Russian sanctions … and France

May 13, 2014

After the EU widened its sanctions to include Vladimir Putin’s deputy chief of staff, the commander of Russian paratroopers and two Crimean energy firms, Ukrainian prime minister Yatseniuk is in Brussels today for talks. The EU is looking to shore up the situation to allow national elections to take place on May 25 and, along with Washington, has set any disruption of that vote as a red line.

Vladimir Putin, perhaps fearing significantly tougher sanctions, has belatedly given rhetorical support to the election. Whether it can legitimately take place given the chaos in parts of the country remains an open question.

The latest additions bring to 61 the number of Russians and Ukrainians the EU has slapped with asset freezes and visa bans and for the first time it has targeted companies after foreign ministers agreed to broaden the scope of sanctions. However, only broader 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.

Diplomatic sources said France would press ahead with a 1.2 billion-euro contract to sell helicopter carrier ships to Russia because cancelling it would hurt Paris more than Moscow.

After holding a referendum on self-rule which the West and Kiev dismissed as illegal, pro-Moscow rebel leaders in eastern Ukraine called on Monday for their region to become part of Russia. Moscow stopped short of endorsing their bid for annexation. Officials in Donetsk and Luhansk suggested a second vote would be held on joining Russia.

Uncertainty surrounding Ukraine has been one of the factors, though only one, that has propelled investors into what we used to call peripheral euro zone bonds, which are now trading at record low yields. Today, Italy will sell up to 7.25 billion euros of bonds maturing in 2017, 2021, 2034 and 2037 while Spain is expected to offer up an inflation-linked bond via syndication.

Inflation-linked debt has generally been the preserve of “core” European issuers but Madrid is following Rome’s lead after it sold a heavily oversubscribed “linker” in March. Spain will also hold a regular t-bill auction today.

The British Retail Consortium reported overnight that sales posted their highest year-on-year rise in three years last month as rising house prices encouraged shoppers to buy new furniture, flooring and other home décor. Bank of England Deputy Governor Jon Cunliffe speaks later. He was the man who warned recently that it would be dangerous to ignore the momentum building in Britain’s housing market.

All this cues up tomorrow’s quarterly BoE inflation report which will reveal latest thinking within the Bank. Given the ongoing strength of economic data, the odds of a first interest rate rise this year are narrowing and one could certainly come before May 2015 elections.

The Bank may also soon flex its new powers to rein in what is rapidly starting to look like a housing bubble, at least in London and its environs.
Among other measures, the BoE could recommend caps on the size of home loans granted in relation to a property’s value or a borrower’s salary although the inflation report is probably not the right forum. One question to ponder is whether the government’s “Help to Buy” scheme, which is helping more people get on the housing ladder, is appropriate any more.


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