Ukraine’s future: staying above the turmoil

Analysis 25 Feb 2025

Federico Saleri

Ukraine Europe Political and Country Risk Investor Services Security Risk Management

The US’ aggressive rhetoric toward Europe and the perceived sidelining of Ukraine have created turmoil. However, the outlines of a possible peace deal are fuzzy at best, and the chances of success are low. Meanwhile, the war continues at the same level of intensity, and a breakthrough on the battlefield remains unlikely in the coming months. While the Ukraine-US agreement on rare earths would represent the first step towards reaching the conditions for a ceasefire, companies should avoid drawing emotional conclusions and stay above the hectic flurry of statements, keeping a close eye on all key players – their leverage as well as their weaknesses.

The fog of war

With discussions about Ukraine increasingly happening outside of – and, to some extent, without – Ukraine, the war continues at its usual pace. From a military perspective, the conditions are not yet ripe for negotiations, which typically occur when one side is clearly losing or when the conflict has reached a stalemate – neither of which is currently the case.

Russia retains the upper hand on the battlefield but will still face increasingly high economic pressure to sustain its efforts. In both new and ongoing offensives, Russia will continue to suffer significant manpower and equipment losses, likely impeding the conducting of mass assault operations along multiple axes simultaneously. At the same time, Ukraine remains on the back foot as it tries to solve its systemic issues concerning manpower generation and force allocation.

For as long as Ukraine maintains a presence – albeit small – on Russia’s territory, Putin is unlikely to agree to freezing the frontlines – or, as the Kremlin calls it, “recognising the realities on the ground”. Russia has not yet fully committed its troops to regain full control of its Kursk region, indicating that it does not yet intend to stop the fighting.

While both sides would benefit from a ceasefire, neither appears willing to compromise. Ukraine seeks long-term security guarantees, while Russia remains committed to ensuring Ukraine never joins NATO, remains politically neutral and, ideally, pro-Russian.

The fog of talk

Since Trump’s inauguration, President Zelenskiy has demonstrated a willingness to engage with Trump’s transactional approach to negotiations. In November 2024, Zelenskiy proposed access to Ukraine’s natural resources in exchange for continued US support. While the first attempt to formalise such a deal fell short at the Munich Security Conference due to it being overly skewed toward US commercial interests and lacking details on security guarantees, the parties on 25 February seemed to have reached an agreement. The deal reportedly does not include security guarantees from the US. However, it will serve as Ukraine’s contracting mechanism to secure the US’ ongoing provision of military equipment, turning Ukraine, in the eyes of US President Donald Trump, from a beneficiary into a client.

By bolstering Ukraine’s military capabilities, the agreement's signing would likely be the first in a long and brittle step-by-step process to reach the military and political conditions for a ceasefire, enabling peace negotiations.

Regarding how the West would provide security guarantees to Ukraine, however, one thing seems certain: NATO membership is not an option. With both Trump and US Secretary of Defense Pete Hegseth making this point so explicitly, Russia has succeeded in achieving one of its key objectives in the war without having to offer anything in exchange. And the Trump administration kicked off the worst crisis in transatlantic relations in recent history through Vice President JD Vance’s scathing speech to European leaders at the Munich Security Conference, where he threw the weight of the US government behind right-wing populist parties.

Following the first official meeting on 18 February between US Secretary of State Marco Rubio and his Russian counterpart Sergey Lavrov, Control Risks remains cautious. Despite the flurry of diplomatic activity driven by Trump’s ambition to finalise a diplomatic agreement on Ukraine, talks could still collapse. The actual expectations about a potential deal and the concessions to be made, if any, are uncertain. As US-Russia engagement takes place behind the scenes, this is not a guarantee of either a successful or a quick agreement.

A clear (though rocky) path for Europe

Trump’s remarks, “We have an ocean in between, they don’t,” sent a clear message to European leaders: Ukraine is your problem. Hastened by pressure from the Trump administration, European leaders agree that the region must increase defence spending significantly. The EU’s delayed and insufficient efforts to establish a new security framework in coordination with its defence sector since Russia’s invasion of Ukraine have left it heavily dependent on the US.

In light of these US-Europe fractures, UK Prime Minister Keir Starmer on 25 February announced plans for the UK to increase defence spending to 2.5% of GDP by 2027. In Germany, the need to increase defence spending will also be at the centre of coalition talks, as leader of the centre-right Christian Democrats (Christian Democratic Union and Christian Social Union, CDU/CSU) Friedrick Merz announced that building European unity and strategic autonomy would be his "absolute priority”.

While reduced US commitments and pressure, Russia’s strategic ambitions, and the poor state of several key European militaries all suggest an urgent need for expansion, several constraints remain. A sluggish economy, limited fiscal flexibility - the UK, for example, is considering an 11% cut to its civil service budget to make room for increased defence spending - and domestic instability in key member states are slowing a more rapid buildup.

Still, the overall trajectory for Europe’s defence remains upward, with a last-resort option of tapping USD 300bn worth of Russian frozen assets, the majority of which sits in European financial institutions.

Possibilities on the horizon

The US’ present confrontational approach to Europe is more likely a pressure tactic than a long-term strategy. A deal that benefits Ukraine is still a credible possibility. In line with its transactional approach, the Trump administration appears willing to continue selling arms to Europe for use in Ukraine. The US is also discussing a deal with Ukraine to provide military support in exchange for a front seat in the country’s reconstruction and for access to resources.

The parties can still meet halfway, especially if Russia agrees to compromise. The easing of some Russia sanctions would then be among the topics on the table that are most relevant for businesses. The prospects will likely be measured against the concessions Russia is willing to provide.

If the prospect of a ceasefire or peace negotiations increases, so do opportunities related to Ukraine’s rebuilding and reconstruction efforts, including investment into sectors such as agriculture, drone technology and IT.

Updated analysis from the Ukraine-Russia monitor, 13 March edition:

US, Ukraine repair relations, but further clashes cannot be ruled out

The beginning of the week was a time for rapport. The US and Ukraine held a lengthy meeting in Saudi Arabia on 11 March but emerged with differences reconciled. The US immediately resumed military aid to and intelligence sharing with Ukraine, largely suspended after a heated altercation between US President Donald Trump and Ukrainian President Volodymyr Zelenskiy on 28 February. In return, Ukraine agreed to back up the US proposal for a full ceasefire for 30 days, with possibility of prolongation. The deal on US access to Ukrainian minerals was not signed but remains on the table.
The outcome did not come out of the blue. Zelenskiy had given the US ample praise in the preceding days, and reportedly did send Trump some form of written apology for their argument. Media reports also mentioned mediation and advice to Zelenskiy by UK and French leaders.
Still, while relations are patched up, this is essentially only a return to square one. New clashes between the two presidents are unlikely – the first was shocking enough – but possible. Moreover, Trump has made no new commitments to helping Ukraine – and the need for more military aid could yet arise in the coming months. Europe will also retain doubts about how interested the US is in its security. Nevertheless, the overall story shows that Trump, despite his frequently aggressive approach, can be negotiated with for an acceptable compromise. This is very possibly more than what can be said for his counterpart in the Kremlin.

Russia poses a challenge for Trump by trying to dodge the ceasefire offer

The problem with the US-Ukraine truce pitch is that Russia is not keen on it. This was suggested by the early muted reaction from Moscow and, on 13 March, Yury Ushakov, an influential foreign policy aide to Russian President Vladimir Putin, put his foot down, saying a temporary break was not in Russia’s interests. Granted, this is not a formal rejection yet. Putin had an international call scheduled late on 13 March, which could conceivably be with Trump, on the same matter.
Other Russian signalling suggests it wants to add conditions to the ceasefire, such as another suspension of military aid to Ukraine, and to tie it in with its maximalist demands for a peace deal – the very thing Trump wanted to discuss after the ceasefire is implemented. Overall, the Kremlin feels it is in a position of strength, holding the battlefield initiative and does not want to give it up. Stalling through endless talks about conditions for a truce is likely how the Kremlin wants to tackle the US offer.
The key question now is how Trump will react. He may overlook Russian reticence in the hope that it advances the overall resolution of the conflict, but he could also take offence at Putin’s failure to reciprocate his outreach. Given widespread accusations that he is harsher on Ukraine than Russia, some warning shot from Washington is plausible – likely in the form of sanctions. The US already let a general licence for energy transactions with sanctioned Russian banks expire on 12 March. This may have been an oversight, but a deliberate move is also plausible – potentially with more to come.

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