Over to Obama

September 3, 2014

U.S. President Barack Obama walks towards Air Force One before departing for Estonia while at Andrews Air Force Base outside Washington

Barack Obama is in Estonia before the NATO summit in Wales intending to pressure Vladimir Putin to back off in Ukraine. The rhetoric will be strong – not least about protecting the Baltics under NATO’s umbrella.

But with zero chance of western military action in Ukraine the hope is that economic pain via sanctions will bring Moscow to heel. Existing sanctions are clearly hurting the economy – the rouble has plumbed record lows as capital flees or shuns the country – but that hasn’t stopped Putin so far.

He seems intent not on taking Ukraine over but keeping the rebels sufficiently well armed and supported to keep Kiev off balance and unstable. If that is the intention it has certainly succeeded.

Western countries accuse Moscow of sending armoured columns of troops into Ukraine, where the momentum in a five-month war shifted last week in favour of pro-Russian rebels. They were virtually on their knees but are now resurgent and said last night they were on the point of retaking the strategically important Donetsk airport.

Putin’s spokesman has just said the Russian president has spoken to his Ukrainian counterpart Petro Poroshenko by telephone and the two leaders largely agreed on what needs to be done to resolve the crisis. No further details were forthcoming.

The United States and European Union are readying fresh measures against Moscow but there will be a price for the EU too as many of its economies falter. Some in the bloc would be hugely vulnerable if Russia cut off supplies of energy although such a move would cost Moscow dear in terms of lost revenues.

The EU is focusing primarily on the financial arena again and is considering widening a ban to borrow or raise capital in Europe to all Russian state-owned firms from just Russian government banks. Other measures discussed include banning syndicated EU loans to Russian government-owned banks and institutions.

The European Commission is to prepare a final draft of new sanctions against Moscow over its invasion of Ukraine today and EU governments will make a decision on the final shape of the package by Friday.

Obama would also like to see Europe start to reverse sharp cuts in defence spending in recent years. Estonian Prime Minister Taavi Roivas told Reuters yesterday NATO needed a clear and visible presence in eastern Europe to deter Russian aggression and Alliance members must also increase military spending after years of cuts.

The U.S. president will also have to respond to the apparent beheading of a second kidnapped U.S. journalist by Islamic State militants in Iraq. Washington has launched air strikes to help stop the IS advance in northern Iraq and has had significant success in doing so.

It is sending three top officials – Secretary of State John Kerry, Defense Secretary Chuck Hagel and counterterrorism adviser Lisa Monaco – to the Middle East “to build a stronger regional partnership” against the Islamic State militants. And 350 more U.S. military personnel will go to protect the large American embassy in Baghdad, bringing up to about 820 the number of U.S. forces working to bolster diplomatic security in Iraq.

The White House said Obama would be consulting with NATO allies on additional actions to take against Islamic State forces and “to develop a broad-based international coalition to implement a comprehensive strategy to protect our people and to support our partners” against the group.

Having admitted last week that it was still searching for a strategy, Washington is eager to recruit allies for potential joint military action. Britain and Australia are potential candidates. Germany has said it was in talks with the United States and others about possible military action but made clear it would not participate. France, which was left on a limb when Obama backed down from the threat of strikes on Syria following a major chemical attack a year ago, may also be a reluctant partner.

A masked figure in the video of the beheading also issued a threat against a British hostage. David Cameron will hold emergency talks with security officials and ministers this morning.

EU/IMF/ECB troika talks with Greek ministers are underway in Paris, a shift in venue to avoid inflaming the Greek public. This looks like a preliminary skirmish which will wind up on Thursday. Widely-expected debt relief negotiations are unlikely to begin until after the latest bailout review is over and results of European bank stress tests are announced in mid-October, according to officials.

Poland’s central bank meets and is likely to keep interest rates at 2.5 percent prior to making one small cut later in the year, according to a Reuters poll of economists.  Financial markets, however, are pricing in a quarter-point cut in September and at least one more by the end of the year.

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