I am following the Ukraine situation closely, with the escalation of the military conflict in Eastern Ukraine deteriorating the outlook for both Russia and Ukraine are tightly linked. There needs to be peace to restore confidence in the market and end the bloodshed. Military action with the separatists is leading to more casualties on both sides and significantly hinders the possibility of peace talks between the Kiev leaders and Donbas rebels. Russia’s failure to reach out to Kiev could have serious consequences on Russian economy, the intensification of military action prompted another round of sanctions against Russia, which may pave the way to Level-III (sectorial) sanctions by the US and EU/European and allies countries.
The downing of the Malaysian civilian aircraft could increase the risk of harsh sanctions imposed on Russia quite substantially as more western countries tend to blame separatist rebels for the incident and, also, Russia for the alleged failure to do more for a de-escalation of the situation in Eastern Ukraine. Russia could be sanctioned due to lack of leadership of the situation many people are observing.
Sanctions applied by the block countries led by the US greatly increase the degree of uncertainty, which is the ultimate goal of the sanctions. Uncertainty has ability to scare the market or pace the market and individuals in a corner. Despite the disclosed sanctions against a few major Russian industrial names look rather limited at first glance, and only concern long-term credit and capital, besides their direct impact on particular companies such sanctions also broadly increase the uncertainty factor for western companies and banks doing business with Russia. Many foreign partners of Russia prefer to sit back during this period, which will reduce the amount of new deals and trade. Phasing in of Level-III sanctions on behalf of the EU is now much more likely than some 3 months ago.
With rising cost of the military operation and the economic disturbances in Eastern Ukraine likely to result in higher liabilities for the state and costs for businesses operating in Donbas. This in turn will increase public and private liabilities due to falling revenue and the rising costs of debt servicing. This could create a negative spiral, that could possible see default if things don’t get better.
S&P recently lifting its rating outlook from negative to stable, I see this decision as primarily based on assumption of large western political commitment, thus on assumption and not on fact.
Ukrainian Bond Yields 1 Yield hitting 20% still below the 26% we saw in Dec 2012, indication of market sentiment is always shown in bond yields before anywhere else.
Lets see what comes from the ongoing talks but something needs to don’t to ensure the humanitarian and economic issues are sorted before things escalate further.