MacroScope

IMF verdict on Ukraine due

By Mike Peacock
March 25, 2014

G7 leaders didn’t move the dial far last night, telling Russia it faced more damaging sanctions if it took any further action to destabilize Ukraine.
They will also shun Russia’s G8 summit in June and meet ”à sept” in Brussels, marking the first time since Moscow joined the group in 1998 that it will have been shut out of the annual summit.

There were some other interesting pointers. For one, the G7 agreed their energy ministers would work together to reduce dependence on Russian oil and gas. Could this lead to the United States exporting shale gas to Europe? A committee of U.S. lawmakers will hear testimony on Tuesday from those who favour loosening restrictions on gas exports.

Sanctions imposed so far may be limited but they are hitting investment and Russia’s currency and stock market. The economy is barely growing and the government said yesterday it now expected net capital outflows of up to $70 billion in the first quarter of the year.

The G7 leaders remain in The Hague for day two of a nuclear security summit and the EU leaders plus Barack Obama will reconvene in Brussels on Wednesday for the annual EU/U.S. summit. But the big moment of the day could come from the IMF which is due to wind up its work in Kiev and is expected to offer an economic reform and aid programme soon.

Aid for Kiev will also hurt Putin.

The U.S. and EU would 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 Kiev, promising closer ties that will help draw it more closely into the heart of Europe.
That is precisely what Putin was trying to avoid.

Remaining Ukrainian troops are being withdrawn from Crimea, the last step in cementing Russia’s control of the region. Russian intervention in eastern or southern Ukraine would be the trigger for additional sanctions, as would violence in Crimea.

Having also been in the Hague, Chinese President Xi JInping will begin a three-day state visit to France. The bilateral focus will be on business and trade deals. But Xi is also a big player in the Ukraine crisis whether he likes it or not. 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.

China 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 on joining Russia was invalid. Xi called for a political solution on Monday but did not harden Beijing’s position towards Moscow.

Germany’s Ifo index will be the main event for the macro markets after its March PMI survey showed solid expansion but at a slightly slower rate than in February. The Ifo is expected to hold steadyish at a high level although German business lobbies are starting to warn about the threat to them from tough sanctions on Ukraine.

Germany’s finance ministry will release its monthly report and both European Central Bank President Mario Draghi and Bundesbank chief Jens Weidmann are making speeches.

Hungary’s central bank – full of government appointees – appears not to have sated its appetite for interest rate cuts despite having lowered them month in, month out since late 2012. A Reuters poll of economists found most expect a further 10 basis points reduction today, taking rates down to 2.6 percent although some think it will hold for the first time in over 18 months. Further cuts could increase the risk of a sell-off in Hungarian assets given the U.S. Federal Reserve’s steady reduction of its money creation.

Nigeria’s central bank, on the other hand, is expected to leave rates at 12 percent today to support its currency at its first meeting since President Jonathan suspended Central Bank Governor Lamido Sanusi, a monetary-policy hawk, last month. It could even hike.

Arab leaders meet in Kuwait, the first high-level political meeting since Saudi Arabia, the United Arab Emirates and Bahrain withdrew their ambassadors from Qatar in a dispute about Doha’s involvement in the region, such as its support for the Muslim Brotherhood in Egypt. Saudi Arabia designated the Muslim Brotherhood as a terrorist group shortly afterwards. Kuwait is attempting to mediate. We will also be watching for news of more Gulf aid to Egypt and there are differences over Syrian and Iran too.

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