Ashs Ukraine update, September 8, 2014

The EU is expected to roll out the latest raft of sanctions - targeting more
Russian SOEs, and limiting their financing options further to no longer than 30
days.

LONDON, Sep 8, 2014 (UBO) Standard Bank chief emerging market economist Timothy
Ash provided the following up on Ukraine-Russia relations as of 09:00 today:

The 12-point ceasefire agreement which came into force on Friday was "sporadically"
broken over the weekend - not very sporadic if it is your house or life being lost to shelling.
Both sides appear to have exchanged artillery fire around Mariupol (close to Metinvest's
Azovstal steel works) and Donetsk airport. Perhaps significantly though, the EU deemed
that this was insufficient to declare the ceasefire null and void.

Reading the 12-point ceasefire agreement, there is no way that either side will view this as
the basis for a lasting peace - further and far reaching talks will be required to formulate a
plan which could be the basis of a lasting peace. And, arguably the Russian and Ukrainian
sides are simply too far apart - unless Kyiv gives up on its pro-Western agenda, Moscow is
unlikely to give any concessions. Its as simple/basic as that.

In terms of the two sides motivations to accept the ceasefire?

For Putin it is obvious as he has achieved his near term goal of securing a frozen conflict,
and an ability to use this to ensure delivery on his broader objectives with respect to
Ukraine, i.e. No NATO, no EU and no Maidan.

For Petro Poroshenko, it had become obvious last week that a speedy military victory was
no longer on the cards (there had earlier been talk of victory by Ukrainian
Independence Day, at the end of August), after the latest Russia incursions/invasion and
indeed the threat was that even more territory would be lost in the South, around
Mariupol, even suggesting that Russia could create a land corridor towards Crimea.

Poroshenko likely wants to stabilise the situation on the ground as far as possible to enable
parliamentary elections to be held as per the current schedule at the end of October. As is,
this will be difficult, given the stained security situation in Donbas, and the fact that so
many troops are currently mobilised. Indeed, the Kyiv appointed governor of Donbas,
Serhiy Taruta, argued over the weekend that elections should be delayed as it was simply
impossible to hold elections given the security situation in Donbas. These elections are
expected to return a large majority for Ukrainian statehood parties, which will likely
strengthen Poroshenko's hand against Russia, at least in terms of domestic politics - with
few/if any pro-Russian parties set to secure more than 5% of the vote required to security
parliamentary representation. The question then is what else Russia and its rebels in
Donbas could do to derail these elections in the six weeks or so to the end of October.

The ceasefire also allows the Ukrainian military time to regroup, re-arm, train, etc. albeit it
is same for the rebels, and also for Russia to deploy more troops/equipment across the
border, before OSCE border monitors arrive.

That said, there are still plenty of players on the ground with an interest to continue
fighting including some volunteer fighters on the Ukrainian side plus irregulars on the side
of the rebels.

The EU is expected to roll out the latest raft of sanctions - targeting more Russian SOEs,
and limiting their financing options further to no longer than 30 days. There has been
some suggestion that these be linked to implementation of the ceasefire, albeit my read is
that they go ahead now anyway, partially as the imposition of a further round of sanctions
seems to have been part of the deal the West brokered to encourage President
Poroshenko to agree to the ceasefire, which does appear to be largely on Russia's terms.
Commentary from US, British and German leaders last week, that sanctions could be taken
off if Russia reverses policy over Ukraine, is probably aimed at appeasing the anti-
sanctions lobby amongst EU member states, I.e. implying that the bar to dismantling
sanctions could be set quite low, so let's put them in place first. Let's see how Russia's
threat of retaliatory measures (e.g. transport bans, perhaps on overflights) shapes opinion
in the EU though. British PM Cameron did suggest over the weekend that for sanctions to
be lifted, Russia would need to get its troops out of Ukraine, including Crimea - that said
he probably has his focus this week on his own separatist movement, i.e. in Scotland, with
the independence vote gaining ground rapidly, and the British PM looking very weak at
present compared to his peers.

Markets will likely be muted in reaction to the latest round of sanctions, unless Russia
retaliates aggressively. The assumption will be that Western sanctions are feeble anyway,
already in the price and likely easily rolled off. The market will also assume that a frozen
conflict style scenario will imply some stability and ratcheting down of the conflict, i.e. no
more sanctions beyond where we are now - albeit it will make the sustainability of Ukraine
over the longer term that much more questionable. Ukraine will now be even more
dependent on Western financial assistance - will the West live up to promises? And there is
still the risk of volatility/escalation in the run up to parliamentary elections in October - let's
see what Russia plans therein to stall/disrupt these elections.


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The Ash commentary above represents a personal view, is not investment advice or
Standard Bank research, but may contain extracts from published research.