Jaw jaw not war war, hopefully

March 5, 2014

The end of Russian military exercises near the Ukrainian border and Vladimir Putin’s statement that force would only be used as a very last resort seemed to have taken some of the tension out of this crisis but the situation remains on a knife edge.

Moscow chose to test fire an intercontinental ballistic missile though Washington said it had been notified of plans to do so before the standoff in Crimea blew up. And there is always the possibility of conflict being triggered inadvertently.

Yesterday, a Russian soldier fired three volleys of shots over the heads of unarmed Ukrainian servicemen who marched towards their aircraft at a military airfield surrounded by Russian troops near Sevastopol.

Markets calmed after a rout of Russian assets on Monday during which the central bank says it blew $11.4 billion of reserves defending the rouble as well as whacking up interest rates. The currency is steadyish this morning while Russia’s stock market is down about 1 percent, which is a modest move in this sort of environment.

It’s not clear what Putin’s end game is and whether he can extricate himself from this standoff without losing face. Russian Foreign Minister Sergei Lavrov and his Spanish counterpart will hold a morning news conference at 0830 GMT and Lavrov will then fly to Paris for a conference, ostensibly on Lebanon, which U.S. Secretary of State John Kerry is also attending. France’s foreign minister meets the acting Ukrainian foreign minister this morning.

A senior U.S. official said Washington was ready to impose sanctions on Russia in days rather than weeks though the European Union appears more reticent. America has also announced an initial $1 billion assistance package for Ukraine. A technical IMF team is already in Kiev going through the books. Countering that, Gazprom said it would remove a discount on gas prices for Ukraine from April.

President Barack Obama spoke to German Chancellor Angela Merkel about a potential resolution under which Russia would pull back its forces in Crimea to their bases in the region, limit the Russian troop numbers to a Ukraine-mandated ceiling of 11,000, and allow in international monitors to ensure ethnic Russians are being protected. That could allow direct talks between the Russians and the new Ukraine government with elections taking place in May as planned.

Obama will not attend Russia’s G8 summit in June unless Putin changes course and Canada said yesterday that the Group of Seven leading industrialized nations were considering holding a meeting in the near future and pointedly exclude Russia.

Russia’s position is that it is entitled to use any method to protect compatriots who are living in “terror” in Ukraine and that any deal must be based on the Feb. 21 peace deal agreed by ousted president Yanukovich and his opponents under which he would relinquish some powers. But that deal lasted only a few hours before Yanukovich fled and even Putin says he has no political future.

Moscow says it would retaliate against any sanctions and one of Putin’s more aggressive aides yesterday floated the idea of dropping the dollar as a reserve currency and refusing to pay off any loans to U.S. banks.

It’s mercifully quiet elsewhere.

Service sector PMI surveys for euro zone members, Britain and others will give the latest snapshot of still generally anaemic economic recovery. The PMIs have generally looked more buoyant than the hard economic data but the French readings have often underwhelmed.

Yesterday, the French Treasury hit back saying the PMI seriously understated French growth trends. Business surveys by French stats office INSEE are routinely more upbeat and poll 10,,000 companies, about 10 times the number covered by the PMI, it said. Markit, the company that compiles the PMI, countered that these surveys were about quality not quantity.

Poland’s central bank meets and is likely to decide whether to extend the current flat rate guidance running until June. The markets expect a rate rise towards the end of the year but certainly no move yet.

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