MacroScope

Will sanctions bite?

By Mike Peacock
April 30, 2014

Financial markets may view the latest sanctions against Russia as feeble, but the reaction from Moscow – Vladimir Putin threatened to reconsider Western participation in energy deals and his foreign minister, Sergei Lavrov, said they were the work of weak politicians – suggests otherwise.

Russia’s top oil producer, Rosneft, will release first-quarter financial results after its boss and close Putin ally Igor Sechin was put on the U.S. sanctions list. Yesterday, energy giant Gazprom – whose chief escaped censure – said further Western sanctions over Ukraine could disrupt its gas exports to Europe and hit its business and shares.

The International Monetary Fund will report on its regular mission to Russia. On Tuesday, the Fund said it was preparing to cut its growth forecast for the second time in a month. Many are now talking about a recession this year and capital outflows exceeded $60 billion in the first quarter.

The other side of the equation is international help for the government in Kiev. The IMF’s board will meet in Washington to consider aid, having provisionally agreed in March to provide a $14 billion-18 billion two-year package, hoping others would bump that up to $27 billion in total. Some of that needs to flow quickly if the country is to avoid defaulting on its debt obligations.

On the ground in eastern Ukraine, separatists took hold of government building in the city of Luhansk and fired on police headquarters. Similar appears to have just happened in the town of Horlivka.

Germany’s Angela Merkel will meet Japanese premier Shinzo Abe in Berlin. Japan imposed visa bans on 23 people on Tuesday as its contribution to sanctions against Russia. The names were not disclosed. Abe faces a balancing act between standing with its G7 partners while maintaining working ties with Moscow as Tokyo seeks to diversify energy imports after the 2011 Fukushima nuclear disaster.

Merkel might also ask him about Japan’s economic revival on the back of a burst of quantitative easing that saw off years of deflation, which is now a hot topic in Europe.

German inflation rose to 1.1 percent in April, by less than had been expected, suggesting that forecasts for the euro zone figure today to jump to 0.8 percent from 0.5 may be a bit toppy.

Nonetheless, any sort of rise in the rate would argue against policy action at the European Central Bank’s meeting next week. They didn’t act when it fell for several months so it’s hard to see them leaping into action after an increase and policymakers continue to insist they see no threat of deflation.

New ECB staff forecasts are due in June and by then the picture may be clearer, but at best the central bank would be likely to start by shaving ultra-low interest rates and possibly pushing the deposit rate – already at zero – marginally into negative territory.

It is just as likely to do nothing at all, unless its inflation forecast has been downgraded markedly. The big game changer would be QE – printing money – but on Monday, Mario Draghi told German lawmakers that was a way off at best.

Draghi said earlier this month that the bank might want to buy corporate assets rather than government bonds if it went for QE, but there is neither the structure nor size of market to make a big difference yet. If it did buy government bonds with new money, most of it would flow to the banks which may not be predisposed to lend it on until their stress tests are out of the way later this year … and maybe not even then.

The Bank of Japan kept the policy tiller steady earlier and the Federal Reserve will deliver its policy decision later. Paring of its bond-buying programme will continue.

After Britain reported strong Q1 growth, Spain comes to the party today. The Bank of Spain has forecast quarterly growth of 0.4 percent and the country is set to achieve the first year-on-year growth since mid-2011. On the back of that, the government will revise its forecasts and is expected to predict growth of 1.2 percent this year and 1.8 percent next year, with an accompanying reduction in unemployment.

Turkey’s central bank will issue its quarterly inflation report. It has said interest rates – which were whacked up in January to defend the lira – will stay high until the inflation outlook improves, despite demands by Prime Minister Tayyip Erdogan for immediate rate cuts. Last week, the central bank ignored him. Minutes of that meeting are also due for release.

Iraqi national elections are taking place against a backdrop of escalating violence again between the military/militia and insurgent groups.  A number of Shi’ite groups are vying for the premiership, Sunnis and Kurds want key government posts and Prime Minister Nouri al Maliki is determined to stay in office.

Maliki is probably in pole position, but his opponents could defeat him if they managed to put aside their differences.

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