As the military endgame in Ukraine approaches, President Vladimir Putinmust decide just how far he’s prepared to go to defend the pro-Russian insurgency.

His options range from an invasion under the guise of a peacekeeping mission to abandoning the rebels in order to avoid further sanctions from the U.S. and the European Union, said politicians, advisers and analysts from Moscow to the U.S.

With Ukrainian forces closing in on the remaining separatist strongholds in the eastern part of the country, military analysts say the revolt sparked by Putin’s annexation of Crimea in March is destined to fail without a sharp increase in aid from Russia. That means Putin must now decide whether to double down and risk further international isolation, which seems likely, according to Olga Kryshtanovskaya, a sociologist studying the country’s elite at the Russian Academy of Sciences.

“Putin has a very difficult choice in front of him,” Kryshtanovskaya said by phone from Moscow. “He has to protect his position in Russia. He has to show that he’s successfully pursuing his goals. He can’t afford to look like a loser in the eyes of the people.”

Putin has made restoring Russia’s influence in the world the hallmark of his presidency and his Ukrainian gambit has sent his domestic popularity to near-record levels. That has come at a cost. Companies from OAO Rosneft, the world’s largest publicly traded oil company by output, to OAO Sberbank, the largest lender in eastern Europe, have been hit with sanctions, while the $2 trillion economy is on the brink of recession. Government bonds have fallen for nine of the past 10 days, while the Micex stock index has declined 10 percent in a month.

And:

Putin, whose approval ratings have soared to 87 percent since the Crimea annexation, will face a public outcry if he doesn’t defend Donetsk and Luhansk, saidSergei Markov, a political analyst who consults the Kremlin staff. As a result, the president and his inner circle have decided to stand by the rebels regardless of the consequences, Markov said.

“Any sign of compromise or restraint on the part of Russia is pointless because they will condemn us in any case,” Markov said by phone from Moscow. “It’s clear the U.S. and the EU don’t want a peaceful solution in Ukraine and are counting on a military victory by Kiev.”

Kryshtanovskaya, the sociologist, said Putin could quietly abandon the rebels and pursue other ways of maintaining influence in Ukraine, such as by extending a cutoff of natural gas flows into the winter, but he seems “absolutely resolute” on staying the course.

“It’s in his character,” Kryshtanovskaya said. “The more pressure on him, the more confident he is that he’s doing the right thing.”

David Fuller's view

The good news is that Putin will be a fatally weakened, diminishing power if he backs down.  However, I agree that this is neither in his temperament nor the old KGB rulebook.  Nevertheless, Putin may also be vulnerable if he doubles down in Ukraine, Provided, and this is the key, the West holds its nerve and increases sanctions in response to further Russian military attacks on Ukrainian territory.   

The temporary problem for investors is that a further Russian-Ukraine war, where the military forces of these two sides are far from equal, would almost certainly trigger a bigger stock market correction.  The war would be costly, not least in lives, and very frightening.

It would also create another very good buying opportunity, not least in the European markets.  Meanwhile, there is one very big impediment to the weakening of Putin and the protection of Eastern European countries which understandably do not want to live under his shadow.  It is the callous and very dangerous view, in my opinion, of some Western strategists that we should leave Eastern Europe to Putin.

Here is a very informative interview: Are Russia and Ukraine on the Brink of War?  This is the main fear in stock markets today and I have discussed it in more detail in the Audio.

(Read Gary Kasparov on this subject, posted in my commentary on Tuesday.  Articulate, to the point, and he would know.)