Both Russian President Vladimir Putin and Ukrainian President Volodymyr Zelenskiy have given up on ceasefire talks, calling them pointless as both sides increase the frequency and ferocity of their mutual missile strikes on each other's territory in recent weeks.

Zelenskiy said that after Putin failed to turn up to the first direct talks between the two sides since 2022 in Istanbul on May 16, the Ukrainian leader said there was “no merit” in further negotiations. Both rounds of talks in Istanbul produced no progress towards the mooted 30-day ceasefire deal proposed by the Trump administration and resulted in nothing other than a POW swap.

And for the first time Putin publicly addressed the destruction of bridges in Russia, blaming Ukraine for what he called terrorist attacks. He stated that negotiations are “unfeasible” in this context, claiming that the Ukrainian government is "degenerating into a terrorist organisation." A railway bridge collapsed on a passenger train in Bryansk close to Russia’s border with Ukraine last week, killing a dozen people. Ukraine has not claimed responsibility, but Russia said the collapse was the work of Ukrainian partisans operating inside Russia. Trains were also derailed in Kursk last week in suspicious circumstances.

While Zelenskiy accepted the unconditional ceasefire proposal as soon as it was made in March, Putin has vacillated, attaching a long list of conditions and saying the “root causes” of the war need to be addressed before a standstill can be implemented. Russian Foreign Minister Sergei Lavrov spelled out the conditions with a revised six-point list of demands at the second Istanbul meeting on June 3 that are a repetition of the Kremlin’s earlier maximalist demands.

“The second Istanbul meeting was no different from the first. The same ultimatums they voiced last time are now presented in writing. Essentially, they are delaying sanctions,” Zelenskiy said.

And tensions have escalated in recent weeks as each side ramps up its assault on the other. Russia launched a devastating missile barrage on Ukraine over the weekend of May 23 – the biggest since the start of the war – targeting urban and residential districts, including in Kyiv. Ukraine responded with the spectacular Operation Spiderweb on June 1, destroying multiple long-range Russian strategic bombers. And the Ukrainian Security Service (SBU) also detonated a 1,100kg underwater bomb in an attempt to destroy the Kerch bridge on June 3.

As bne IntelliNews reported, the drone attack on Russia’s strategic bomber fleet will likely harden, not soften, Putin’s resolve to continue the war and attempt to crush Ukraine in order to turn it into a “friendly” country.

Ukraine’s allies have been nervous about Armed Forces of Ukraine (AFU) attacks inside Russia for fear of escalation, but as Western support wanes, it appears that Kyiv has a freer hand and in a change of strategy has decided to take the fight to Russia. Notably, as Ukraine’s domestic arms production develops it has a wider range of home-made cruise missiles and long-range drones at its disposal and does not need to rely on Western-made missiles for these attacks. Such weaponry is usually supplied by allies, with restrictions on its use.

Putin argued that the Bryansk bridge bombings just before the second round of negotiations in Istanbul were intended to derail the talks before they began. Concurrently, Zelenskiy feels that ongoing meetings with Russia in Istanbul are pointless if they yield no results.

"The second Istanbul meeting was no different from the first. The same ultimatums they voiced last time are now presented in writing. Essentially, they are delaying sanctions," Zelenskiy said on June 5.

The Ukrainian delegation had its own 22-point list of demands that led with a call for the immediate implementation of the month-long ceasefire. The Russians countered with an offer of a two-day ceasefire on parts of the front line so both sides could collect their dead.

"With each new postponement of diplomacy, Russia shows its middle finger to the whole world, and to everyone who does not want to increase pressure on Russia,” said Zelenskiy, who is in Washington to lobby the Trump administration for more support.

 

Getting ready for a long war

While the ceasefire talks were underway since they kicked off in Riyadh on February 18, both sides continued their preparations for a long war in the background.

Ukraine’s defence sector is relying on the EU, which has been assuming the US will withdraw its support this year, although Zelenskiy has been lobbying hard to prevent that. Kyiv is receiving a major financial boost from its international partners under the so-called Danish model that includes a €1.3bn grant that will be invested in Ukraine’s domestic arms industry in 2025. The initial tranche of €428mn will be provided by Denmark, Sweden, Canada, Norway and Iceland, with funds directed towards the production of artillery, drones, missiles and anti-tank systems. Some of the financing will come from proceeds linked to frozen Russian assets.

For its part, as reported by bne IntelliNews, Russia has also ramped up its drone and missile production with the help of China and is now currently outproducing all of the US, EU and Ukraine combined. Military experts say a major new offensive has been launched in the Donbas and some 50,000 soldiers, freed after Russia retook the occupied Kursk region last month, are being massed on Ukraine’s border to support this offensive as the summer fighting season gets underway.

New decisions are also being drafted to facilitate investment by Ukrainian companies in Ramstein coalition countries, alongside plans to enable European defence manufacturers to establish production within Ukraine as the strategy shifts from sending EU weapons to facilitating more Ukrainian production of its own weapons. Amongst other things, Kyiv plans to produce 2.5mn deadly drones this year.

EU taking over from US

On the diplomatic front, efforts to increase sanctions on Russia have produced little results. US President Donald Trump has been extremely soft on Russia. Despite some tough talk following the massive missile barrage last month, the US has failed to impose any new sanctions on Russia since Trump took office, nor has Trump made anything more than a token increase in new weapons supply deals. What is being delivered to Ukraine at the moment is legacy supplies from the departed Biden administration.

European Commission President Ursula von der Leyen confirmed that the EU supports synchronised sanctions with the United States. “We are primarily interested in sanctions against the energy sector and blocking sources of financing for Russia,” she said, noting that the EU’s 18th sanctions package will include restrictions on firms linked to the Nord Stream pipelines and a reduction in the oil price cap.

However, the EU has expressed concern over the proposed 500% tariffs in the US sanctions package, proposed by Senator Lindsey Graham, citing risks to member states that still import Russian energy. As bne IntelliNews reported, Graham’s “bone-crushing” sanctions sound like a game-changer, but will be almost impossible to implement. Graham has signalled readiness to revise the proposal to accommodate European concerns.

Ukraine’s mounting economic problems

Adding to Kyiv’s headache, and part of Putin’s calculation that he can just wait Bankova (Ukraine’s equivalent of the Kremlin) out, Ukraine's economic problems are mounting.

Essentially, the Ukrainian economy has reached its growth ceiling, unable to progress into positive territory without favourable structural changes. The decline stems from the exhaustion of recovery effects following the tough year of 2022, which became evident around the start of the second quarter last year.

Last week Finance Minister Serhiy Marchenko admitted that Kyiv has just lost €2bn in EU funding for missing an accession reforms deadline. Kyiv will lose another €800mn in trade after an exemption on import duties and quotas under the Deep and Comprehensive Free Trade Areas (DCFTA) expired on June 5. And on the EU trade problems, Ukraine’s two biggest export earners – corn and metal – have become uncompetitive as other producers like the US are undercutting Ukrainian prices.

Ukrainian exports declined 7.4% in value in the first quarter of this year to $9.9bn, as global market volatility and tariff disputes weighed on demand for key commodities.

And the economy slowed markedly in the first quarter of this year, which will reduce the tax take and pressure the budget this year. Analysts cite the fading impact of post-2022 recovery momentum, which dissipated around early the second quarter of 2024. Industrial output fell 6.1% year on year in the first quarter, while construction dropped by 11% and producer prices soared by 40.4%. Though the value of industrial goods sold rose 15.6% and capital investment climbed 32.5%, these gains were largely nominal and defence-driven.

Nevertheless, thanks to the EU and Biden administration pledges, Kyiv is well funded for this year and into the start of next.

Russia’s mounting economic problems

The Russian economy is under pressure with growth slowing noticeably now; indeed, the economy contracted in real terms in the first quarter of this year, although it put in 1.4% GDP of nominal growth. But persistent high inflation of around 10% and crushingly high interest rates of 21% are taking their toll and Russia’s big corporations are under increasing pressure as debt servicing is significantly eating into their profits.

The fall in oil prices to around $60 and the strength of the ruble, now trading at around RUB80 to the dollar, also both reduce the amount of rubles available for budget spending. Ministry of Finance (MinFin) has already trebled the budget deficit forecast for this year to a still manageable 1.7% of GDP, but it is also eating into the National Welfare Fund (NWF) which fell to a five-year low in May of RUB5.49 trillion ($60.77bn) as of June 1, a decrease from RUB6.29 trillion ($69.65bn) at the beginning of May, and is the lowest level since April 2019. The total volume of the fund stood at RUB12.18 trillion ($134.87bn), equivalent to 6.9% of projected GDP for 2025.

Still, the MinFin has several fall back options. There is still some RUB20 trillion in liquidity in the banking sector that can be tapped through the bond market to fund an expected RUB3.8 trillion deficit. And the Kremlin has yet to raise taxes significantly which remain amongst some of the lowest in Europe, so the Kremlin can fund its war for several more years. And CBR Governor Elvia Nabiullina says that by the end of this year inflation should start falling, thanks to the slowdown, that will allow her to start cutting rates again.