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Friday, July 04, 2014

Ukraine update – Russian sanctions come to the fore again

We’ve been overdue an update on the situation in Ukraine. Over the past few weeks, as anyone following the news will have seen, the situation on the ground has remained very volatile. The attempted ceasefire was widely disregarded, leading to the Ukrainian government to launch a significant counterattack once it expired.

On the international level though, there seemed to have been some de-escalation: Russia drew back troops from the Ukrainian border, the Russian Parliament removed the government’s right to military intervention in Ukraine (at Russian President Vladimir Putin’s request), Putin welcomed the new Ukrainian President and government and generally softened his tone.

However, in recent days, events seem to be taking a different turn, with several reports suggesting a potential widening of economic sanctions on Russia. Much of this seems down to the fact that many believe Russia has allowed its border with Ukraine to be deliberately permeable and may have directly helped to resupply the pro-Russian separatists both with arms and personnel.

Importantly, Germany has hardened its position on sanctions, earlier this week German Chancellor Angela Merkel said:
“Regarding sanctions against Russia, we have so far reached level two and we cannot rule out having to go further.”
Deputy Chairman of the CDU/CSU Michael Fuchs added:
“If the Russians were to go further on the road which they have recently taken [towards escalation] then we must thoroughly consider whether there should be other sanctions . . . The best sanction is to take less [Russian] gas . . . You don’t even have to call it sanctions, but just don’t buy so much.”
In the meantime, the EU has also completed much of the technical work behind imposing wider economic sanctions, particularly sector specific ones. While, Russia has previously brushed off such threats the WSJ reports today that, according to a leaked document from the Russian Finance Ministry, it is quite concerned. The document argues:
[While Russia] has adequate reserves to compensate (for) the majority of the economic losses caused by sanctions…[they could still have a] substantial impact.”

“The imposition of sanctions on individual sectors of the Russian economy could lead to a worsening of their financial condition, borrowing terms, a rise in the risk premium and an increase in the capital outflow.”
As we noted in our very first report on all of this, sector specific sanctions would certainly hurt Russia, especially in the longer run which is looking increasingly worrisome from an economic perspective.

But while Russia is right to be concerned, as we noted in our Dove/Hawk scale, the EU is incredibly divided over deeper sanctions. While some countries have hardened their stance – notably Germany and the UK – others remain quite opposed, in particular Italy (which fears a restart of economic uncertainty) and France (which remains keen to conclude its military dealings with Russia before any further talk of sanctions). As such, it seems that any clear EU decision on this remains someway off.

On top of this, the standoff over gas supplies to Ukraine continues. Russia continues to insist that all gas from now on must be pre-paid and is demanding an immediate payment of $1.95bn out of a claimed $4.5bn in unpaid bills. Ukraine is refusing to give in, not least because its worsening economic situation means such upfront costs will be very difficult to stomach and may well have to be funded by European bailouts. So far this has avoided blowing up into a Europe-wide issue since transit of gas to Europe has continued but as Ukraine’s reserves dwindle and it seeks to import gas back from the rest of Europe (something Russia said it would prohibit) it could easily quickly spiral into a very serious continent wide problem.

In other areas there have also been renewed tensions. Ukraine finally signed the long awaited Association Agreement with the EU – the factor which essentially started all of this off. Russia remains concerned by such action and has already retaliated against Moldova, with bans on certain imports, which signed a similar deal. Meanwhile, new Ukrainian Defence Minister Valeriy Heletey stressed that the army would retake Crimea, promising, “There will be a victory parade... in Ukraine's Sevastopol.” Whether or not this has publicly manifested itself yet, you can be sure such comments and actions are antagonising Putin and Russia.

The situation in Ukraine remains very fragile but more worryingly little real progress seems to have been made. Russia, Ukraine and the EU remain at loggerheads over the association agreement and gas supply. Ukraine and Russia continue to disagree over the future for eastern Ukraine and Crimea. Despite these longstanding disputes which intermittently flare up and recede, Europe as a whole seems no closer to finding a clear stance or unified position on how to deal with what is happening. 


Rik said...

Europe should develop asap a strategy that deals with long term instability in the Ukraine.
Not a certainty but by far the most likely scenario. Lots of economic refugees with the label political. Problems with the pipelines. And overflow of increased criminality.

There seems to be no proper plans to deal with all this.

It is totally unrealistic if Putin wants to continue the present scenario that it can be stopped.
Fighting could become more 'Partizan' and it is impossible to beat them.
Furthermore a lot of things could be done in other fields. Even militarywise a lot of easy options are open and not yet used. Like taking the (consequences) of the fighting to Kiew. Getting after the money.

Support will drop in own areas when economic growth longer term turns negative as it undoubtedly will. Not even to mention wath it will do in the East.
Similar for the local energy demands.

When people start shooting at each other reset is always very difficult.

Jesper said...

A clear stance has been taken: The EU and its institutions support Porosjenko.

That 'moral', or is it 'ethical', stance is hindered by the more practical problem: Who'll pay for the stance/situation?

Also, who in the EU is considering supplying Ukraine with gas on credit?

R Davis said...

In the mean time, are we any closer to discovering what happened to the GOLD of the Ukraine. Which was moved to parts unknown, for safe keeping, prior to the 'fake coup'.?
[ apparently Putin swore before God that it was not in Russia ]
In the mean time the 'now' government will purchase GOLD to the tune of $1 billion with some of the borrowed monies from the I.M.F., to be repaid with interest.
And therefore is it safe to assume that the missing GOLD is to the value of $1 billion. But is it that the GOLD which is being purchased is actually the original GOLD, in the first place ?

R Davis said...

Max Keiser - on the Keiser Report - shortly after the 'fake coup' said the THE GOLD OF THE UKRAINE WAS AT THE U.S.FEDERAL RESERVE.
We all know that the U.S. Federal Reserve is answerable to no one.
Forget your umbrella there & you will never see it again..no one in their right mind would deposit 2 pence & a half penny there for fear of never seeing it again - the veritable Black Hole of Calcutta is the U.S. Federal Reserve.