In a move that will surprise no one who has been watching the bond markets, Vladimir Putin has once again refused to engage in direct talks with Volodymyr Zelensky. The Kremlin's latest dismissal of diplomatic overtures is a reminder that this conflict, now grinding into its third year, is not about to resolve itself any time soon. And for the markets, that means continued uncertainty, continued volatility, and continued upward pressure on defence spending.
Let us be clear: war is expensive. The Ukraine conflict has already cost the global economy an estimated $1 trillion in lost output, disrupted supply chains, and fuelled inflation. The UK, for its part, has committed £12.3 billion in military and humanitarian aid. That is a lot of gilt issuance. And with interest rates still elevated, the cost of servicing that debt is not going away. The longer the war drags on, the more it eats into the fiscal headroom that governments might otherwise use for tax cuts or public services.
Putin's refusal to negotiate is, of course, a strategic choice. He is betting that Western support for Ukraine will wane. And he may have a point. The US election cycle, European political fragmentation and the simmering discontent over energy prices all suggest that patience is not infinite. For the markets, this creates a binary risk: either Ukraine holds the line and Western support continues, in which case defence spending remains high and inflation sticks, or there is a sudden collapse, triggering a risk-off event and a flight to safety.
Either way, the bottom line is that the conflict is a drag on productivity and capital formation. We are seeing it in the data: UK GDP growth is anaemic, business investment is subdued and the service sector is struggling to find workers. Meanwhile, the Bank of England is caught between a rock and a hard place. It wants to bring down inflation, but it cannot ignore the supply side shocks emanating from Eastern Europe. The result is a policy mix that is heavy on caution and light on conviction.
For investors, the message is clear: diversify, hedge and prepare for a long haul. The days of easy money and peace dividends are over. We are in a new era of geopolitical risk, where the cost of capital is higher and the margin for error is thinner. Putin may think he can outlast the West. But he is also outlasting the patience of the markets. And that is a dangerous game to play.
In the meantime, keep an eye on those gilt yields. They are telling you the real story: the market is pricing in a prolonged conflict and its attendant fiscal costs. The front pages may focus on the diplomatic drama, but the back pages are where the real battle is being fought. And right now, it is a stalemate.
