EU ponders another round of Russia sanctions

January 29, 2015

Ukrainian servicemen sit atop an armored personnel carrier as they patrol Orekhovo village in Luhansk

EU foreign ministers hold an extraordinary meeting today after their leaders have asked them to consider possible new sanctions on Russia. A final decision to impose them is likely to be left to their bosses who meet in next month and again in March.

A draft statement for the meeting, seen by Reuters, suggests the European Union will extend by six months a round of sanctions imposed on Russia last March over its annexation of Crimea, add new people to the list of those under sanctions and prepare new broader measures.

Officials told us that they could include further capital markets restrictions, making it harder for Russian companies to refinance themselves and possibly affecting Russian sovereign bonds.

The toughest layer of existing measures were introduced last summer and are up for review in July. It seems inconceivable that they will not be rolled over unless Moscow has taken a dramatically different tack over Ukraine by then.

Moscow said on Wednesday military action by the Ukrainian government would prompt an “inevitable further escalation of the conflict” with pro-Russian separatists in the east.

Washington signed an agreement to provide $2 billion in loan guarantees to help Ukraine with “near-term social spending” and said it was prepared to step up economic sanctions against Russia if necessary.

Greece bears watching in all this. Its new government under Alexis Tsipras has signalled it may not support tougher action against Russia. With Tsipras seeking to renegotiate Greece’s debt pile with its euro zone partners and already dismantling chunks of the bailout agreement could he try to use Russian sanctions, which must be unanimously agreed, as a bargaining chip?

European Parliament President Martin Schulz, who will visit Athens today, warned Tsipras on Wednesday against diverging from the European Union’s stance towards Russia over the Ukraine crisis.

Greek borrowing costs shot up yesterday as privatization plans agreed under the country’s bailout programme were halted but there is still no sign of Greek jitters infecting other euro zone markets. Italy, which can borrow for 10 years at not much more than 1.5 percent, will auction up to 8.25 billion euros of inflation-linked floating-rate notes and fixed-rate bonds later.

Italian lawmakers hold a first round of voting to elect a new president to replace 89-year-old Giorgio Napolitano.
Selecting a new president will be a major test for Prime Minister Matteo Renzi, who is loath to get bogged down in any stalemate with his reform programme still largely incomplete while many in his party are uncomfortable about his pact with Silvio Berlusconi.

Earlier this week, Renzi won Senate approval for his electoral reforms  which will change voting rules to ensure a clear winner at elections and more stable government. For the presidential vote, he will need support from outside his own party.

During the first three rounds of secret voting, a candidate must receive more than two-thirds of the votes. A simple majority is needed in the fourth round. The president can nominate prime ministers, dissolve parliament and call elections. He also has the power to grant pardons, something of particular interest to Berlusconi.

The central bank world has been upended over the past fortnight by a combination of cheap oil and the prospect of the European Central Bank unleashing a flood of euros.

The Federal Reserve has proved the exception, saying last night that while it would remain “patient” in deciding when to raise interest rates from near zero, the U.S. economy was expanding at a solid pace with strong job gains.

South Africa is expected to hold its key rate at 5.75 percent today. Its view has always been that it doesn’t have the clout to tackle the vagaries of the currency market. Africa’s most-developed economy has been mired in stagflation for the past five years but the plunge in oil prices and a potential recovery in the euro zone could spur economic growth.

Euro zone money supply data will show whether there has been any pick-up in bank lending to businesses and households in December, after bank stress tests were completed and in anticipation of a glut of ECB euro printing which has now been agreed. Lending has fallen month in, month out for as long as I can remember.

After the ECB surprised on the upside last week with a QE programme that should pump more than a trillion euros into the euro zone economy, Benoit Coeure and Peter Praet – both executive board members – speak today.

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