Clashes in the Ukraine Pressure Ruble/Hryvnia

Banc De Binary analysts examine the escalating crisis in the Ukraine and its financial implications for the region.

Fears of an Imminent Civil War in the Ukraine begin to mount!

The international media has been awash in up-to-the-minute updates regarding the rapidly escalating violence in the Ukraine. May Day mayhem between pro-Russian separatists and the Ukrainian military has left hundreds of people injured and over 40 people dead. Fresh violence erupted as the acting President of the Ukraine announced a reinstatement of the draft for men between the ages of 18 and 25. The military crackdown against pro-Russian rebels has been met with fierce resistance by the militia groups in the southern and eastern regions of the Ukraine. President Turchynov is determined to steel his countrymen against the ‘foreign enemy’ as the military has been retaking key government facilities and installations in the eastern part of the country. Some of the hotspots include Donetsk, Kramatorsk, and Slovyansk. US Secretary of State John Kerry has urged his Russian counterpart Sergei Lavrov to cease and desist from supporting the pro-Russian separatists in the Ukraine. In his rebuttal, Lavrov urged Kerry to put pressure on the Ukraine government to stop what he termed fratricidal conflict.

Sanctions Targeting Key Russian Interests

The fresh violence has led to high-level meetings between top European and American diplomats. The Americans have been pushing for greater sanctions against Russia – the purported antagonist in the region. The undersecretary for terrorism and financial intelligence, David Cohen, announced that the US is looking to change the playing field so that Russia will be deterred from igniting a regional war. If the situation on the ground does not significantly improve during the month of May, the US will look to impose broader economic sanctions against Russia. This will likely take the form of punitive measures against Putin’s inner circle and various sectors of the Russian economy. Some of the targets of US sanctions include the CEO of OAO Rosneft (LONDON:ROSNl), Igor Sechin, as well as SMP Bank and OAO Bank Rossiya. Since the US dollar is the world’s reserve currency, it carries significant clout. Businesses wanting to transact in international markets require dollars to trade with. Since sanctions prevent these Russian institutions from acquiring US dollars, they cannot trade internationally.

At a meeting with German Chancellor Angela Merkel, President Barack Obama highlighted May 25th as the next potential flashpoint date. On that day, the Ukraine will hold general elections, although separatists have earmarked May 11th as their date for a referendum on secession for the eastern region of the Ukraine. The rebels are calling for a federal type of system that would be strongly aligned with Moscow. In spite of the military crackdown, hundreds of rebels continue to pour into vacant regional headquarters across the eastern regions of the Ukraine. Rebels have seized control of police stations, government buildings, security service facilities, and beyond. An urgent situation arose when three Special Forces soldiers were captured by rebels in Horlivka. Multiple rallies have been taking place, some of them were cancelled owing to the street violence on Friday 2nd May and Saturday 3rd May that left hundreds injured and 43 dead. A rally in Kharkiv was cancelled to prevent a recurrence of the violence that took place in Odessa.

Massive Economic Upheaval

The ongoing tumult has been hitting the Ukraine hyrvnia particularly hard and the Ukraine Central Bank recently increased the interest rate to 9.5% to stem inflationary pressures and capital flight from the country. Record low interest rates were recorded in August 2013, months before the current unrest, at 6.50%. The yield on government debt in the Ukraine was measured at 10.90% .As of Friday 2 May the Ukrainian hryvnia was trading at $0.086. Across the border in Russia, the ruble has been steadily depreciating against the greenback. The combined effect of increasing international isolation, capital flight and stiffer economic sanctions has led to a depreciating Russian ruble. By the close of trade on Friday 2nd May, the Russian Ruble was worth $0.028. On the 1st January 2014, the russian ruble was trading at 32.90015 per USD. By the 2nd May 2014, the ruble had depreciated to 35.83816 to the USD. That represents an 8.9% decline in purchasing power. Figures put the capital flight from Russia during Q1 2014 at over $50 billion. The Ryield on ruble denominated government debt for delivery in February 2027 was last recorded at 9.67%.This figure exceeds all the capital flight for the whole of 2013. The latest figures place capital flight at over $60 billion. Investors are scared to have their funds tied up in Russian stocks, industries and businesses with the threat of sanctions and the uncertainty in the Ukraine. Another important economic measure is the Micex Index which has slid more than 13% during 2014.

Emerging Market Economies Feeling the Pinch

The Ukrainians feel that there is some smidgeon of hope that the Geneva accords can be upheld. Of the four signatories to the deal – the EU, US, Ukraine and Russia – Russian and the Ukraine have not been upholding their end of the deal. However, the recent release of international observers has been heralded as a great development. The crisis exploded after the Ukrainian President was removed from power after his decision to break with the EU in favour of an alliance with Russia. The deal – which smacks of malfeasance and pandering to Moscow - was worth an estimated $15 billion. The result of his ousting has been a dramatic surge in Russian troops along the border. Estimates peg the number of Russian soldiers at 40,000 or more. Bank De Binary analysts caution that a further escalation in the conflict is likely in the days ahead. The ruble and the hryvnia are now under tremendous pressure for different reasons. In the absence of inflationary pressures, exports in Russia may increase on a limited scale, but imports will diminish. Emerging market economies remain a highly risky proposition at this time.