Centre of attention moves to Crimea
This week there has been a sharp increase in geopolitical tension on the back of the violent in recent weeks and particularly since the Ukrainian parliament voted to oust President Viktor Yanukovych at the weekend and appointed a new caretaker president and a new government ahead of presidential elections, which are now scheduled to be held in May.
As we pointed out in Flash Comment Ukraine – geopolitical risks increase, the events over the weekend sharply increased geopolitical risk and we expected the focus of the markets to turn to eastern Ukraine and the peninsula of Crimea. The events this week have confirmed this.
We also note that most of the population in Crimea is ethnic Russian and many hold a Russian passport. During the Russian-Georgian conflict in 2008, fears about increased separatist sentiment in Crimea increased tensions between the then Ukrainian government and Russia. These concerns have now returned. This morning a group of apparently pro- Russian armed men seized Crimea's regional parliament and the government headquarters of the Russian-majority region.
Yesterday, Russian President Vladimir Putin ordered tests of the combat readiness of Russian armed forces in western and central Russia and today the Russian Ministry of Defence said it had put its fighter jets on ‘combat alert’ on its western border.
The new Ukrainian government has reacted angrily to recent geopolitical events. Hence, Ukraine’s interim President Olexander Turchynov has warned Russia against any ‘military aggression’ in Crimea.
The clear escalation of the geopolitical situation is now having a very clear impact on not only the Russian and Ukrainian markets. Hence, over the past couple of weeks there has been some contagion – so far fairly moderate – to other central and eastern European markets but, as of today, it seems that we are seeing an even broader spillover as fears of an armed conflict have increased.
The Ukrainian hryvnia has fallen sharply this week and today alone it is down around 10% against the US dollar. The Ukrainian central bank has effectively stopped defending the hryvnia as it has more or less run out of foreign currency reserves. Furthermore, it is very clear to us that the banking sector has effectively stopped working in Ukraine and the country is close to default. Indeed, we think it is impossible to avoid a sovereign default unless the Ukrainian government receives foreign financial assistance. This is also reflected in the pricing of Ukraine’s credit default swap.
The Russian rouble has also come under additional pressure. The rouble, which has been under pressure for some time and has lost some 20% in value over the past year. yesterday hit the weak end of the official fluctuation band against the basket of the euro and the US dollar.
To Read the Entire Report Please Click on the pdf File Below