Last-ditch talks on Crimea

March 14, 2014

U.S. Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov will meet in London, a last chance by the look of it to make diplomatic headway before Sunday’s Crimean referendum on joining Russia which the West says is illegal.

Kerry said he would present “a series of options that are appropriate in order to try to respect the people of Ukraine, international law, and the interests of all concerned” and that sanctions would be imposed against Moscow if the referendum went ahead.

A full NATO meeting will take place in Brussels with the Russian and Ukrainian ambassadors invited. There is no sign yet of Vladimir Putin coming to the negotiating table.

Following Washington’s lead, the European Union has agreed on a framework for sanctions against Russia, including travel restrictions and asset freezes, which goes further than many expected. The list of targeted individuals is still being worked on but will be ready for the bloc’s foreign ministers to look at on Monday.

Germany had been cautious about imposing anything too tough but now agrees actions will be taken next week unless diplomatic progress is made – signalled by a notably uncompromising speech by Angela Merkel on Thursday in which she warned Moscow risked massive political and economic damage.

Moves are also accelerating to shore up the new government in Kiev. An International Monetary Fund team will begin formal negotiations with Ukrainian authorities about an economic reform programme and aim to complete it by  March 21.

Interesting that one of the more thoughtful voices in Russia – that of former finance minister Alexei Kudrin – said the country could face economic stagnation and capital outflows of $50 billion a month if tough sanctions are imposed. Kudrin remains an adviser to Putin.

Russian markets took a bath last week as the situation in Crimea escalated but have since steadied. This morning stocks in Russian utilities, steelmakers and banks have fallen sharply with the main share index down 5 percent.

Russia’s central bank holds a regular policy meeting having been forced to yank up interest rates by 1-1/2 points last week in order to try and defend the rouble and stave off market chaos. It also blew the thick end of $12 billion of its reserves trying to put a floor under the currency.

The rate hike is intended as a temporary step but with few expecting strong downward pressure on the rouble to abate quickly it is unlikely to be reversed soon.

The central bank’s efforts to adhere to a more orthodox inflation-fighting mandate, progress it has made in building a reputation for steady economic management and plans to allow the rouble to float more freely risk being utterly derailed by Putin’s intervention in Ukraine.

Longer-term, the crisis has also focused minds in the EU and spurred efforts to end decades of dependence on Russian gas by developing the bloc’s own energy supplies and pushing for greater access to U.S. supplies. That will come up at next week’s summit of EU leaders. It’s a long-term project but could be a hammer blow to the Russian economy if it succeeds.

Spain’s Treasury will publish the contents of a fiscal reform proposal presented to it by a committee of experts on Thursday. The government has already promised income tax cuts for 2015, an election year, though it has also said they will initially be revenue-neutral.

It seems Mariano Rajoy is prepared to take a big electoral gamble – shifting the tax burden from jobs to consumption by lowering the burden on businesses but pushing up consumption taxes such as VAT.

The strategy would probably boost exports further, and help create jobs, but it could also hit domestic demand. Spanish retail sales fell at their fastest rate in four months in December, adding to evidence that a tentative recovery has yet to be supported by depressed consumer demand.

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