Russians Will Vote for More of the Same. Investors Should Brace for Surprises.

A person votes in Russia’s parliamentary election in St. Petersburg on Sept. 18. (Olga Maltseva / AFP via Getty Images)

Russian voters head to the polls this weekend, almost certainly to elect a new legislature that overwhelmingly backs President Vladimir Putin’s war in Ukraine. But predictable election results don’t mean predictable global markets, as what looks like a frozen conflict continues to deliver global shocks.

Sanctions and military spending have slowed Russia’s economic growth to barely 1% this year, according to the International Monetary Fund. Economic discontent is mounting, and opposition leaders have called on voters to demonstrate their dissatisfaction with the ruling United Russia party by showing up at polls together at noon on Sunday. But that won’t change the results: Putin has banned Russia’s only major antiwar party, Yabloko, from participating in the election.

And Putin has so far managed to limit the war’s impact on the lives of most Russians. The war has created a labor shortage, which has driven up real incomes and the army has attracted recruits with generous salaries and death benefits. Falling corporate profits and rising government deficits have led wage growth to stall lately, but rumors abound that Putin will follow an election victory with a second mobilization of recruits and expand attacks on Ukrainian cities as winter approaches.

This is all despite the fact that Russia isn’t making much progress on the front lines; it took just 0.3% of Ukraine’s territory in the past year.

With Moscow committed to the war and Kyiv not backing down, investors may be tempted to look past what appears to be more of the same. Global markets have managed thus far to adjust to the wall of Western sanctions erected around the world’s second-largest crude oil exporter. Russia has learned to adapt with shadow fleets for petroleum exports and sanctioned imports through China and Central Asia.

Complacency would be a mistake, however. Even if the front lines aren’t budging, the escalating sophistication of drone attacks from both sides threatens to roil commodity markets. Ukrainian attacks have targeted Russia’s oil refineries, industrial supply chains, and Black Sea port of Novorossiysk. Russia has continued to pound Ukrainian cities and electricity grid, and its shipping infrastructure in Odessa.

The port attacks look especially worrying for global food prices as the fall harvest comes in with no reliable channel for either country to deliver its products. A deal to allow a secure corridor for grain and fertilizer exports collapsed in 2023, and Ukraine’s shipments that skirted threats in the Black Sea have now come under Russian attack. In Russia, wheat exports fell more than 50% in August due to Ukrainian attacks on its cargo infrastructure. Ample harvests elsewhere have kept global food prices from rising sharply so far but pressures will mount in the coming months.

Drones will keep putting upward pressure on energy markets, too. Oil markets tightened further last week following Iranian and Houthi attacks on tankers and oil pipelines, which made prices all the more sensitive to Ukraine’s drone attacks on Russian refineries. Brent crude eclipsed $109 a barrel before briefly dropping by $4 after Trump posted on Truth Social that both sides had agreed to halt strikes on each other’s energy infrastructure. Moscow quickly moved on from that idea. Ukrainian and Russian attacks resumed, and prices shot back up. Oil prices are climbing again.

Outside the battle zones, investors should watch stray Russian incursions into Western Europe, which include at least 144 drone incidents over the past two years. Most recently, a foiled Russian drone attack on a Ukrainian cargo plane at German airport triggered a furious response from European politicians, with renewed promises to reinforce Europe’s military capabilities. Defense stocks have underperformed this year, but they may get a boost if more Russian drones enter West European skies.

American efforts to stave off that potential escalation—including the CIA director’s secretive trip to Moscow last month and peace talks spearheaded by Special Envoy Steve Witkoff and Jared Kushner—have delivered little. President Donald Trump, who badly wants an end to the war, is now trying to coax Russia into a peace deal with business opportunities, according to the New York Times.

It is tempting to hope the war will neatly end once Putin passes from the scene (he is nearly as old as Stalin was when he died and there is speculation about his health). The base case for now, however, has to be that he will maintain parliamentary support and finish off another term in 2036, or that any immediate successor will take up his mantle to defend Russia from the West.

What is so gut-wrenching about this central scenario is that whenever the fighting ends, any territorial agreement will fall more or less along current battle lines.

Russia will continue to be isolated from Europe, even if Trump’s family manage to squeeze out a few questionable investment deals. Ukraine will serve as the centerpiece for focal point for future European military spending, as U.S. investments in NATO decline. But the military stalemate will continue to escalate unpredictably and deliver meaningful shocks to markets.

Guest commentaries like this one are written by authors outside the Barron’s newsroom. They reflect the perspective and opinions of the authors. Submit feedback and commentary pitches to ideas@barrons.com.

Christopher Smart is managing partner of the Arbroath Group, an investment strategy consultancy, and was a senior economic policy advisor in the Obama administration.

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