Kiev Revolution

SUBHEAD: Russia faces the choice of large losses from a default or rising debt from propping up Ukraine.

By Staff on 20 February 2014 for the Russian Times -
(http://rt.com/news/kiev-maidan-before-after-946/)

[IB Publisher's note: Keep in mind Russia, and USA as well as EU, each have there own dogs in this fight. So it's back to the Cold War and determining which sphere of financial influence will dominate in Europe.]


Image above: Before and After view (looking north?) of Independence Square in Kiev during the uprising for greater self determination (or alignment with the West). From original article.

The blackened ruins and gaping windows of Ukraine’s landmark Independence Square have left Kiev looking like a warzone for the first time since WWII. The square has always served as a main stage for Ukrainian politics – but not a literal battleground.

Featured on every postcard, the grandiose post-war complex of monuments has been the true – if slightly touristy – heart of Kiev.

But now, the square is divided by ad hoc barricades built from paving stones, wooden debris, and tires. The iconic Trade Union building, which has served as the protesters' headquarters, was set on fire earlier this week and is now just a shell, after its floors and walls collapsed one by one.


Image above: Before and After view (looking south?) of Independence Square in Kiev during the uprising for greater self determination (or alignment with the West). From original article.

In contrast to the normal, everyday hustle and bustle, the square is currently filled with hastily-appointed leaders deciding who mans the entrances and who is responsible for food and barricade building. But regardless of security measures, people in the area are an easy target for snipers lurking in the buildings that surround the square from all sides.

Police dressed in riot gear are stationed several blocks away, taking turns between sitting in their vehicles and patrolling the perimeter. Journalists with the world 'PRESS' written on their jackets float between the two sides, but find themselves in the crossfire once skirmishes begin.

Once the conflict ends, the square will have to be rebuilt. It may be more difficult to do the same with the country that surrounds it.



Financial crisis threatens Russia

By Anbrose Evans-Pritchard on 20 February 2014 for the Telegraph -
(http://www.telegraph.co.uk/finance/financialcrisis/10652767/Financial-crisis-threatens-Russia-as-Ukraine-spins-out-of-control.html)


Image above: A revolution in Ukrania has brought Kiev to its knees. Government snipers are firing on citizens. From original article.

The dramatic escalation of Ukraine’s civil conflict and fears of Russian military intervention have sent financial tremors across Eastern Europe, turning the region into the new fulcrum of the emerging market crisis.

“This has suddenly gone from a domestic Ukrainian story into a geopolitical clash,” said Lars Christensen, from Danske Bank.

The Russian ruble has fallen to a record low against the euro, with contagion reaching Poland, Hungary and Romania in recent days. “The moves in Russia are very like the events during the war in Georgia in 2008. Markets are pricing in the risk of Russian intervention,” he said.

Any deployment of Russian troops to stiffen the Ukrainian governmment - even if invited by President Viktor Yanukovich - could spiral out of control, leading to an East-West stand-off not seen since the Cold War. It might even been seen as replay of Russian intervention in Hungary in 1956 to prevent the country slipping out of the Soviet sphere.

German foreign minister Frank-Walter Steinmeier called Ukraine a “powder keg” as the death toll rose to 70, while Poland’s premier Donald Tusk warned of civil war.

Russian foreign minister Sergei Lavrov called the demonstrators fascists bent on a 1930-style “Brown Revolution”. Moscow has accused the EU of instigating a coup d’etat by mob violence.

Regis Chatellier, from Societe Generale, said there is a “high risk” that Ukraine will be pushed into default on its €60bn sovereign debt, triggering a credit shock for Russian banks. Sberbank and VTB are both large holders of Ukrainian bonds. Global emerging market bond funds hold 3pc of their portfolio in Ukrainian debt. “The spillover effect of a Ukrainian default would be significant, but not systemic,” he said.

The decision by the Ukrainian nationalist stronghold of Lvov this week to declare “independence” from Kiev has upped the ante, creating a volatile climate in which the Ukrainian army may be forced to intervene to head off civil war.

“Ukraine is on the verge of splitting into two countries. We’re looking at events that we have not seen in Europe since the break-up of Yugoslavia,” said one City economist with links to Lvov. “When you have this level of hatred and mistrust, anything can happen.”

Ukraine’s foreign reserves are down to survival levels. Russia has so far kept the country afloat with a $3bn loan, the first tranche of a $15bn bailout, but further payments are in doubt.

Russia faces the choice of large losses from a default or the ever rising costs of propping up Ukraine's economy. Military intervention to subjugate the rebels in the Catholic strongholds of Western Ukraine orbit could lead to a quagmire.

Russia is already near recession itself. Industrial output has contracted over the past year and fixed investment has fallen by 7pc. “We think Russia is the most exposed. The current account surplus has fallen very sharply,” said Liza Ermolenko, from Capital Economics.

Russia has nearly $500bn of foreign reserves - the world’s third largest - but this cannot easily be deployed in an economic slump. The country learned the hard way in 2008-2009 that such action has a side-effect of monetary tightening. The central bank burned through $200bn propping up the ruble, but in the process destroyed part of the Russian banking system.

The central bank has been intervening gingerly in the exchange markets over recent weeks, but may feel tempted to go further if the ruble buckles. “We think such a defence could become very costly for the Russian economy,” said Danske Bank.

Russia largely escaped the first wave of the emerging market crisis - mostly directed against those, like Turkey, South Africa and Brazil, with large current account deficits - but is now at the epicentre as worries switch to geopolitics. The ruble has fallen 10pc against the dollar this year.

Russia has never fully recovered from the post-Lehman crash in 2008-2009. It is a textbook case of the “Dutch Disease”, over-reliant on oil and gas at the expense of manufacturing. It requires crude prices above $110 to balance the budget, leaving it acutely vulnerable if a flood of oil from Iran, Iraq and Libya this year leads to a sharp fall in prices.

The Ukrainian crisis is happening against a backdrop of stress for emerging markets as the US Federal Reserve and China’s central bank tighten monetary policy. This is forcing a string of countries to tighten in lock-step to shore up their currencies, even if their own economies are slowing.

The International Monetary Fund said in a report for the G20 summit this weekend that emerging market woes are the key risk for global recovery, warning that a trifecta of “capital outflows, higher interest rates and sharp currency depreciation” could set off a corporate debt crisis.

Societe Generale said in a new report that emerging markets have risen from 18pc of world output to 40pc over the past 20 years, implying that a broad upheaval in these countries today would have “much greater ramifications for the global economy”.

The bank’s China strategist, Wei Yao, said the Chinese authorities appear determined to halt their country’s credit bubble regardless of the pain. “There is no other ending to China’s massive credit misallocation than a painful burst,” he said.

Societe Generale said this would have crushing consequences for commodity exporters and advised clients to brace for a slump in emerging market equities of 30pc or more this year.
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