Tim Ash’s Update on Ukraine for Sept. 1, 2015

2015/9/1 11:30:04

“…the risks of future Russian intervention in Ukraine have not permanently reduced – Moscow, likely, rather will be biding its time.”


 

 

 

 

 

 

 

 

 

 

 

 

 

 

LONDON, Sep 1, 2015 (UBO) – Nomura International’s top emerging market economist Timothy Ash provided the following update on Ukraine at 10:26 today:

 

Ukraine was in the headlines again for all the wrong reasons over the weekend, with violent clashes outside the Verkhovna Rada, associated with the passage, at the second reading, of proposed constitutional changes giving greater power to the regions, including “Special Status” (still unclear what exactly that will amount to as the fine detail will be published in a separate bill) to the rebel held regions of DPR and LPR.

 

Approval of laws decentralising powers to the Regions was a key part of the Minsk II ceasefire agreement back in February, brokered by Merkel and Hollande, with President Putin of Russia and President Petro Poroshenko of Ukraine. At Minsk II President Poroshenko committed to adopt a form of decentralisation (albeit not going far enough for Russia) as a pre-requisite, with holding local elections, to enable troop withdrawal and Ukraine retaking control over its borders by year end. Local elections are still slated for October, but it is unclear how all this squares with the time-table of rolling out constitutional reform, which seems to be dragging.

 

In a conference call last week with Merkel and Hollande, Putin re-iterated that he expected Minsk II commitments to be implemented in full.

 

In Putin’s Russia nothing much gets done these days without careful pre-planning and with non-too subliminal messaging at work. Therein views of Putin and Medvedev “pumping iron” over the weekend – before cooking/devouring their steak - were likely intended to send the message, to foes at home and abroad, that Russia and its political leadership is fit and focused and ready to face any challenges, and ultimately they get what that want (cutting up the steak). This was a clear warning in my mind to Ukraine – again to bow to Russian demands on the decentralisation front, and to move back out of the Western orbit, or face the consequences.

 

In the end Poroshenko managed to secure the backing of the Verkhovna Rada for the moves towards decentralisation – albeit that still falls well short of Russian demands, and those of DPR and LPR. It will hence be interesting to see how Russia reacts therein.

 

Poroshenko’s team argues that the current bills do indeed safeguard Ukrainian sovereignty (but falling short of Russian demands), and that the Verkhovna Rada has to back the bills as is, to ensure continued Western support against Russia – in particular the maintenance of the sanctions regime around Russia. The opposition in parliament to the decentralisation bills are suspicious of what might end up in the new Special Status laws for the east, and just view this whole constitutional debate as marking a sell-out of Ukraine, by the West, and also by Poroshenko and his supporters – the fact that the Opposition Block voted in favour of the bill, hardly helped ease these concerns.

 

Therein, a number of points should be made:

 

  • First, the violence at the demonstrations just underscores the hugely emotive nature of the subject for many in Ukraine. For many Ukrainians the thought of now decentralising power to the regions, and DPR and LPR in particular, represents bowing to Russian bullying, and is particularly anathema after the deaths of over 7,000 people now in the conflict in the East. Decentralisation for its opponents represents the thin end of the Russian wedge towards Russian plans for a Federal constitutional set up for Ukraine, which in their minds would mean the start of centrifugal forces in Ukraine, moving towards its eventual disintegration. Under this latter scenario, the opponents of these moves argue that Russia will come in and “slice and dice” (the steak) Ukraine to its territorial liking, perhaps taking off a large section of the East of the country, and leaving a rump, unsustainable/ungovernable Western bit, perhaps to be taken at a later stage.

 

  • Second, the decentralisation bill only secured the backing of a simple majority, of 265 deputies, short of the two-thirds, or 300+ deputies required. The bill has to be voted a third time, with a constitutional majority to become law, and to comply with Minsk II. As the second vote over the weekend proved, this will be acutely difficult for Poroshenko to deliver on.

 

  • Third, and critically perhaps, four of the pro-European parties that initially forged a coalition after Maidan and the parliamentary elections held thereafter – Svoboda, Self-Help, Tymoshenko’s Batkivshchyna, and the Popular Party, all failed to support the bill. And, importantly, the bill only secured majority support in parliament with the backing of the former Regions’ Opposition Party – albeit it has distanced itself now from its former leader, former President Viktor Yanukovych. This break within the pro-European order could make government much more difficult going forward – therein the recently “agreed” debt restructuring agreement has yet to secure parliamentary approval, so let’s see if there is any impact therein.

 

  • Fourth, it will be interesting to see if cooperation between Poroshenko/Yatsenyuk and the Opposition Party develops into something more meaningful. Of note, my sense is that one of the demands of Moscow has been a government in Kyiv more representative of its interests, and those of Eastern Ukraine – which it likely would be with a new coalition arrangement with the Opposition Party. Such a new arrangement would be very high risk for Poroshenko/Yatsenyuk, et al, as it would surely risk Maidan III.  So this latest effort at cooperation, on the decentralisation bill, might simply just be a marriage of convenience for the time-being and related to passage of the decentralisation bill.

 

  • Fifth, with domestic politics in Ukraine appear more complex/strained, the likelihood of nearer term Russian intervention in Eastern Ukraine has likely eased back – reports in recent days do suggest a moderation in the level of violence. Russia will likely see less need to intervene to destabilise the East, given that Ukrainian politicians seems to be making life very difficult for themselves at present. That is not to say that the risks of future Russian intervention in Ukraine have not permanently reduced – Moscow, likely, rather will be biding its time.

 

Note that today marks the start of a new ceasefire effort, centred on the start of the new school year in Ukraine - and so far it is encouraging that violence just does appear to be toning down moderately in the East. Russia will likely make much with its German/French interlocutors that it is still doing its best to support the peace effort in the East of Ukraine - with an eye still on trying to get sanctions ratcheted down by year end.

 

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NOTE: The comments by Timothy Ash in the article above have been issued by the Sales/Trading departments of Nomura International plc ("NIplc") and are made available to you by NIplc and/or its affiliates (collectively, "Nomura"), in order to promote investment services and is provided without compensation. This is not investment research within the meaning of applicable regulatory rules in the European Economic Area, nor is it research under the rules of the U.S. Self-Regulatory Organizations of which Nomura is a member or under applicable rules in Hong Kong. Information contained herein is provided for informational purposes only.

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