The shock of Russia’s surprise invasion of Ukraine on February 24 two years ago was quickly followed by awe at the heroic defence of Kyiv, then delight as Ukrainians fought back, popping the tops of tanks and running circles around the cloddish Russian forces.

Optimism built to a crescendo when Kyiv struck a hammer blow in September, bursting through the Russian lines in the Kharkiv region and routing the Russian invaders, taking back control of hundreds of square kilometres. The month was crowned with the recapture of Kherson and Russia’s withdrawal to the left bank of the Dnipro.

Two years on and that optimism has evaporated. A black miasma fell over the recent Munich Security Conference amongst the allies as Ukraine faces multiple difficulties. Only one in ten of respondents in the EU now believe that Ukraine can win the war against Russia, according to a new survey commissioned by European Council on Foreign Relations (ECFR).

The US ran out of money for Ukraine in January. A US official warned that the Armed Forces of Ukraine (AFU) could face an ammunition crisis in the next few weeks if more aid is not provided. And Russia is pressing home its advantage, increasingly well-armed, well-supplied and with fresh troops in rotation thanks to a successful recruiting campaign, which has been so large that it is showing up in the banking statistics.

Ukraine is losing the war

Ukrainians impressive resistance to Russia’s invasion convinced many that Ukraine could win the war. And that looked increasingly possible after the first Ramstein conference where the West promised heavy and advanced weapons, including the German-made Leopard tanks.

The introduction of advanced longer-range missiles like the HIMARS were also used to devastating effect to blow up command centres and destroy large ammo dumps behind Russia’s lines.

But after retaking Kherson last September there was a long pause in the war while Ukraine waited for these weapons to arrive. The Russians dug in and built heavy defensive lines. When Ukraine finally launched its long-anticipated counteroffensive last summer it ran into a brick wall. By November Ukraine’s top general, Valerii Zaluzhnyi, admitted the war had reached a stalemate.

Russia continues to occupy a quarter of Ukraine’s territory. “About 26% of the country's territory is still under occupation, but the Russian army cannot advance significantly. We have stopped them," said Ukrainian President Volodymyr Zelenskiy in an interview with an Italian channel on February 5.

The tide has started to turn since the beginning of this year as weapon supplies started to run low. US funding had dropped dramatically already last August, and a military assessment reported in November predicted that Ukraine would start to run out of longer-range missiles in February, then air defence rockets in the following month before running out of shells in the summer. All this has come to pass and sooner than expected.

The end of the four-month intense battle for Avdiivka, which fell to Russia last weekend, has handed Russia the military advantage. US President Joe Biden explicitly blamed the defeat on the US House of Representatives' failure to pass a $60bn support bill. In practical terms, Ukraine trails Russia badly in shell fire rate and, more worryingly, it was reported that Russia took complete control of the skies over Avdiivka during the battle for the first time in two years.

Ukraine has had some successes. Zelenskiy pointed out that Ukraine, a country without a navy, has successfully pushed Russia’s Black Sea Fleet out of its base in Crimea, breaking the naval blockade. Grain exports in recent months are back up to around 6mn tonnes a month, close to their pre-war levels. And Ukraine has been striking Russia’s oil refineries deep in Russian territory with new long-range drones. Russia’s oil product exports tumbled by a third in February as a result.

The EU is increasingly stepping into the breach. A new four-year €50bn EU support package was approved in February and Ukraine has also recently signed “security assurances” with the UK, France and Germany that are worth more than €10bn a year, with more deals with Italy and Denmark in the pipeline.

Even without the US money, Ukraine will probably be able to muddle through the rest of this year without losing the war. The hope is next year when new Western arms production comes online, Ukraine can resupply and strike back. If Ukraine has sufficient support from its partners and continues to maintain its defence this year, it can launch a counter-offensive in 2025, said the head of Ukraine’s military intelligence, Kyrylo Budanov. He added that the Russian professional army was largely destroyed in the first year of the invasion, and now the enemy is throwing untrained conscripts into battle. The full occupation of the Donetsk and Luhansk regions remains the priority goal of Russian troops in 2024, but they are unlikely to be able to achieve it, says Budanov.

But the supply of game-changing weaponry is also unlikely. The 40-odd Leopard tanks that have already been supplied have made no serious impact on the war, as they quickly became bogged down in the Russian minefields, and without air support were vulnerable to Russian drone swarms. Denmark reports the first F-16 fighters are due to arrive only this summer and will face the formidable Russian air force.

The Bundestag again voted against supplying Ukraine with the powerful Taurus cruise missiles on February 22, but did sign off on replenishing “necessary long-range missiles.” Likewise, the EU will miss its target of supplying Ukraine with a million shells by March, EU foreign policy chief Josep Borrell announced, and will send less than half that amount. More recently it was reported that actuallly Europe will only transfer 170,000 shells by March.

Russia, which has placed its entire economy on a war footing, increased its production of shells from 1.7mn to 2mn last year and aims to produce 3mn this year, in addition to several million shells that are being supplied by North Korea.

West doesn’t want Ukraine to win the war

Despite the “as long as it takes” rhetoric and the talk of victory, the West has not attempted to supply Ukraine with what it needs to win. The strategy from the start has been to supply Ukraine so it doesn’t lose the war, but not with enough so it can actually win.

The fear in the Western capitals is that if Russia was faced with an imminent defeat in the wheatfields of Ukraine, it would either launch a nuclear strike or attack a Nato country such as the Baltics, Poland or Romania.

During the recent debate on sending Ukraine its Taurus missiles, German Cabinet spokesman Steffen Hebestreit laid out the thinking explicitly: the German government intends to support Ukraine as much as possible under the condition that Germany does not become a warring party.

"I can cite three principles: we support Ukraine as much as possible; we ensure neither Germany nor Nato become a warring party; and we coordinate closely and on the basis of trust with our partners and allies, above all with the United States," he said.

This strategy means that the West has been happy to pour money into Ukraine, but remains reluctant to share its best and most powerful weapons. The EU’s €50bn package is exclusively to fund the Ukrainian budget, but the parallel Ukraine Peace Facility that is exclusively for weapons has money in it but much less, despite Zelenskiy's calls that week for an additional €5bn to be added to the fund.

And after the US, Germany has been the most generous of all the EU countries, disbursing funds or reserving future spending commitments of approximately €28bn in military support for Ukraine.

Nevertheless, the weapons supplied so far are short-range and limited in power. The Javelin missiles handed over in the early days were effective against tanks in the field and the HIMARS precision missiles had a range of 80 km, enough to sit behind Ukraine lines out of range of Russian artillery and hit Russian supply lines, but the US withheld its longer-range 350-km version for fear Ukraine would fire them into Russia proper.

Likewise, Zelenskiy has been calling for F-16 fighter jets to “close the skies” from the very first day of the war, but the West continues to hesitate, as those planes are both capable of striking targets inside Russia and carrying tactical nuclear weapons, but are also seen as a danger that could provoke Russia into a more extreme response. The bottom line is that Putin has still not called for a general mobilisation and could flood Ukraine with troops if he did so.

It is notable that what Ukrainian attacks there have been inside Russia have either been made by special forces or partisans or use Ukraine-made long-range drones, not weapons supplied by its Nato allies. What effective weapons that have been supplied have been too little, too slow. Even in the case of the Leopard tanks, only 40 were delivered, when something closer to 500 were needed to change the course of the battle, according to military experts.

Sanctions failed

“Two years after Russia’s full-scale invasion, it is now painfully clear that EU sanctions have failed to meaningfully curtail Moscow’s ability to wage war on its neighbour,” the former head of Institute of International Finance (IIF), Robin Brooks said in a recent editorial in the FT.

The problem is that it is extremely difficult to sanction a country that runs a large current account surplus. As the net transfer of money is to Russia, the West has been effectively borrowing from Moscow to buy its gas and fertilisers. If you cut off that trade, then due to the boomerang effect the sanctions do more damage to the West than to Russia, which has successfully redirected most of its trade to willing customers in Asia.

“Financial sanctions can be highly effective when imposed on countries that run a current account deficit, because such countries must continually borrow from global markets to pay for imports. No more foreign credit causes the economy to collapse,” Brooks added. “However, before, during and after the invasion, the value of Russia’s exports has far exceeded what it pays for imports. As a current account surplus country, Russia effectively lends to the rest of the world: it accumulates foreign assets. Russia’s current account surplus is forecast to be 4% of GDP this year by the IMF.”

As followed by bne IntelliNews, the oil price cap sanctions have failed, as not a single barrel of Russian crude oil has been sold below the oil price cap of $60. Likewise, the technology sanctions have also failed, as Russia is importing Western tech with impunity. Russia has earned an astronomical $653bn in oil sales since the start of its full-scale invasion of Ukraine. Russia’s imports in 2023 were 20% above pre-COVID pandemic levels.

Of all the sanctions, the most effective seem to be the banking sanctions, as no one, not even Russia’s closest allies, wants to see their US branches closed down. The biggest banks in both China and Turkey have recently cut off ties with Russia under the threat of US secondary sanctions, and that is already negatively affecting trade. But as Brooks points out, not all Russian banks have been sanctioned, because of the need to pay Russia for those goods that it is still exporting: gas supplies to Hungary, Austria and Slovakia, for example.

“By sanctioning some Russian financial institutions, the West merely caused the accumulation of foreign assets to shift from sanctioned to non-sanctioned banks,” says Brooks. “Effectively, Gazprombank replaced Russia’s sanctioned central bank as the main financial intermediary with the outside world. This shift did not in any way curtail payments to Russia for its exports, so there was no impact on its ability to pay for imports.”

Russia is too big to sanction. The rest of the world is too dependent on its supplies of energy and materials to be able to cut itself off completely. And Putin’s bet on the Global South Century is not a stupid gambit: the rest of the world is more than happy to buy Russia’s exports, especially when the Kremlin is prepared to offer a discount. In its economic war with the US, the Kremlin is less concerned with the profitability of its business, but is simply focused on earning enough revenue to pay for the war.

What started as an elegant market-mechanism strategy for controlling how much Russia earns from oil exports by limiting access to maritime insurance has descended into a game of whack-a-mole – a game you can’t win.

The EU is due to introduce its thirteenth sanctions package on the anniversary of the start of the war, but according to reports this will be the most modest package yet, doing little beyond adding a long list of individuals to the already 2,000-strong names already on the lists – including the management of the penal colony where opposition figure and anti-corruption activist Alexei Navalny died on February 16.

Russia has successfully rebuilt much of its trade, switching exports from west to east. The share of friendly countries in Russia’s foreign trade totalled over 75% in 2023. Around 95% of payments in the Chinese and Indian directions were made in national currencies in 2023, while China became Russia’s key trade partner accounting for 29% of total trade turnover.

Russian exports to Europe dropped by more than two-thirds in 2023, as the EU drastically cut its direct purchases of Russian oil and gas, said Russia's customs agency. Russian exports to Europe dropped 68% in 2023 to $84.9bn, according to the federal customs agency. Meanwhile, exports to Asia, which has replaced Europe as the country's main energy client, were up 5.6% to $306.6bn, the agency said.

However, indirectly Europe still buys much of Russia’s products and Europe exports to Russia continue via third countries. Europe no longer buys diesel or kerosene directly from Russia, but it does buy those from India and China, which refine it using Russian crude. The sanctions on oil are less sanctions, and more of a massive distortion imposed on global energy markets. Likewise, EU imports of gas have plummeted, but Europe still buys half of Russia’s gas production, with more of it exported as LNG, which is not sanctioned. Imports of Russian LNG soared in Spain and Belgium last year, which have Europe’s biggest LNG terminals.

Exports from all EU countries to Central Asia soared last year. Germany’s exports of cars to Kyrgyzstan were up 5,000% in a year. The biggest gains were in Kyrgyzstan and Georgia, which despite its EU candidate status is now more dependent on Russia than at any time since its independence thanks to this booming trade.

While British exports to Russia have fallen sharply, exports of drones, optical devices and heavy engineering products to Eurasian countries, from Uzbekistan to Georgia, have grown unprecedentedly. British export volumes to Armenia have increased almost as sharply. Analysis shows that GBP6bn worth of parts for airplanes, helicopters, drones and other equipment were sent to Georgia, Armenia, Kyrgyzstan and Uzbekistan by British companies last year.

The extreme sanctions imposed in the first weeks of the war were originally designed to collapse the Russian economy – and they came close. Had the West also stopped paying for Russian energy in the first weeks of the war, or at least pay the money into escrow accounts that could only be accessed by the Kremlin after it withdrew from Ukraine, the economy would have collapsed and the war could have been over very quickly. The billions of dollars Europe continued send to Moscow was a lifeline that kept it in the game.

Instead the Russian economy bounced back and ended 2023 with only 1.9% of GDP budget deficit, putting in 3.6% of growth. That makes Russia the fastest growing of all the major developed markets in the world.