides are digging in. Russia, as pointed out earlier, is still committed to war, focusing increasingly on dividing global sympathies with Ukraine. There are also early signs of ‘donor fatigue’ setting in among the US and its allies.

Meanwhile, in Ukraine, the public has braved continuous death and misery around them, as soldiers have fought valiantly to push back Russian forces from main cities towards Eastern and southern borders, taking back occupied territories on the way. The Ukrainian government is optimistic to achieve full victory. However, Western observers have pointed out that there is a limit to Ukrainian advances and that now is the best time to sit down and peacefully end this war (as suggested by the US military chief as well).

As Russia increasingly targets Ukrainian strategic assets and plunges that country into darkness and cold by destroying energy infrastructure, there is little appetite in the Ukrainian government to sit down with Russia and talk about a deal that would inevitably involve a territorial compromise.

Russia probably won’t turn its back East without taking a chunk of Ukrainian territory that it currently holds. Such a scenario is unacceptable to Ukrainians who have suffered so much during almost a year in this brutal war.

While Western powers have incentives for this war to end soon, they cannot afford to abandon Ukraine as it might lead to Russian victory and future aggression along NATO’s eastern flank, threatening the Baltic states. On top of already-delivered economic and security aid to Ukraine, the EU this week pledged $19 billion worth of humanitarian aid. The US is reportedly planning to give the embattled country its flagship Patriot Missile Defense System, which can provide long-range defense against Russian airborne attacks.

Some cynical minds have noted hawkish calculations are at play: the US wants to take this opportunity to bury Putin’s long regime by turning Ukraine into another Afghanistan for Russia. While that may be Plan B or C, but if Russia is humiliated with its back to the wall and it resorted to nuclear strikes (as suggested by Putin himself a few times), it won’t end well for anybody (to put it mildly). That’s perhaps why measures like the G7’s price cap on Russian oil sales are meant to find a middle ground and reduce uncertainty in energy markets. But a side-effect of such concessions is an entrenchment of this war. It’s like a catch-22.


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