In a move that would have been unthinkable six months ago, Volodymyr Zelensky has signalled a willingness to sit down directly with Vladimir Putin. The Ukrainian president’s office confirmed this morning that Kyiv is exploring the possibility of face-to-face negotiations, a dramatic reversal from its previous insistence on a full Russian withdrawal as a precondition. Meanwhile, Whitehall sources indicate that British diplomats have been quietly urging restraint, warning that the conflict’s escalating costs are beginning to outweigh strategic gains.
For those of us who track the market’s mood, this is the clearest signal yet that the war’s economic calculus is shifting. The gilt market, which had shrugged off earlier peace overtures, reacted with a modest rally. The 10-year yield dipped four basis points to 3.42 percent, suggesting that investors are pricing in a lower probability of prolonged conflict. Sterling, too, firmed against the dollar, gaining half a cent to $1.27. The currency market is notoriously skittish about geopolitical risk, and any hint of de-escalation is treated like a rate cut.
Let us be clear: this is not a sudden outbreak of altruism. Wars are expensive. The UK’s fiscal position, already strained by post-pandemic borrowing, is facing the twin pressures of higher defence spending and the need to support Ukrainian refugees. The Office for Budget Responsibility has pencilled in a £5 billion contingency for Ukraine aid in the current fiscal year, but the actual cost may exceed that if the fighting drags on. Inflation, which stubbornly remains above the Bank of England’s 2 percent target, is being propped up by energy price volatility linked to the conflict. A ceasefire would remove one of the biggest upside risks to the inflation outlook, giving the Monetary Policy Committee more room to ease rates.
But a cynical observer might note that Zelensky’s overture comes as Ukraine’s western backers grow weary. The US Congress has yet to approve the latest $60 billion aid package, and European stockpiles are running thin. The Ukrainian economy, which contracted by 30 percent last year, is surviving on life support. With grain exports still constrained and infrastructure destroyed, the cost of rebuilding has been estimated at $500 billion. No amount of western generosity can sustain that indefinitely.
What would a deal look like? The markets are already gaming it out. A territorial compromise, likely involving some form of autonomy for the Donbas, would be greeted as a positive by risk assets. But the devil is in the details. Any agreement that leaves Putin with a de facto veto over Ukraine’s foreign policy would be a strategic defeat for NATO and a blow to the credibility of western guarantees. That is a risk no bond market can price in easily.
For now, the cautious optimism in the City is justified. If peace talks lead to a meaningful de-escalation, we could see a rotation out of safe havens into riskier assets. But the history of this conflict suggests that Putin views negotiations as a tactical pause, not a permanent settlement. Until there is a fundamental change in Russia’s willingness to accept a sovereign Ukraine, the peace premium will remain volatile. The bottom line: hope for the best, but hedge for the worst.
