Binary Outcomes in Ukraine: How Investors Should Play the Geopolitical Tug-of-War

The Russia-Ukraine peace talks on May 16, 2025, delivered a stark reality: no breakthrough, no ceasefire, and no clarity. The negotiations exposed a fundamental truth—this conflict is now a binary bet for investors. Will a ceasefire emerge, or will Russia’s maximalist demands prolong the war? The answer will dictate the trajectory of oil prices, defense spending, European equities, and trade flows. This is not a time for passive investing. This is a moment to position aggressively for one of two outcomes.

Energy: Betting on Sanctions and Supply

The energy sector is the first battleground. A failed ceasefire will keep Western sanctions on Russia in place, crippling its oil and gas exports. With 40% of Europe’s natural gas imports still reliant on Russian pipelines, even partial supply disruptions could send prices soaring. Conversely, a breakthrough ceasefire might ease tensions and allow renewed flows, driving prices lower.

ETF Play: Go Long on Oil Services
The Invesco Oil & Gas Services ETF (PXJ) is the prime beneficiary of geopolitical uncertainty. With YTD gains of 52.77% (as of May 2024), PXJ invests in companies like Schlumberger and Halliburton, which thrive when energy infrastructure projects ramp up. If sanctions remain, their services will be in demand. Even a temporary ceasefire won’t halt the need for maintenance in aging Russian fields.

Short Play: Bet Against U.S.-Russia Trade ETFs (if they exist)
While no dedicated Russia ETF remains, investors can short energy ETFs exposed to Russian supply chains. A ceasefire could trigger a sell-off in PXJ if traders bet on restored flows. But tread carefully: Putin’s track record of reneging on deals suggests this is a high-risk, low-probability trade.

Defense: The Supercycle Play

The defense sector is the ultimate beneficiary of prolonged conflict. European nations are already executing a €800 billion rearmament plan, while the U.S. is pushing a $1 trillion 2026 defense budget. Even if a ceasefire emerges, global defense spending will remain elevated—geopolitical instability is now the new normal.

ETF Play: European Defense Stocks (SHLD)
The Global X Defense Tech ETF (SHLD) is the clear winner here. With YTD gains of 20.1%, SHLD holds European firms like Leonardo (LDO) and BAE Systems, which are insulated from U.S. tariffs and directly funded by NATO’s 2% GDP spending rule. Even a temporary ceasefire won’t stop Europe from preparing for future threats.

U.S. Defense: A Contrarian Bet on ITA
The iShares US Aerospace & Defense ETF (ITA) is down 5.3% YTD due to tariff headwinds. But if Trump’s budget passes, ITA’s holdings like Raytheon (RTX) and Boeing (BA) will rebound. This is a long-term contrarian play—own ITA now, ahead of the inevitable budget deal.

European Equities: A Divided Continent

European equities face a binary outcome too. A ceasefire might spark a relief rally in sectors like tourism or manufacturing. But failure could deepen stagflation, with energy costs and sanctions weighing on growth.

ETF Play: Short Broad European Equities (IEV)
The iShares MSCI Europe ETF (IEV) is the proxy for European economic health. A prolonged war will drag its performance. Shorting IEV now locks in gains if the continent’s GDP stagnates.

The Binary Call: Act Now

The May 16 talks revealed Putin’s playbook: delay, demand maximalist terms, and let the war grind on. Zelensky’s “decorative lineup” critique underscores the lack of trust. Investors must choose a side:

• Bullish on a Ceasefire (Low Probability):
• Short PXJ, long IEV.

• Exit defense ETFs like SHLD.

• Bearish on a Ceasefire (High Probability):

• Go long PXJ, SHLD, and ITA.
• Hedge with short positions in trade-exposed energy ETFs (if available).

Final Warning: Don’t Gamble on Putin’s Mercy

The stakes are too high. Russia’s 50,000 monthly troop mobilizations and refusal to accept a ceasefire suggest this is a war of attrition. Zelensky’s demands for sanctions escalation—and Western leaders’ reluctance to back down—mean the status quo will persist. Investors who bet on a quick resolution are setting themselves up for losses.

Act now. The binary outcome is clear: this war isn’t ending soon. Position for the defense supercycle, energy volatility, and a fractured Europe. The market will reward those who see it coming.

Note: All ETF performance data is illustrative and based on historical trends. Always conduct due diligence before investing.