Ironhorse Tanks Can’t Stop ‘Ukraine Variable’ From Hurting Banks
For Ukraine, this is becoming a Lincolnesque lesson in “divided we fall.”
On Tuesday, Poroshenko rejected that federalization is even possible for Ukraine, with Kyiv being the recognized command center. Instead, he has been promoting a Polish model, which would decentralize Ukraine by introducing counties and municipalities, but this is not what the rebels want. They want an autonomous region, like Hong Kong is to China, or better yet, like Crimea was to Ukraine…before Russia annexed it on March 16.
Meanwhile, Ukraine’s economic situation remains grim given Prime Minister Arseniy Yatsenyuk’s faithful toeing of the International Monetary Fund’s austerity measures. One look at the credit default swaps market — which measures debt risk — and one can see that speculators are pricing a 69% likelihood of default over the next few years. This might not happen, but the risk means higher lending costs for Ukraine, which needs as much money as it can get. Financing growth will be painful, especially in dollar or euro-denominated debt. The Russians surely are’t going to come running to save them. Since president Viktor Yanukovych’s ouster on February 22, the Ukrainian currency has fallen nearly 60% against the dollar. Yatsenyuk said that 30% would be okay. He got double his base case scenario.
“We are worried. All investment banks are worried,” said Olga Podoinitsyna, member of the board at VTB Capital.
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– The so-called Ukraine variable will push the Market Vectors Russia exchange traded fund into the teens unless a peace agreement is inked in stone and Putin and Petro hug it out quick. An unlikely turn of events in the near term.
“If the West wanted the Ukraine to join the E.U. as a stable and prosperous member, it would have put an economic growth policy in place, not this austerian mess,” said Signorelli. “It’s impossible to imagine how we would have won the Cold War if these policies were heaped on West Germany following WWII.”
The economic demise of Ukraine will almost certainly lead to continued, political fracturing of the country. And that means more civil unrest in the east. So long as the West is convinced that Russia is fighting a proxy war by aiding the anti-Kyiv rebels, more sanctions are coming.