“When politicians start talking about large groups of their fellow (citizens) as 'enemies,' it's time for a quiet stir of alertness. Polarizing people is a good way to win an election, and also a good way to wreck a country.”
Molly Ivins, Author and political commentator
- The peace proposals offered by the president – an early election and a power sharing government – is a positive step forward in terms of politics but does little to resolve some of the key questions for investors and concerning the economy in 2014. The “deal” leaves open the question of who will provide the rescue deal that Ukraine critically needs and on what terms. Until resolved this will continue to hang over the debt, equity and currency markets. Clarity is not expected until after the elections.
- Critical for bond holders and the currency is whether the Russia rescue deal remains in place or whether it will be suspended until the outcome of the elections is known. The next comments from Moscow will be key for the short-term performance of debt issues. In the event the deal is suspended or delayed, default risk will rise. If a pro-western government eventually takes power then default risk will be very high as an EU/IMF substitute deal will not protect all bond holders and will insist on the currency peg being eliminated.
- In any event, given the continuing negative impact on the performance of the economy, including tax revenue generation/collection, the government will need more than the $15 bln agreed with Moscow last December. The total cost of a default-avoiding bailout for 2014 is likely to have risen to $20 bln at this stage.
Note; I do not propose to rehash the pros and cons of the politics. There is plenty of coverage of the issues in the media. This note is confined to the “what if” scenarios which may impact on the economy, on asset valuations and the possible contagion to Russia.
To access the full report, click Download CIS_Ukraine_Briefing_Feb_21_14