(Bloomberg) -- Vladimir Putin’s war on Ukraine is escalating after months of bloody attrition.
As the conflict entered its 1,000th day, Ukraine took advantage of its newly granted long-range missile capabilities to strike a military base on Russian territory. Moscow, which has warned against such action, stepped up its threat of a nuclear response to conventional attacks.
The twin developments early on Tuesday rattled investors who have long tuned out of the war’s daily grind, prompting a rush into haven assets. In reality, the recent arrival of North Korean troops to support Russian forces on the battlefield had already upped the ante.
The prospect of Donald Trump’s return to the White House in January and his pledge to end the war in short order has created a new sense of urgency for Ukraine and its allies.
President Volodymyr Zelenskiy has been pleading for more weapons to strengthen his hand, the Biden administration is sending Kyiv as much aid as possible before they leave office, and Germany’s Olaf Scholz called Putin last week to sound him out on talks. The Russian leader showed no interest in compromise, Scholz reported.
“The current situation offers Putin a significant temptation to escalate,” Tatyana Stanovaya, a senior fellow at the Carnegie Russia Eurasia Center, said in a post on X. Such a move would allow both Putin and Trump to blame Joe Biden for the spiraling conflict and serve as a premise for direct talks, she said.
“This marks an extraordinarily dangerous juncture,” she added, since Putin may be trying to convince western leaders they have to choose between a nuclear conflict or a settlement on Russia’s terms.
The news sent investors scrambling into some of the world’s safest assets. The yield on 10-year Treasuries fell as much as seven basis points, while the rate on equivalent German securities dropped 11 basis points. The moves also spread to the currency market, lifting the Japanese yen and Swiss franc.
Still, Russian Foreign Minister Sergei Lavrov sought to calm worries about a nuclear escalation, even as he accused the West of escalating the conflict. “We are strongly in favor of doing everything not to allow nuclear war to happen,” he said at the G-20. “A nuclear weapon is first and foremost a weapon to prevent any nuclear war.”
The US signaled it wouldn’t adjust its nuclear posture in response to Russia’s decision to change its doctrine. A National Security Council spokesperson, speaking on the condition of anonymity, said the move wasn’t a surprise.
The attack came as Biden and Scholz were gathered with other Group of 20 leaders at a summit in Rio de Janeiro where maneuvering over Russia’s war has been one of the major points of contention. The host, President Luiz Inacio Lula da Silva of Brazil, has tried to shut down debates over the conflicts in Ukraine and Gaza in order to focus on climate change and poverty. But his heavy-handed and, at times, chaotic management of the meeting has left many other leaders ill-tempered.
Adding to the sense of unease, two undersea data cables were damaged in the Baltic near the Russian exclave of Kaliningrad Monday. Governments in the region have repeatedly reported cyber attacks, disinformation and incursions by Russian jets and have warned that they will be under threat if Putin secures victory in Ukraine. The Swedish police said it started a probe into the cable breaches as possible sabotage.
“Something is going on there,” German Defense Minister Boris Pistorius said.
The origins of this week’s developments can be traced back to Pyongyang’s intervention in the theater of war last month, a move that came in defiance of warnings from Washington.
That was the shift that persuaded Biden to drop his longstanding opposition to long-range strikes on Russia with the American-made Army Tactical Missile Systems, known as ATACMS. Deploying North Korean troops in combat took the situation to “another level,” Oleksandr Polishchuk, Ukraine’s ambassador to India, said in an interview in New Delhi Monday.
Ukraine’s first strike with those missiles hit an ammunition depot in the western Russian border region of Bryansk, according to local Ukrainian reports later confirmed by Russia’s Defense Ministry. The Russians reported that they downed five out of the six missiles launched and there were no casualties. Neither Ukraine’s General Staff nor Defense Ministry would comment on what systems were used.
Later in the day, Putin signed a decree expanding Russia’s nuclear doctrine under which Moscow could consider using atomic weapons, his spokesman Dmitry Peskov said. Under the revised guidelines, the Kremlin could use nuclear weapons in response to an attack on its soil by Kyiv using conventional Western weapons. Russia will also view an attack by a non-nuclear state that is supported by a nuclear power as a joint assault.
“This is Putin’s typical MO - escalating before talks,” Timothy Ash, a senior EM sovereign strategist at RBC BlueBay Asset Management, said in a blog post. “Putin is assuming he will have to sit down and talk peace with Trump at some time over the next few months.”
Ukrainian President Volodymyr Zelenskiy, addressing the European Parliament in Brussels, urged governments not to “fear doing even more” to aid Kyiv’s defense against Russia.
Zelenskiy didn’t mention the use of ATACMS, although he did offer an apparent dig at German Chancellor Olaf Scholz, who has refused to follow Biden’s lead and send Germany’s long-range missiles to Kyiv and he irritated Zelenskiy with his outreach to Putin. Scholz faces a snap election in February after the collapse of his three-way coalition.
“While some European leaders think of elections, Putin is focused on winning this war,” Zelenskiy said.
--With assistance from Andrea Dudik, Marton Kasnyik, Alice Gledhill, Piotr Skolimowski and Thomas Hall.
(Updates with comments from Lavrov in ninth paragraph)
©2024 Bloomberg L.P.