MacroScope

Ukraine inching back to the brink

Pro-Moscow protesters in eastern Ukraine took up arms in one city and declared a separatist republic in another yesterday and the new build-up of tensions continues this morning.

The Kiev government has launched what it calls “anti-terrorist” operations in the eastern city of Kharkiv and arrested about 70 separatists. Moscow has responded by demanding Kiev stop massing military forces in the south-east of the country.

Russia’s own forces remain massed just over the border and Ukrainian President Oleksander Turchinov said Moscow was attempting to repeat “the Crimea scenario”.

Washington has warned Vladimir Putin against moving “overtly or covertly” into eastern Ukraine and said there was strong evidence that pro-Russian demonstrators in the region were being paid.

There is also a standoff over gas. Kiev appears to have made no payments to Gazprom, missing a deadline last night to reduce its $2.2 billion debt. Gazprom has not said what action it may take. In previous years, gas disputes between Moscow and Kiev have hurt supplies to Europe.

Reasons to do nothing

It’s ECB day and the general belief is that it won’t do anything despite inflation dropping to 0.5 percent in March, chalking up its sixth successive month in the European Central Bank’s “danger zone” below 1 percent.

The reasons? Policymakers expect inflation to rise in April for a variety of reasons, one being that this year’s late Easter has delayed the impact of rising travel and hotel prices at a time when many Europeans take a holiday. Depressed food prices might also start to rise before long.

More fundamentally, they do not see any signs of deflation psychology taking hold, whereby businesses and consumers defer spending plans in the expectation that prices will cheapen.

How stiff is EU’s resolve?

Russian troops seized two Ukrainian naval bases, including a headquarters in Sevastopol where they raised their flag. Moscow, continuing to insist it does not control the unbadged militia in Crimea, called for a detained Ukrainian navy commander to be freed, which has now happened. Make of that what you will.

Washington is keeping up the rhetorical pressure. Vice President Joe Biden, in Lithuania, said Russia was travelling a “dark path” to political and economic isolation. U.N. Secretary-General Ban Ki-moon is travelling to Moscow for talks with President Vladimir Putin, Foreign Minister Sergei Lavrov and other senior officials. He will move on to Kiev on Friday. 

More potent may be an EU leaders’ summit today and Friday. After subjecting 21 Russians and Crimeans to travel bans and asset freezes, tougher sanctions are already under consideration and minds have also been focused on ending decades of dependence on Russian gas. It’s a long-term project but one that could deal a hammer blow to the Russian economy if it succeeds.

Last-ditch talks on Crimea

U.S. Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov will meet in London, a last chance by the look of it to make diplomatic headway before Sunday’s Crimean referendum on joining Russia which the West says is illegal.

Kerry said he would present “a series of options that are appropriate in order to try to respect the people of Ukraine, international law, and the interests of all concerned” and that sanctions would be imposed against Moscow if the referendum went ahead.

A full NATO meeting will take place in Brussels with the Russian and Ukrainian ambassadors invited. There is no sign yet of Vladimir Putin coming to the negotiating table.

Sanctions loom for Russia

The European Union, as we exclusively reported yesterday, has agreed on a framework for sanctions against Russia, including travel restrictions and asset freezes, which goes further than many expected. The list of targeted individuals is still being worked on but will be ready for the bloc’s foreign ministers to look at on Monday.

Angela Merkel will speak to the German Bundestag about the standoff with Russia. Merkel has been cautious about imposing anything too tough as she tries to convince Vladimir Putin to agree to a “contact group” that would reopen communications between Moscow and Kiev. But yesterday she said measures would be imposed next week – after a Crimean referendum on joining Russia which the West says is illegal – unless diplomatic progress is made.

There is no sign of Vladimir Putin coming to the negotiating table and no question of western force being deployed. In Washington, Ukrainian Prime Minister Arseny Yatseniuk said his government was ready to negotiate over Moscow’s concerns for the rights of ethnic Russians in Crimea – a possible diplomatic avenue? The U.N. Security Council will discuss the crisis in an open meeting later.

Fundraising for Kiev

If the hastily drawn up timetable is adhered to an interim Ukrainian government will be formed today. Whatever the line-up, it is likely to repeat its urgent call for aid.

The West, led by the EU, is trying to drum up support – Brussels has already talked with Japan, China, Canada, Turkey and the United States on possible help — but the signals are that big money will only flow after May 25 elections when a permanent government is in place. Can it wait that long? The IMF adds that conditions it imposed on a previous loan offer would still apply, strings that it would be tough for any government in Kiev to meet.

Russia’s next step is the great unknown question but it seems safe to presume that the $12 billion outstanding from its $15 billion bailout of Ukraine will not be forthcoming, at least for now. There is also the prospect of the cut-price charged for its gas zooming back up.

A glimmer of hope in Kiev

A glimmer of hope in Ukraine?

Let’s not count our chickens after 75 people were killed over the past two days but President Viktor Yanukovich’s people are saying an agreement on resolving the crisis has been reached at all-night talks involving the president, opposition leaders and three visiting European Union ministers.
A deal is due to be signed at 1000 GMT apparently although no details are as yet forthcoming. There has been no word from the EU ministers or the opposition so far.

Even if the violence subsides and some sort of political agreement is reached (a huge if), there is potential financial chaos to deal with despite Russia’s only partially delivered pledge of $15 billion to bail its neighbour out.

Standard & Poor’s has cut Ukraine’s sovereign rating for the second time in three weeks, saying the political situation has deteriorated substantially, posing an increased risk of default. The rating is now deep in junk territory at ‘CCC’ and with a negative outlook, meaning further cuts are likely.

Cold War chill over Ukraine

Dramatic twist in the Ukraine saga last night with a conversation between a State Department official and the U.S. ambassador to Ukraine posted on YouTube which appeared to show the official, Assistant Secretary of State Victoria Nuland, deliberating on the make-up of the next government in Kiev.

That led to a furious tit-for-tat with Moscow accusing Washington of planning a coup and the United States in turn saying Russia had leaked the video, which carried subtitles in Russian. A Kremlin aide said Moscow might block U.S. “interference” in Kiev.

Nuland is due to give a news conference today after her visit to Kiev.

Vladimir Putin is likely to meet Ukrainian President Viktor Yanukovich in Sochi as the Winter Olympics get underway. It could be awkward for Yanukovich’s opponents if they look like western pawns.

ECB – stick or twist?

 

The European Central Bank meets today with emerging market disorder high on its agenda.

It’s probably  too early to force a policy move – particularly since the next set of ECB economic and inflation forecasts are due in March – but it’s an unwelcome development at a time when inflation is already uncomfortably low, dropping further to just 0.7 percent in January, way below the ECB’s target of close to but below two percent.

If the market turbulence persists and a by-product is to drive the euro higher, which is quite possible, the downward pressure on prices could threaten a deflationary spiral which ECB policymakers have so far insisted will not come to pass.

PMIs on the up

Slowing growth in the Chinese and U.S. factory sectors earlier this week did nothing to soothe frayed market nerves and put a firm focus on today’s service sector PMI surveys in Europe along with the equivalent U.S. report and a weekly jobless number there.

While the world’s two largest economies suffered a hiccup, euro zone factories had their best month since mid-2011 in January. But it is the service sector that dominates in Europe. Flash readings, which are not usually revised much, showed the euro zone services reading hit a four-month high with France lagging Germany again although even its number rose. Today we’ll get the first numbers for Italy, Spain and Britain.

The reports will be the last meaningful pieces of evidence the European Central Bank gets to chew over before Thursday’s policy decision. Emerging market tumult and its possible effect on already vanishing inflation will be bang at the top of its agenda.