Risk has ratcheted up. It is a statement of the obvious to say that the situation in Ukraine has just become a whole lot more uncertain. A great has already been written about the events of this weekend and every possible scenario has been proposed and discussed. To say that it all depends on what happens next is another statement of the obvious. In this note we confine ourselves to looking at the possible implications for the Ukrainian and Russian economies and the capital markets.
Hot political rhetoric from all sides. Our base case assumption is that there will not be an actual shooting war, or, at worst, only minor skirmishes. The news flow is unsettling and is likely to worsen in the coming days. The political rhetoric, including accusations and threats, will initially be vigorous from all sides and will unsettle markets.
Will the IMF soften its previously tough stance? An IMF delegation is scheduled to visit Kiev this week to start talks about the terms of a bailout loan. The head of the IMF was still taking about tough conditions late last week but the escalation of the dispute with Russia may lead to political pressure on the IMF to soften the terms. That would be positive for the debt market and, medium-term, for the economy.
Biggest question mark hangs over the gas deal. It is a fair assumption to make that the Russian bailout deal is now on indefinite hold. The only question is what will happen to the revised gas deal. The low cost deal is to be reviewed again at the start of Qtr 2 and may either be extended or reverted back to the previous, higher tariff, deal. It should also be remembered that the previous deal allowed for a $100 p/’000 cm discount to pay for the Sevastopol naval base lease. “Complicated” doesn’t even come close to describing the possible scenarios.
Little real threat to the Russian economy. The threat to the Russian economy from the escalation of the crisis and threats from the west is quite minimal. 80% of the country’s exports are commodities and the bulk of the rest is defence equipment and grains or other goods not likely to be subject to restrictions. The bulk of Russian imports are sourced from the EU. The total value last year was approximately $170 bln and was mostly consumer goods and machinery. A slowdown is unlikely and, in any event, would help boost import substitution. The trade and investment relationship with the US is less important and major US corporations, such as Boeing or ExxonMobil, who have been active in Russia for many years have historically sidestepped political disputes.
Economy is slowing for other domestic reasons. Russia’s macro report for January was very poor and the issues causing the slowing momentum are certainly serious. But they are separate to the events in Ukraine (see our March Macro Monthly to be published in the next days).
The Ukraine economy is already reeling. The major