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Ukraine Region Declares Independence Sending Dollar Bonds To Record Low; Russian Ruble Tumbles To 5 Year Low | Zero Hedge
The events in the Ukraine continue to deteriorate. Moments ago Lawmakers in Ukraine’s Lviv region, declared independence after backers evicted appointed governor overnight. Lviv’s parliament formed executive committee with department heads in Governor Oleh Salo’s administration that will take over functions of regional government, Oksana Dmetryv, a spokeswoman for Speaker Petro Kolodiy, said today by phone from Lviv. Protesters also seized headquarters of security services in Lviv, a region of 2.5 million people bordering Poland. Elsewhere, there were reports of more military vehicles crossing through Kiev: if there are any more Molotov Cocktail video follow ups we will be sure to capture them.
Still, to expect president Yanukovich (or Putin) to just sit there and let the country be torn apart by secessionists is naive. As Reuters reportrs, Yanukovich accused pro-European opposition leaders on Wednesday of trying to seize power by force after at least 26 people died in the worst violence since the former Soviet republic gained independence. European Union leaders said they were urgently preparing targeted sanctions against those responsible for a crackdown on protesters who have been occupying central Kiev for almost three months since Yanukovich spurned a far-reaching trade deal with the EU and accepted a $15-billion Russian bailout.
Russian President Vladimir Putin’s spokesman insisted the Kremlin was sticking to a policy of not intervening in Ukraine, although his point man has called for action to crush the protests. The Kremlin said Putin and Yanukovich spoke by telephone overnight, calling the events an attempted coup. Moscow announced the resumption of stalled aid to Kiev on Monday with a $2-million cash injection hours before the crackdown began.
So far, however, the implicit Russian backing of the Ukraine as is is not doing much as both the Ukraine Dollar short-bonds due June 2014 have fallen more than 2 points to a record low of 94.25 according to Tradeweb, while the Russian Ruble has just tumbled to its lowest levels against the dollar since 2009.
The market is finally starting to notice, and realize that nothing in the Ukraine is contained, and the consequences form a prolonged civil war would be dire for everyone involved. Which, as is the case in every proxy war, just happens to be everyone.
The decision in parliament, taken suddenly by a show of hands, caught the opposition off-guard [EPA]
|Ukraine’s parliament has passed a new set of legislation in an apparent bid to suppress protests against President Viktor Yanukovych.
The laws, backed by 235 out of 450 lawmakers on Thursday, made blockading public buildings punishable by up to five years in prison and protesters wearing masks or helmets will face a fine or an administrative arrest.
The legislation also simplified a procedure to prosecute lawmakers.
Dissemination of slander on the Internet was also banned and would be punishable by a fine or corrective labour of up to one year.
People and organisations who provided facilities or equipment for unauthorised meetings would be liable to a fine of up $1,275 or by detention of up to 10 days.
The sweeping legislation caused an outcry among opposition leaders who fear that the government would use the new legislation to prosecute them and break up the protest movement.
“The regime of Viktor Yanukovych and the Regions Party have completely destroyed state power in Ukraine,” said Arseniy Yatsenyuk, leader of Batkivshchyna (Fatherland) party.
“This is nothing else but an overthrow of the constitutional system and a power grab in Ukraine.”
Last month, hundreds of thousands took to the streets in the capital, Kiev, and western Ukraine after Yanukovych decided to scrap key political and trade agreements with the EU.
The protests have since dwindled but the opposition maintains a protest camp on Kiev’s central Independence Square known locally as the Maidan.
Opposition politicians regularly use a stage in the square to broadcast messages of support to the protesters and the law, assuming it is signed into force by Yanukovich, would clearly make such action illegal.
The decision in parliament, taken suddenly by a show of hands which caught the opposition off-guard, followed a court ban on protests in Kiev, boosting opposition fears of an imminent police crackdown.
Russia and Ukraine strike $15bn deal
Moscow says agreement comes without conditions but there are fears it may inflame of pro-Europe protesters in Kiev.
Last updated: 17 Dec 2013 19:30
|Russia threw Ukraine an economic lifeline on Tuesday, agreeing to buy $15 billion of Ukrainian bonds and to reduce the price its cash-strapped neighbour pays for vital Russian gas supplies by about one-third.
The deal, reached at talks in Moscow between the Russian and Ukrainian leaders, is intended to help Ukraine stave off economic crisis though Moscow will hope it keeps Kiev in its political and economic orbit.
The agreement could also fuel protests in Kiev against Ukrainian President Viktor Yanukovich, who faces accusations of “selling” Ukraine to the highest bidder after spurning a trade deal with the European Union and turning to Moscow for help.
Finance Minister Anton Siluanov said Russia would tap a National Welfare Fund – a rainy day fund – and use the $15 billion to buy Ukrainian eurobonds.
Announcing the deal after talks with Yanukovich, President Valdimir Putin said Russia would help Ukraine through its problems as big debt repayments loom but that there had been no discussion of Kiev joining a Russia-led customs union.
“The Russian government has made the decision to convert part of its reserves from the National Welfare Fund into Ukrainian securities. The volume is $15 billion,” Putin said in the Kremlin, with Yanukovich beside him.
“I want to draw your attention to the fact that this is not tied to any conditions … I want to calm you down – we have not discussed the issue of Ukraine’s accession to the customs union at all today.”
Ukraine’s Naftogaz energy company will pay Russia’s Gazprom $268.5 per 1,000 cubic metres of natural gas, on which it is heavily dependent. The previous price had been about $400 per 1,000 cubic metres.
The new price will take effect at the start of next month, Ukraine’s energy minister said.
Yanukovich’s visit to Moscow came as thousands of people continued to brave snow and freezing temperatures to call for his removal.
‘Blood on his hands’
Opponents are demanding greater EU integration and are angry about the country’s propinquity to the Kremlin.
They are also unhappy with his decision to keep opposition leader Yulia Tymoshenko in jail – a move also condemned by European leaders.
Yanukovich’s move to spurn Brussels sparked the fiercest anti-government rallies since the 2004 Orange Revolution that first nudged Ukraine on a westward path.
Mass protests have been met with accusations of police brutality. A protest on Saturday saw seven people hospitalised and dozens under arrest.
One opposition leader, Arseni Yatsenyuk, said the president had “the blood of our children, the blood of students, the blood of youth on his hands.”
The unrest has exposed fault lines between the nationalist and Ukrainian-speaking west of the country and the more Russified east aligned with Moscow.
The Ukrainian government has attempted to organise counter-rallies in Kiev but those have been dwarfed by the pro-EU protests.
Ukraine Escalates: Police, Some Armed With Chainsaws, Storm Protest Camp – Live Webcasts | Zero Hedge
It will be a long night in Kiev, where as warned previously, once things start rolling downhill, they will deteriorate rapidly. Via Bloomberg:
- POLICE STORM PROTEST CAMP IN CENTER OF KIEV, AP REPORTS
- UKRAINIAN POLICE MASS NEAR BARRICADES AT KIEV SQUARE
- RIOT POLICE ARMED WITH CHAINSAWS APPROACH KIEV BARRICADES
- UKRAINIAN POLICE INSIDE KIEV PROTEST CAMP
BREAKING: Police storm protest camp in the center of Ukrainian capital.
— The Associated Press (@AP) December 10, 2013
— Jonathan Paterson (@patersonjon) December 10, 2013
— Quentin Guillemain (@qguillemain) December 10, 2013
Some background from Guy Haselmann of Scotiabank:
Ukraine is a strategically important country of 45 million people. A trade pact with the EU was close. However, it appears that a rival bid (or other means of influence) arose during two closed door meetings with Vladimir Putin. The press often reports that President Yanukovich’s corrupt government has shown an instinct for self-preservation often at the expense of the expense of the nation.
The Ukraine economy is in recession. The country has only $20 billion of foreign reserves which is 2 ½ months of imports (worse than Egypt). The IMF’s red flag level is 3 months. Ukraine has $10bln of external debt maturing in 2014. Its CDS rose over 100 bps this week to near 1100. Debt-to-GDP is only 43%, but Argentina defaulted with its debt-to-GDP at 50%. Its currency (Hryvnia), which was devalued in 2008, is pegged to the dollar. The current account deficit is 7% and herein lies the biggest problem.
The IMF is unlikely to help until after the 2015 election. The EU is unlikely to provide any aid. Russia may be enticed to help via loans. The President is on his way to China – who may help – but he may return no longer in power.
And Goldman notes the situation is fluid but highly likely that anti-regime protests will persist with several possible scenarios developing:
1) President Yanukovich declares a state of emergency and/or uses force to prevent protests from developing further;
2) President Yanukovich agrees to talks with the opposition and to a roadmap for signing the EU association agreement at some point in 2014 (our understanding had been that this would not be possible on the EU side, but EU leaders have recently suggested otherwise);
3) President Yanukovich does nothing and protests persist.
From the macroeconomic standpoint, these protests come at a time when the National Bank of Ukraine (NBU) has had to defend the currency peg through sizeable interventions, which have depleted the reserve cover to 2.5 months of imports, and when the government is arguably unable to roll its debt in the market. Goldman fears the further risk is that, due to the heightened political uncertainty, capital outflows could intensify, putting further pressure on the peg.
While there had been some press reports suggesting sizeable Russian financial help in exchange for the country not signing the EU association agreement, the recent developments, in our view, call this further into question. We think that Russia is unlikely to extend substantial help without guarantees. Given that it appears that President Yanukovich’s chances of holding on to power beyond the 2015 spring election have decreased following the protests and schisms in his administration might even weaken his powers earlier (splits in the Region’s Party, for instance, might deprive him of a majority in parliament) he might very well not be in a position any more to give those guarantees.
As indicated by polling and by the participation in street protests, the decision to suspend preparations for signing the EU association agreement was an unpopular one, at least with a significant part of the population. Goldman believes that President Yanukovich may have underestimated the political ramifications of doing so.
At this stage, it is difficult to forecast how the situation will evolve. Apart from the size of the protests it also matters to what extent the president can hold on to his own power bases in the Regions Party and the eastern part of the country. Given that the economy is in recession and the heavy industries in the east in particular are suffering, his support there might very well be more brittle than in the past.
But perhaps there is a silver lining – in an odd twisted way – the concerns about Ukrainian banks and the currency peg have seen deposit outflows increasing the risk to the country’s financial system and creating a particularly acute headache for Russian banks. The silver lining, of course, is that Russia may be forced to provide more assistance in a Cyprus-style save for its own banks (lenders) and depositors…
While other foreign lenders have cut their Ukraine exposure in the five years since – to 20 percent of Ukraine banking sector assets in 2012 from 40 percent in 2008, according to a Raiffeisen Research survey – Russian banks have maintained a strong market presence, still accounting for 12 percent.
Among foreign banks, the Russians have easily the biggest exposure, more than twice that of Austrian lenders, the next biggest.
“[Moodys] estimate that these banks’ exposure to Ukrainian risk is $20-$30 billion, a sizeable amount indeed, considering that their combined Tier 1 capital was $105 billion in June,” Moody’s said.
Moody’s, which estimated that 35 percent of all bank loans in Ukraine were problem loans, said the country’s severe economic problems would keep local borrowers under pressure and could result in higher loan losses for the Russian lenders.
In the absence of the association agreement with the European Union, Russian-Ukrainian trade is likely to rise, and the four big Russian banks may well increase their exposure to Ukraine, it added.
Dimitry Sologoub, head of research at Raiffeisen in Kiev, said the banks had learned lessons from the 2008 crisis, so were much less exposed to credit risk, liquidity risk and forex risk, and the central bank was calming matters by providing liquidity and foreign exchange.
“The question is how long it will go? The reserve cushion of the national bank is not so big.”
In the meantime, Ukraine might secure short-term benefits from its closer ties with Russia, enough perhaps to stave off the kind of currency crisis that nearby Belarus suffered in 2011, said Charles Robertson, chief global economist at Renaissance Capital in London.
“In the long run, it will probably keep Ukraine poor. This is bad for Ukrainians and bad for Russia,” he added.
“Instead of being a strong, successful economy on Russia’s borders, able to buy plenty of Russian exports, Ukraine risks becoming another Belarus.”
Which – after all – could be just what Putin wants…