10th September 2014
Jan Dehn, Head of Research at Ashmore discusses the situation on the ground in Ukraine and his view of the impact of more sanctions on Russia below.
Pro-Russian separatist rebels and the Ukraine government entered a temporary cease-fire, but whether this holds largely depends on buy-in from both Russia and the West. So far the odds of a permanent cease-fire look poor. Europe has decided to go ahead with fresh sanctions on Russian state-owned banks and defence companies. The lack of support from the West increases the incentives for one or both of the warring parties to exploit tactical opportunities to better their positions on the ground. Over the weekend there were already indications that the cease-fire had been broken in places. Statements from Western leaders that sanctions could be unwound if there is progress on the ground may not be sufficient. Details of the new sanctions are to be unveiled this week, according to officials. We expect a broadening of sanctions to new individuals and companies rather than a deepening of sanctions to already sanctioned names.
Russia has also hinted that it would retaliate in the event of new Western sanctions. Its response could include renewed support for rebels in Eastern Ukraine and further bans on access to Russian markets for Western goods and services. If yet another chance for peace goes begging the economic pain in both Europe and Russia will only increase. Markets are already paying less attention to this conflict as it becomes increasingly apparent that it has no major impact on third parties, though this could change in the event of a major re-escalation. We expect a peaceful resolution to this conflict, but a resolution looks set only to materialise once the mindless diplomatic and proxy military tit-for-tat retaliations have inflicted sufficient misery, loss of life, and economic pain on both sides to focus the minds of politicians on a solution.
Meanwhile, one of the predicted economic consequences of the conflict for Russia is inflation. Russian inflation did indeed push higher in August, though not beyond what was already expected. Core inflation in August was 8%, bang in line with consensus and up from 7.8% in July. Meat and fish prices rose most strongly, but agricultural goods prices declined due to prospects of a good Russian harvest this year. The ban on food imports into Russia from the West is likely to continue to put upwards pressure on prices, but a solid Russian harvest could significantly ameliorate the effects. A loss of control of inflation is very unlikely, in our view. The Central Bank of Russia has not been afraid to hike rates, and may do so again, while the economy is not showing strong upwards cyclical momentum. The central bank’s rate setting meeting is this coming Friday.