What price victory? Ukraine on the front foot

0:02The Economist.

0:09Hello and welcome to The Intelligence from The Economist. I'm Jason Palmer.

0:19Today on the show, how Home Depot is America's housing market bellwether and the supply chain choke point for cricket bats.

0:34But first...

0:46The latest news from Ukraine paints a brutal picture of Russian intent. Missile and drone strikes on Kiev over the weekend were among the worst of the war. Yesterday, the Kremlin warned of more, consistent systematic strikes on the military-industrial complex, as opposed to the many civilian targets from the weekend. This is not the aggression of an invading force finishing the job. It seems more like the recklessness that comes with being on the back foot. Ukraine, at last, is doing more than surviving. There's more hope on the ground than there has been in some time. But if victory comes, at what cost will it come for the body politic?

1:32Things have not looked this good for Ukraine for some time. Oliver Carroll is our Ukraine correspondent. A bitter winter has now given way to a story of momentum. But as Saturday's mass strike on Kiev showed, Russia still remains a brutal adversary. The question still for Ukraine is how long its strategic reserve, its people and its resources can sustain the battle. And even if it can, what kind of country can survive? So just give us a snapshot for the moment how Ukraine is doing on the battlefield, Ali. The news from the front line is very promising. Ukraine is basically now inflicting casualties on Russia at rates faster than Russia is replacing.

2:18To give you an example, training for the most elite assault units is now down to basically 10 days. Usually it would be several months. Ukraine reckons 50 ,000 is the absolute ceiling of Russia's training capacity. I mean, to make it more would require structural changes which you just can't bring about quickly. Now already it's showing 35 ,000 wounded and killed per month. And Russia has far less to show for these numbers than at any time before. I was speaking to presidential advisor, Brigadier General Pavlo Pallisa, and he was saying that they're at least two years behind what are already scaled back timetables for taking the rest of Donbass, which I find listeners is the main political and military aim of Vladimir Putin at this point.

3:05So what's changed? Why this period of momentum and success on the battlefield? Well, I think it's a combination. First of all, Russia were basically front-loading an awful lot of their attacks in an attempt to show their might. On the Ukrainian side, there's a new team at the Ministry of Defence, and that's really turbocharged the change in the last few months there. More broadly, really key at the moment is the success they're having in extended-range drone operations. And by that, I mean, on the one hand, what we'd call intermediate range between 20 kilometres up to a couple of hundred kilometres.

3:40And that's really hitting Russian supply lines, radars, ammunition dumps and so on. And then we're looking at also great success going thousands of kilometers inside Russia, hitting its defense industries, particular targets in the oil and gas industry. I've been speaking to commanders in charge of these units and they predict a full-on air defense crisis for Russia by the autumn. And by that point, it's anticipated that Ukraine's own ballistic program will be in line. And it's going to get very ugly in Russia. Ukraine's also benefiting from new lines of European cash. Now, remember, up until the departure of Viktor Orban, there was a big question mark as to whether there would be consensus in the EU.

4:26Well, that's gone. And his departure has cleared the way for a long-promised 90 billion. But as you say, this hasn't been, this won't be at no cost to Ukraine. Yes, and I mean, the strikes on Saturday, Sunday morning really shows just the vulnerabilities which remain in Ukraine. And this has been one of the tensions actually playing out in the leadership. There have been different camps, those who basically say that Ukraine can benefit from a longer war, because in time, the effect on Russia's economy will be shown. The integration of Ukrainian industry with the European defense industries will come online.

5:00and all of that will play into a longer term degradation of Russian potential. But others say, listen, you know, all the time that war goes on in Ukraine, it's Ukraine's critical infrastructure that's being frayed first of all. And certainly from the civilian point of view, it really depends where you are. If you're a civilian in Kharkiv, you want this war to be over as soon as possible. The same of certain areas in Kiev. And the situation this winter was pretty grim. The city was very close to being a total blackout. And what about the national picture and the tetchy political picture you've described in the past?

5:36How are things at that high level? It's really hard to tell. But one thing we can say is that despite the grimness of the winter, public morale held. I've seen a survey which was commissioned by an American NGO which underlined that point. But it does also show that society is fracturing. And there is an element which is increasingly worried about the direction of the country. And what was interesting actually in that survey was it wasn't actually, you know, the trauma and the exhaustion of war, which was pulling down as a demotivating factor. It was the idea of elite corruption and distrust of institutions like the presidency and so on.

6:16And the issue of conscription and injustices in conscription are increasingly controversial in society and they hit a nerve. We have a huge number of people now AWOL, too scared to go out on the streets for fear of being picked up by draft officers. And we know that a lot of these people, when they're caught, are being sent as punishment to the front lines, to the kill zone positions, from which many of them, frankly, a majority, won't be returning. We also have a breakdown in unity. Internal politics is a really difficult moment right now with corruption scandals implicating presidential circles, wartime centralization, and a sense that the president is very thin-skinned about criticism.

7:03All of that is increasing the entropy in this political system, and it's not really clear where it will end up. And to your mind at this stage, is there a potential for a negotiated way out of this war or is it attrition just right through to the end? There was a period at the beginning of this year where it looked like a deal might be possible. Right now, those negotiations are off and it doesn't look like they'll be opening soon. Some optimistic insiders will tell you things might happen in June. But really looking at the broader picture, you see Vladimir Putin who is still addicted to the idea of taking control of Ukraine.

7:40So I think despite the difficulties on both sides, we're in for a prolonged period of fighting. And that's really where this question of how and who can survive this war without end comes in place. I understand that Zelensky has ordered preparations for the country to prepare for the next two or three years in war. And looking at the dynamics of the last six months, there's no reason to suggest it can't survive that long. But the question is, even if it does survive that long, what is the Ukraine that will survive? If it's an increasingly centralized, war-worn, poor country, well, that doesn't look like much of a victory to me.

8:25Oliver, thanks very much for joining us. Jason, it's always a pleasure.

8:43There is one economic indicator that can help us understand the state of the U.S. housing market. Home Depot. Home Depot is no ordinary retailer. It's the world's biggest DIY chain. And when sales drop or are flat, it can signal tough times ahead.

9:05Vingeru Mkandawire is a news editor at The Economist. Long before most people saw the housing crash coming during the financial crisis in 2008, Home Depot's sliding sales were already sounding the alarm. Their numbers dropped and the housing markets soon followed. Then, once COVID hit, Home Depot's revenue surged, along with the boom that followed the pandemic. And now, if you look at the current state of the housing market, Home Depot might have some clues as to what's going on. Why is that? What are we seeing with Home Depot? Well, the tills at Home Depot just aren't as busy. Shoppers are still buying smaller items like gardening tools and paint, but they're not really starting large projects like kitchen and bathroom renovations.

9:48What that tells us is that America's housing market is gridlocked. Home prices have largely held up, But the home buying frenzy that we saw after the pandemic has ground to a halt. Sales of existing homes over the past two years have fallen to their lowest level in three decades. And Home Depot's finance chief said recently that they had never seen housing activity this low for this long. So all this means fewer DIY projects, which is why Home Depot's annual sales in America have been falling or flat for three years. And so what's behind the gridlock in the housing market? The spike in mortgage rates is a big part of the problem.

10:29The more expensive mortgages are, the less buyers can afford to pay for a house. Not only are higher rates putting buyers off, but homeowners with pandemic-era fixed rates of 3 % or below are reluctant to sell now that the average rate has risen to nearly 6.5 % on a new 30-year mortgage. But another factor which I think is overlooked is homeowners unwillingness to sell at a loss. That loss aversion means that prices essentially haven't moved very much, but the number of sales has crashed. This sounds like a fairly similar story in that here in Britain, the housing market is also pretty cool. Yes.

11:10So similar factors have also frozen the market in Britain where transactions remain subdued. Mortgage rates are obviously higher, but in both the U.S. and in the U.K., we're seeing that sellers are extremely reluctant to realize losses from their homes, and so they're staying put rather than selling. And so you're describing a sort of several-year timescale effect going on here. All of this is only surely going to be made worse by the war in Iran. Yes, exactly. So before the war in Iran, America's housing market looked ripe for recovery. Unemployment was low, existing homeowners were sitting on near-record equity, and affordability was improving, in part because of rising incomes.

11:53But the closure of the Strait of Hormuz has sent energy prices rocketing. This threatens to drive up inflation and, in turn, mortgage rates. And so the housing market remains on ice. So how to melt that ice then? How to get things moving again? And, well, things looking a little shinier for Home Depot? Well, until borrowing costs drop significantly, there are very few ways to actually get the housing market moving again, at least in the short term. Some homeowners have little option but to sell. So those undergoing divorces, for instance, or people moving for work. However, Home Depot can't rely on this trickle of transactions.

12:32So instead, it's courting builders who tend to spend more than the DIY crowd, and they now account for half of Home Depot's revenue. And over the past few years, Home Depot has spent more than$30 billion acquiring wholesale distributors that cater to professional contractors. But for now, plenty of its tills remain empty and offer a warning that the housing market is no longer working for people who need to buy or sell. And so in many ways, the housing market is broken.

13:05Thanks very much for joining us, Vinjara. Thanks for having me, Jason.

13:24China may have a chokehold on rare earth minerals and Iran can close the Strait of Hamus at will but there's one corner of global supply chains that is forever England.

13:35Andrew Rammer writes about Britain. High-end cricket bats have massively increased in price recently and top models retail for well over£1 ,000 but almost all of them are produced from English willow No other wood provides the same ping even when you grow the same species of tree in other similar climates like France or the Netherlands The price of English willow trees has tripled since 2017 driven particularly by demand from the cricket mad and rapidly growing Indian middle class.

14:16I recently headed down to the Essex headquarters of JS Wright and Sons. They supply wood for about three quarters of the willow bats globally. When I got there I was surprised to find the yard absolutely vibrating to the sound of chainsaw on willow. You see a stream of trucks coming in, depositing willow trunks that they've sourced from across Britain. That has got a bit of woodness, you see that there? It's not too much, but it just makes it a bit harder for the bat maker, so that brings it down to a cold. They're then graded by one of the employees. It gives them a ranking from high to low. Lovely bats, yeah.

14:59At the end of the process, the vast majority of these clefts are stacked in shipping containers and sent over to India, where the final transformation from cleft to bat takes place. Business at JS Wright is booming. The 132-year-old company employs about 100 staff, including contractors.

15:22Sourcing enough wood to meet the growing demands for cricket bats is a key challenge. An English willow takes about 15 years to reach maturity. Each tree must be visited twice a year to remove the little side shoots that can lead to knots. And when they're felled, they have to be felled very carefully to preserve the grain and don't ruin the bat. JS Wright is planting up to 45 ,000 saplings a year at the moment, but Oliver Wright, the fourth generation to run this family firm, told me that they don't all make it to mature trees. We have to factor in deer damage, squirrel damage, beaver damage, lack of maintenance, all those sorts of things into the equation.

16:06So we tend to plant about three or four to one.

16:15Cricket is a very ancient sport. Its laws were formulated well over 250 years ago. For most of that time, there was no formal restriction on the material from which a bat could be made. There was a notorious incident in 1979 when Australia's Dennis Lilly used a cheap aluminium bat as a marketing stunt for his friend's company. And after that, the Marlborough Cricket Club, which controls the rules, felt that they had to step in and codify for the first time that cricket bats need to be made of wood. Now the Marlborough Cricket Club, the arbiter of the game, is taking steps to increase affordability of bats while preserving the balance of power between batters and bowlers.

16:58Amateurs will be allowed to use bats with blades that are laminated from up to three pieces of wood for the first time. But the expectation is very much that professionals will continue to use a single piece of willow. The Marlebone Cricket Club is very much open to the idea of using alternative materials for bats. But the MCC's Fraser Stewart told me they really don't want an arms race as you've seen in tennis or golf. If someone can come up with a bat that is far more cost effective, that performs in that sort of narrow performance window, because if they're too bad down here, people won't use them.

17:38And if they're too good up there, we won't allow them.

17:48Well suppliers like Jess Wright are sourcing as much willow as possible. Trees take many years to mature. The challenge in the meantime for the arbiters of cricket is to keep the nature of this ancient game as unchanged as possible while stopping and becoming just a pastime for the rich.

18:21That's all for this episode of The Intelligence. We'll see you back here tomorrow.

18:36Thank you.