Russia & Ukraine
Yesterday, President Putin delivered an address to the nation where he officially recognised the unilateral secession of the two separatist regions of eastern Ukraine, the ‘Donetsk People’s Republic’ and the ‘Luhansk People’s Republic’. The move is the latest violation of the Minsk agreement and Putin’s violation on Ukraine’s territorial integrity.
This act of recognition set the pretext for the Kremlin to send Russian troops and materiel into the regions on so called ‘peace keeping operations’ as Putin simultaneously called Kyiv to end their security operations in the region.
Moscow’s latest act is tantamount to the Kremlin not recognising Ukraine’s jurisdictional authority over the two regions and hence, given that Ukraine has been conducting security operations there, the likelihood of escalation is severe since Russian troops (who will henceforth be there under the Russian flag and Russian insignia) will now be in close proximity to Ukrainian troops.
The announcement and subsequent actions are in clear violation of the Minsk II agreement which, being signed in 2015, sought to broker a ceasefire in the Donbas region after the Minsk Protocol (signed in 2014) failed. Those around the diplomatic table included Ukraine, Russia and the OSCE with France and Germany acting as mediators.
Of particular significance was the notion “On temporary Order of Local Self-Governance in Particular Districts of Donetsk and Luhansk Oblasts”. Hence, Putin’s recognition undermines the “local self-governance” aspect of the protocol as he now considers the regions as sovereign independent states, not merely administrative subdivisions of Ukraine.
Moreover, the Minsk II agreement included the instillation of a 50km buffer-zone around the region which involved pulling out of all heavy weapons. Hence, the column of five Russian tanks (in addition to APCs) moving into the region this morning is yet another violation of the Minsk II agreement and could potentially provoke Ukraine to send a similar calibre of weaponry and materiel to protect its personnel.
Recognition of the region will also allow the Kremlin to administer financial resources there.
The global community will therefore be paying close attention to whether Putin’s recognition sets a precedent for allies of Russia to also recognises the self-declared states. For example, Venezuela, Nicaragua and Syria, all recognise the unilateral secessions of Abkhazia and South Ossetia and it is possible that they may follow suit in recognising Donetsk and Luhansk. Moreover, the recent developments may also see other pro-Russian de-facto separatist states including Abkhazia (the separatist region in Georgia) and Transnistria (the separatist region in Moldavia) from the so called ‘Community for Democracy and Rights of Nations’ recognise the two regions and provoke separatist sentiments elsewhere.
The crisis in Ukraine and has also revived political discussions in Finland and Sweden around the prospect of joining Nato. Indeed, just last month Nato secretary-general, Jens Stoltenberg said that “Nato’s door remains open . . . Sweden and Finland are our closest partners,”. Thus, such considerations are indicative of wider national security concerns in the east of Europe.
Following the announcement, Liz Truss committed to announcing further sanctions on Russia while Ursula von der Leyen and Charles Michel each tweeted in a joint statement that “The EU and its partners will react with unity, firmness and with determination in solidarity with Ukraine”. Following this, the EU are set to agree on a ‘package’ of further sanctions this afternoon.
While Volodymyr Zelenskyy prepared for a televised announcement at 02:30 (local time), the Ukrainian President also received a number of solidarity calls from leaders including Biden and Johnson where they no doubt discussed possible next steps.
Over in Washington, Biden signed an executive order which prohibits “new investment, trade and financing by U.S. persons to, from, or in” the two regions. The White House Press Secretary, Jen Psaki also stated that the Biden Administration will announce “additional measures related to today’s blatant violation of Russia’s international commitments”. In other words, a string of separate sanctions on the Russian Federation seems likely, and the markets will be paying close attention to this and the degree of response.
The Russian RTS index (USD denominated) dropped 10.8% this morning, indicative of its wider 32.5% drop since the start of the year. Moreover, the MOEX (RUB denominated) dived by 8.8%. The ruble is similarly trading lower at 80.7 to the dollar.
The risk-off sentiment has also seen the USD Index (DXY) gain some ground with safe haven assets including gold appreciating to a one year high ($1,910 USD/t.oz).
In the UK, the FTSE 100 has lost 1.4% while in the States, futures contracts tracking the tech-heavy Nasdaq 100 fell 2.6%.
The implications of further sanctions on Russian exports have seen Crude Oil and Brent seeing increases of 3.5% and 3.25% respectively in the day. This puts Brent above $98, USD/Bbl for the first time since 2014 and brings us ever closer to the massive psychological level of $100. Trading around and through this level might also have significant implications, not only for human traders, but also the algorithms that power high frequency and systematic traders and this is a concern raise a couple of weeks ago in an FT article. The concern is that robo-traders are placing an ever-greater proportion of trades in the market (already up from 65% in in 2015 to 80% in 2019) and that such a volume of contracts being bought and sold between robots could lead to distortions that suddenly unravel and create serious volatility. When any market trades towards significant psychological barriers there is always heightened activity, but their concern here is that the investor sentiment plus the algorithms could send prices flying once we cross that level.
More on Oil
In the US: An explosion at an oil refinery could lead to regional constraints on the amount of petrol and diesel, which wouldn’t bode well for already high inflation. The explosion took place at the Marathon refinery near New Orleans which is one of the nations’ largest. The immediate market impact was for gasoline futures to jump by 1.6% but it is not yet known how extensive the damage is. Fuel prices in the US are already up 7.5% at the pump this year and that’s on top of a 46% hike last year. To date this has been driven by global crude prices, but a curve ball on infrastructure utility on top of continually rising prices could well see a steepening in price rises – we have some sympathy here, but fuel prices in the most expensive state, California, are just 77 pence per litre which is exactly half of what they are in the UK at the moment!