Trump-Putin talks are already a triumph for Moscow, its economy and markets

Talks between Russian President Vladimir Putin and U.S. counterpart Donald Trump are still days away, but the two leaders’ upcoming meeting to negotiate an end to the war in Ukraine is already seen as a victory for the Kremlin, the Russian economy and global financial markets.

The discussions are set to take place on Friday in Alaska.

“This is already a big win for Putin to be invited for the first time since 2007 to meet with the U.S. president on American soil. Is a wonderful achievement, from his point of view, no conditions and the absence of Ukraine, the absence of any European representation. This is already a triumph,” Richard Portes, head of the Economics faculty at the London Business School, told CNBC Monday.

There are concerns that Ukraine could be forced to cede Russian-occupied territory to Moscow, and the mood is dour in Kyiv, whose officials, including President Volodymyr Zelenskyy, have so far not been invited to attend the talks.

Kyiv has said no deal about its future would be struck in its absence, and European leaders are pushing strongly for Ukraine’s involvement. The U.S., for its part, has said its considering inviting Zelenskyy, NBC News reported.

In the meantime, economists say the talks — which take place as Russia makes gains on the battlefield in southern and eastern Ukraine, with no ceasefire deal in sight — are already a win for Putin and his war-centered economy that is laboring under international sanctions and stubbornly high inflation of 9.4% in June.

“[Putin] starts from a relatively strong position on the battlefield. They’re advancing …On the other hand, from the economic point of view, he starts from a weak position. The Russian economy is not in very good shape. They’re running a significant fiscal deficit, partly because oil revenues are down very substantially, oil and gas [are down] because of the oil price. And … this is a weak economy,” Portes told CNBC’s “Europe Early Edition.”

Coming into talks with a strong position in the battlefield, Russia is likely to want immediate sanctions relief as part of any ceasefire deal, as well as Ukrainian territorial concessions.

The Kremlin has spied a rapprochement with Washington as an opportunity not only for an economic recovery, but investment. Russian Presidential Aide Yuri Ushakov on Saturday stated that “the economic interests of our countries intersect in Alaska and the Arctic, and there are prospects for implementing large-scale and mutually beneficial projects,” the Kremlin stated.

Portes said that if Trump “had the patience and the willingness to apply sanctions properly, then waiting [to hold talks] would result in a very significant change in the balance of forces.”

As things stand, however, Trump has mulled but so far held off on increasing sanctions on Russia. Washington has instead threatened the Kremlin’s remaining trading partners, such as India, with “secondary sanctions” and additional trade tariffs for continuing with purchases of Russian oil, which have funded Moscow’s war machine.

Asked whether Trump could press ahead with more punitive sanctions to push Putin toward a peace deal, Portes asked: “Can anyone predict what the President of the United States will do from one day to the next? It’s very difficult.”

“The likelihood of an increase in sanctions pressure is significant, but … given Trump’s desire for a Nobel Prize, the the likelihood that Trump will increase sanctions at this stage. Does not look very high, but he could change his mind tomorrow,” he said.

Global financial markets reacted positively to the announcement on Friday that talks to end the war would take place imminently, with bourses in Europe and U.S. rising. Defense stocks in Europe fell on the news, however, as traders appeared to bet that peace could deter further investment pledged by NATO allies.

The spot price of gold, seen as a safe haven in times of geopolitical and financial market stress, was down around 1% at $3,364 per ounce, as of 8a.m. London time on Monday.

Shares of Germany’s Rheinmetall were trading lower by almost 4% while Hensoldt declined by 1.5% and Renk fell 3.3% in early trades. Italy’s Leonardo and France’s Thales were also down by 1.9% and 1.7% respectively. Meanwhile, London-listed BAE Systems and Babcock also gave up gains from earlier in the day, down 1.1% and 1.3%, respectively around 9 a.m. London time.

But Christopher Granville, managing director at TS Lombard, said that the talks could ultimately prove to be a “win-win for European defense stocks” and advised investors to “buy on that weakness.”

Granville said if the peace process fails, there would still be a need to replenish depleted arms inventories of U.S. and Europe, which “would be very good for orders and procurement for Rheinmetall and all the other European defense stocks.”

“Or if there is a peace agreement, what do we see? We see a very powerful Russian military which — although the words ‘victory’ and ‘defeat’ will be banded around and should probably not be used — has to an extent prevailed. That reality will force continued increase defense procurement by European governments, and it’s also good for European defense stocks. Either way, it’s a winner,” Granville told CNBC’s “Squawk Box Europe.”

“The market, of course, has been discounting this some from time to time and as those [defense stock] names pull back a bit, you should buy on that weakness, in my opinion.”