Unrest in Ukraine turns violent
It has been a terrible week for Ukraine, as demonstrations this week have turned violent with large numbers of both demonstrators and police killed. This morning's events have taken an even more deadly turn after shooting broke out in central Kiev and there are media reports of a number of deaths. This comes after both the government and the opposition had announced a truce late yesterday night. Unfortunately, the truce did not hold for long. Indeed, this morning (Thursday), things seem to have escalated dramatically yet again.
So far, the spillover to other financial markets has been limited but this week's sad events are now beginning to affect Russian markets in particular and this week the Russian rouble has been under significant pressure. We note that the rouble is now trading very close to the weak end of the official fluctuation for the EUR/USD basket. This could eventually force the Russian central bank to intervene to ensure that the rouble does not break through the weak end of the fluctuation band. We think such a defence could potentially become very costly for the Russian economy.
As the situation in Ukraine continues to escalate, market jitters have spread to other Central and East European markets. Hence, it is not only the Russian rouble that has been under pressure: we have also seen some pressure on the Polish zloty, the Hungarian forint and the Romanian leu. In our view, the biggest direct risk if geopolitical escalates further is to the zloty.
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