Ukraine and Russia remain in the spotlight this weekend. Here are the top stories.

  1. Russia hiked interest rates 50 basis points on Friday accompanied with a warning about inflation and a sluggish economy.
  2. Russian Markets Have Worst Week Since Crimea.
  3. Ukraine’s acting prime minister accused Russia of wanting to start WWII.
  4. Ukraine forces barricade the rebel stronghold of Slavyansk

Russia Issues Downbeat Economic Statement

The World Politics Journal notes Russia’s central bank issues a downbeat statement on the Russian economy.

On Friday, April 25th, Russia’s central bank raised its benchmark interest rate by 50 basis points to 7.5 per cent, giving higher inflation risks as a reason behind its decision.

‘The probability of inflation exceeding the 5% target at the end of 2014 has increased substantially’, the Russian central bank said in a statement.

Annual inflation stood at 7.2 per cent as of Monday, April 21st. However, the central bank estimates that inflation would not exceed 6 per cent by the end of 2014.

The Russian economy expanded 1.3 per cent in 2013, the slowest pace of growth since a 2009 recession. For comparison, the economy grew by 3.4% in 2012. The Bank of Russia said in a downbeat statement on the economy: ‘Labour productivity growth is sluggish, while fixed capital investment continues to contract because of declining profits in the real sector, limited access to long-term financing in both international and domestic markets, as well as low producer and consumer confidence.

The Russian central bank predicts that the country ‘will continue to witness a downward trend in economic growth’ in 2014, adding ‘Amid economic uncertainty and declining producer confidence there is a strong probability of a reduction in fixed capital investment. Combination of slower growth in real wages and a decline in household lending growth rates will have a dampening effect on consumer activity’.

Russian Markets Have Worst Week Since Crimea as S&P; Cuts Rating

Bloomberg reports Russian Markets Have Worst Week Since Crimea as S&P; Cuts Rating.

Russian bonds and stocks suffered their worst weekly rout since mid-March as the truce forged to ease tension in eastern Ukraine unraveled, fueling concern that President Vladimir Putin faces stiffer international sanctions.

Benchmark ruble bond yields climbed to the highest since March 14, prompting the Finance Ministry to abort plans to return to the local debt market on April 23, two days before Standard & Poor’s cut Russia’s credit rating to one level above junk. The central bank’s surprise half-point interest-rate increase yesterday failed to stem the ruble’s weekly retreat, the biggest among 24 emerging markets after South Africa’s rand.

“The past few days have been particularly painful for Russian fixed income,” Benoit Anne, the London-based head of emerging-market strategy at Societe Generale SA, said by e-mail yesterday. The failed debt auction “badly damaged investor confidence. In addition, the geo-political situation continues to deteriorate with a war of words and a tougher rhetoric employed between various parties,” he said.

The Micex Index (INDEXCF) dropped 5.6 percent for the week, the most since the period ended March 14, the last trading day before the Crimean referendum that paved the way for Putin to annex the Black Sea peninsula. The yield on government bonds due February 2027 jumped 29 basis points yesterday to 9.65 percent, extending the weekly increase to 65 basis points, following the central bank’s move to raise its key rate to 7.5 percent.

The ruble suffered its steepest weekly retreat against the dollar since the five days ended March 9, depreciating 1.2 percent to 36.0450 by 9:08 p.m. in Moscow yesterday. The currency, whose three-month implied volatility rose to an almost six-week high, slumped 8.8 percent this year, the most for an emerging-market currency after Argentina’s peso.

Ukraine PM Accuses Russia of Wanting WWIII

The Financial Times reports Kiev Forces Blockade Rebel Town as Rhetoric Rises

Ukraine pursued its operation to flush out separatists in the east for a second day on Friday, surrounding the rebel stronghold of Slavyansk, as the interim prime minister accused Russia of “wanting to start a third world war”.

Serhiy Pashynsky, acting head of Ukraine’s presidential administration, said a decision had been made to blockade Slavyansk – which on Friday was still in the control of the pro-Russian “people’s mayor” Vyacheslav Ponomarev – by positioning its security forces around the town.

A Ukrainian military transport helicopter, parked at an airport in nearby Kramatorsk where separatists are barricaded inside the town hall, exploded in a fireball on Friday after being hit by a sniper bullet, dealing a symbolic blow to Kiev’s campaign to clear cities of rebels.

Ukraine’s interior minister said law enforcement officials were taking a cautious approach in the crackdown, which continued amid fears of an imminent Russian military intervention . “The key principle in the antiterrorist operation . . . is minimising risk for the peaceful population,” Arsen Avakov said.

Ukrainian officials described their crackdown as the “second stage” of an operation that began on Thursday. Their deliberation suggests Kiev is trying to avoid casualties that might provoke Russia to retaliate.

However, officials engaged in fiery rhetoric, capping a week that saw tensions between Moscow and Kiev rise to perhaps their highest level since Russia annexed Crimea in March.

“The world has not forgotten [the] second world war,” Arseniy Yatseniuk, Ukraine’s acting prime minister, said on Friday. “Russia wants to start a third world war.”

Ukraine Handling Situation Well

Recent polls support the notion the regions want more political autonomy not outright independence.  If that’s what the majority want, who I am I to judge differently? I would say the same thing if the regions wanted to rejoin Russia. Simply put, it is not my place or the US’s place to judge what is in the best interest of people thousands of miles away, in a place most US citizens could not even find on a map.

For now, it appears Ukraine is handling the situation well.

A blockade may take a while to work, but anything that acts to reduce tensions is welcome.

Talk of World War III, is likely just that, talk. At least let’s hope so.

Finally, with the Russian economy crumbling, rash escalation of sanctions may be counterproductive.
Russia may easily decide to shut off gas to Europe if pressured enough.

Instead, this may quietly blow away by November in the absence of serious policy mistakes by one side or another. In that regard, excessive US pressure is unlikely to help.

Mike “Mish” Shedlock