Ukraine inching back to the brink

April 8, 2014

Pro-Moscow protesters in eastern Ukraine took up arms in one city and declared a separatist republic in another yesterday and the new build-up of tensions continues this morning.

The Kiev government has launched what it calls “anti-terrorist” operations in the eastern city of Kharkiv and arrested about 70 separatists. Moscow has responded by demanding Kiev stop massing military forces in the south-east of the country.

Russia’s own forces remain massed just over the border and Ukrainian President Oleksander Turchinov said Moscow was attempting to repeat “the Crimea scenario”.

Washington has warned Vladimir Putin against moving “overtly or covertly” into eastern Ukraine and said there was strong evidence that pro-Russian demonstrators in the region were being paid.

There is also a standoff over gas. Kiev appears to have made no payments to Gazprom, missing a deadline last night to reduce its $2.2 billion debt. Gazprom has not said what action it may take. In previous years, gas disputes between Moscow and Kiev have hurt supplies to Europe.

EU officials will meet Ukraine’s energy minister as well as review the bloc’s own gas storage levels as fears grow of a cut-off of gas supplies.

There is pain for Russia too. Its central bank is due to release data on first quarter capital flight out of the country. The government has already talked about a $70 billion exodus. If it is that high, or even higher, the central bank would likely keep tight monetary policy for longer than initially expected. Raising rates in the future would also not be out of question, some analysts say.

Russian stocks are down about 1 percent having tumbled sharply on Monday in tandem with the rouble.

Fresh talks between chief negotiators from Iran and six world powers over its nuclear programme take place in Vienna. The aim is to hammer out a long-term deal by July 20 that would define the permissible scope of Iran’s nuclear programme in return for a lifting of sanctions that are battering its oil-dependent economy.

Tehran hopes enough progress will be made at talks with the United States, France, Russia, China, Britain and Germany to enable negotiators to start drafting by mid-May a final accord. At the last talks in March, officials said positions diverged widely in a number of areas, particularly over uranium enrichment. Will the East-West standoff over Ukraine leach into these negotiations?

Matteo Renzi’s government will present Italian growth and deficit targets for the coming three years that will provide the fiscal framework for his economic reform plans. He has already said the growth forecast is likely to come down to under 1 percent for 2014.

He has also promised sweeping tax cuts to boost growth and to repay some 68 billion euros of arrears owed by public bodies to private sector suppliers without quite explaining how they will be funded beyond talk of spending cuts, which would have to be swingeing. Italy’s budget deficit is below the EU’s 3 percent of GDP ceiling and is likely to rise.

Renzi and a newly reshuffled French cabinet have revived the European debate about how to get growth going. Paris is seeking to delay yet further the point at which it will lower its budget deficit target to the EU limit in order to cut taxes for consumers and businesses. Brussels has already pushed back but new life has been breathed into the growth versus austerity argument.

The IMF, which holds its spring meeting in Washington later in the week, has lobbed in a grenade of its own by urging the European Central Bank to do more. In an unusually forthright briefing, the U.S. Treasury echoed that call yesterday, warning of a dangerous spiral into deflation.

The new French line-up faces a confidence vote in the National Assembly. Prime Minister Manuel Valls will make a speech to the lower house first. Some Socialists MP are pressuring the cabinet ahead of the vote although it would take a large number of dissenters to prevent it going the government’s way.

Bundesbank chief Jens Weidmann said last night that France had set a test case for Europe’s fiscal rules which put their credibility at stake. He is speaking again later today. The Bank of France has just confirmed its 0.2 percent first quarter growth forecast.

The Spanish parliament will debate a call from the Catalan Parliament to hold a referendum on independence. With the ruling People’s Party and the main opposition group, the Socialists, both opposed, it will be thrown out.
Catalan President Artur Mas has already set a date for a referendum, on Nov. 9, and will try to go ahead with it, possibly as a non-binding opinion poll. If he is not able to hold it he has said the next Catalan elections, which must be held by 2016, will be a proxy vote on independence.

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