MacroScope

G7 test of mettle

By Mike Peacock
March 24, 2014

Another crunch week in the East-West standoff over Ukraine kicks off today with Barack Obama in the Netherlands for a meeting of more than 50 world leaders at a nuclear security summit in the Netherlands. There, he and his fellow G7 leaders will hold separate talks on Ukraine.

Obama upped the ante on Vladimir Putin last week with sanctions that hit some of his most powerful allies and strayed firmly into Russia’s banking and corporate world. The EU acted more cautiously but is looking at how financial and trade measures would work, getting ready in case Putin escalates the crisis further.

There is certainly no signs of de-escalation. Over the weekend forced Russian troops forced their way into Ukrainian military bases in Crimea and took them over. NATO’s top military commander said Russia had built up a “very sizeable” force on its border with Ukraine and may be eyeing up a region in the ex-Soviet republic of Moldova too.

Nonetheless, Dutch Prime Minister Mark Rutte, who will host Obama and the leaders of Germany, Britain, Canada, France, Japan and Italy for today’s talks, said the West might want to move slowly from here.

U.S. officials say any further sanctions will need to be carefully calibrated to avoid bans on entire sectors, like oil or metals, that could hit the world economy. There is also the consideration that if Russia really was cut off, Putin could lash out.

The leaders will consider the upcoming meeting of G8 nations in the Russian resort of Sochi in June. They have suspended preparations for that and warned that Russia could face permanent exclusion from the group.

The next few days may be as much about carrots to Kiev which also hurt Putin.

The G7 is almost certain to discuss more assistance, particularly since an IMF team in Kiev will finish its work on Tuesday. The U.S. and EU could row in behind any IMF package, helping Ukraine meet its debt obligations and begin the process of rebuilding.

The EU has signed the political elements of an “association agreement” with Ukraine, promising closer ties that will help draw it more closely into the heart of Europe. That is precisely what Putin was trying to avoid late last year.

By luring the rump of Ukraine towards the west and priming it with funds it could be lost to Russia forever, dealing a fatal blow to Putin’s plan for a Eurasian trading bloc.

Also in the Netherlands will be Chinese President Xi Jinping who is spending a week in Europe. Beijing has stayed studiously to one side of the Ukraine crisis, as is its wont, and Moscow still has high hopes of a huge natural gas supply deal with China that is apparently close after years of negotiations.

Beijing has said sanctions are not the way forward but it abstained on a U.N. Security Council resolution, which Russia vetoed, that declared the Crimea referendum was invalid. Anything Xi says will be news. But will he say anything?

What does Putin do next? That’s the great imponderable. His retaliatory sanctions so far look rather thin but there could be more to follow which will hit Europe, with its deep economic and trade ties with Russia. The chorus of defiance from his allies suggest they remain four-square behind him.

The working assumption remains that it would cost Moscow too much to cut off its gas supplies to the EU. It supplies a third of Europe’s gas but the EU has hefty reserves after a mild winter. The other presumption is that while Europe will not go to the wall over Crimea, any Russian intervention in the east of Ukraine would demand a more robust, though not military, response.

The first round of local elections for mayors and councillors in France’s local boroughs (the second is next Sunday) looks to have dealt a blow to President Francois Hollande. The far right National Front, tipped in some polls to lead all other parties in European Parliament elections in May, looks to have scored heavily although turnout was low.

Hollande’s Socialists and their allies won 43 percent of the national vote, behind 48 percent for opposition conservatives, exit polls showed. The National Front took 7 percent, a proportionately high amount given it fielded candidates in just a fraction of the constituencies.

Fresh tension between Turkey and Syria after Turkish armed forces shot down a Syrian plane on Sunday that Ankara said had crossed into its air space in an area where Syrian rebels have been battling President Bashar al-Assad’s forces for control of a border crossing. Damascus said the jet was pursuing rebel fighters inside Syria.

Flash PMI surveys for the euro zone, Germany and France will give a snapshot of economic activity in March. China’s equivalent survey showed manufacturing – its main growth motor – contracted in the first quarter of the year. That could push the government into fresh stimulus measures.

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