Ukraine fissure

By Mike Peacock
May 12, 2014

Pro-Moscow rebels declared a resounding victory in Sunday’s referendum on self-rule for eastern Ukraine, with some saying that meant independence and others eventual union with Russia. On the ground, fighting appears to be getting increasingly out of control.

The EU declared the referendum illegal but separatist leaders in eastern Ukraine may use the vote to formalise a split with Kiev. Nearly 90 percent of voters in Donetsk, the larger of two eastern regions where a plebiscite was held, voted for self-rule, the head of the separatist election commission there said.

There are signs of alarm even in Moscow with Vladimir Putin calling last week for the referendum to be suspended, perhaps fearing tougher sanctions from the West. Washington and the EU have set any disruption of Ukraine’s May 25 national election as their red line. Putin has belatedly given rhetorical support to that vote. Whether it can legitimately take place given the chaos in parts of the country remains an open question.

EU foreign ministers meet in Brussels today and are likely to expand their criteria for sanctions should they feel the need to go further. Sources have told us that there is agreement to add about 15 people and five Crimean-based companies to the bloc’s list of targets. The EU has previously imposed asset freezes and visa bans on 48 Russians and Ukrainians over Moscow’s annexation of Crimea.

This would mark the first time the bloc has targeted companies but the measures are still limited and well behind the stance of the United States. Only trade and financial sanctions would really bite and on that, Washington is much keener than Europe which is heavily dependent on Russia for its energy needs.

European Council President Herman Van Rompuy will be in Kiev for talks with Ukrainian premier Arseniy Yatsenyuk. They are expected to focus on how to stabilize the situation on the ground before the presidential election.

A variety of policymakers will speak at a Vienna conference on banking union, European Central Bank Vice President Vitor Constancio probably topping the list.

Mario Draghi has again put the cat among the pigeons, saying the ECB was ready to take action in June to boost the euro zone if updated inflation forecasts are lowered further and stressing that the euro’s strength was “a serious concern”. The euro has come off since the master of verbal intervention’s latest feint but this time it may have to be backed up with action to stick. If it comes, it is likely only to involve a salami slice off already ultra-low interest rates – not an economic game changer – and maybe some other tinkering.

If this week’s euro zone GDP numbers come in strong, the markets may decide even that is unlikely and push the single currency higher again. What, one wonders, would the ECB do in response to signs of faster growth which could prompt the currency to strengthen further into its danger zone – the stronger growth would argue against policy loosening, the stronger currency in favour.

There’s a good reason why central bankers down the ages have refused to comment on exchange rates.

Moody’s upgraded Portugal’s credit rating late on Friday and said a further rise could soon follow, that after S&P lifted the outlook on its rating to stable. That should keep intact investors’ ardour for what we once called peripheral euro zone bonds.

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