The Kremlin is massing forces for a fresh offensive in the Donbas, according to British military intelligence, with a strategic city in eastern Ukraine now squarely in Moscow's sights. The warning, released this morning by the UK Ministry of Defence, suggests that Russia is preparing to escalate its campaign to seize the remaining Ukrainian-held territory in the region. For markets, this is yet another reminder that the war is far from priced in.
The intelligence update points to a significant build-up of Russian troops, artillery, and armour near the frontline. The unnamed city, widely believed to be Chasiv Yar or the outskirts of Pokrovsk, has become a critical objective. If Russia takes it, they would gain a tactical advantage for further advances toward Kramatorsk and Sloviansk the last major Ukrainian strongholds in Donetsk province.
But this is not just about territory. The timing is telling. With the US Congress paralysed over Ukraine aid and European stockpiles running low, Kyiv is desperately short of artillery shells and air defence. The Russian command likely calculates that now is the moment to exploit that weakness. As one Ministry official put it, 'The window of opportunity is closing for Ukraine if resupply does not arrive soon.'
The market reaction so far has been muted but tense. European gas prices ticked up this morning, though nowhere near the spike of 2022. The euro is soft, and the FTSE 100 is slightly lower. But the real action is in the bond market. UK gilt yields edged higher as traders priced in the increased risk of a prolonged conflict, which keeps energy prices elevated and inflation sticky. The Bank of England will be watching closely. Any further disruption to supply chains could force them to hold rates higher for longer, choking off the already anaemic growth.
Investors should also watch the gold price. It is hovering near record highs, driven by central bank buying and geopolitical risk. If this offensive succeeds in breaking through Ukrainian lines, expect a flight to safety. The dollar will strengthen, emerging market currencies will wobble, and the usual defensive plays utilities, defence stocks, and commodities will outperform.
But here is the uncomfortable truth. The West's fiscal response to this war has been to print money and pile on debt. UK public sector net borrowing is already running at 5% of GDP. We are funding a war of attrition with borrowed money. That may be politically necessary, but it is economically dangerous. If the conflict drags on, we will see higher yields, a weaker pound, and eventually, higher taxes. That is the bottom line.
For now, the market is not panicking. But the intelligence warning is a clear signal that the next phase of the war is about to begin. And in this theatre, the consequences for inflation, interest rates, and capital flows are far from over.
