A small step back?

March 4, 2014

A reported 0300 GMT deadline, which Russian forces denied had been issued, for Ukraine’s troops to disarm in Crimea or face the consequences has passed without incident and in the last hour President Vladimir Putin has ordered troops that took part in military exercises in western Russia to return to base.

That has helped lift the euro but the situation remains incredibly tense. Russia’s stock market is up a little over two percent and the rouble has found a footing but they are nowhere near clawing back Monday’s precipitous losses.

The West may have no military card to play – and its ability to impose meaningful sanctions is untested as yet – but the markets reminded Putin in no uncertain terms yesterday that there is a price to pay for war mongering.

The rouble plunged, Russian stocks dropped 11 percent and the central bank raised interest rates by a full point and a half and then blew $12 billion of its reserves trying to prop up the currency, hardly an ideal policy response for an economy that is already struggling. If in the longer term foreign investment dries up things could get quite nasty. 

NATO allies will hold emergency talks on the crisis, for the second time in three days, following a request from Poland which has taken a more robust stance against Russia than some of its European peers. Kiev’s U.N. ambassador said Russia had deployed roughly 16,000 troops to Crimea since last week.

Washington is talking up sanctions from visa bans and asset freezes to trade isolation and has now suspended all military engagements with Russia. But the European Union, with its close energy and economic ties to Russia, is more reticent.
EU foreign ministers held out the threat of sanctions on Monday but went no further than that. EU leaders will meet on Thursday to discuss next steps. The G7 members may boycott Russia’s June G8 summit in Sochi.

Britain’s David Cameron and Barack Obama reiterated in a call that there would be “significant costs” for Moscow unless it changed course. But a UK official walking into Cameron’s office was snapped by photographers with a document. It showed the UK would not support trade sanctions for now, nor close London’s financial centre – the City – to rich Russians.

Whether it was a discussion paper or a definitive outline of policy is not clear but either way it will hardly have Putin and his backers quaking in their boots. Cameron’s office denied it was putting the City’s interests before Ukraine’s plight.

The Organisation for Security and Cooperation in Europe, or OSCE, said it was trying to convene an international contact group to help defuse the crisis after Germany said Chancellor Angela Merkel had persuaded Putin to accept such an initiative.

The new Ukrainian government may be completely outgunned by its neighbour but it also has some cards to play. An IMF mission arrives in Kiev today – the first step towards working out an aid programme – and Prime Minister Arseny Yatseniuk has spelled out budget spending cuts and pledged to deliver whatever reforms the Fund wants.

Previous governments in Kiev baulked at an increase in gas prices for domestic consumers and a flexible exchange rate for the hryvnia currency. So it is possible that serious funds could soon be flowing into Ukraine.

Cyprus’s fractious parliament holds a critical vote on government privatisation plans which it rejected last week. The vote is crucial for the  disbursement of a new tranche of aid from international lenders, as part of its 10 billion euros bailout, without which the island could slide into default.

Cypriot MPs threw out a proposed roadmap for the sale of state assets last Thursday, prompting the government to resubmit the plan to privatise its ports, telecoms and electricity companies to raise up to 1.4 billion and pay down debt, in the hope that its opponents would look over the abyss and pull back.

Romania’s parliament is expected to hold a confidence vote in Prime Minister Victor Ponta’s newly proposed cabinet lineup but there are complications. President Traian Basescu has questioned Ponta’s legal right to form a new government because of the loss of one of its founding parties.

Ponta criticised Basescu’s new challenge as irresponsible at a time when domestic political instability, coupled with emerging market jitters over the Federal Reserve’s tapering and turmoil in the Ukraine, have put pressure on Romanian assets.

Fears that the Liberal party’s exit from Ponta’s coalition could weaken commitment to the IMF deal appear to have been unfounded.
Estonian Prime Minister Andrus Ansip will hand in his resignation request to the President who will then have two weeks to try to form a new government. Ansip’s move is aimed at finding a new prime minister from his own party who could contest elections due in March 2015. He is opting out having held office with three separate coalitions since 2005.

Estonia has low levels of government debt and is fiscally stable. The key policy difference between the ruling coalition and the centre-left opposition is over Estonia’s flat 21 percent personal income tax, to be reduced to 20 percent in 2015. The opposition parties would like to move towards a progressive tax policy with higher rates for higher earners.

The Ugandan central bank has a policy decision to make after the currency has weakened sharply in the wake of an anti-gay law passed by the government. International donors have declared they will withhold aid in response and the World Bank postponed a loan. The central bank was forced last week to sell dollars to defend the shilling. Rates were held at 11.5 percent last month.

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