Reuters Insider - World at Risk: Ukraine on failed state brink – Nomura
23/05/2014 20:25
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Description: Post the presidential election, the Ukrainian
government will have greater legitimacy, says
Nomura’s Alistair Newton. But the key will be how
it deals with factions in the east of the country.
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Transcript (May be auto-generated)
I'm Alastair Newton, Senior Political Analyst at Nomura International plc.
Presidential election is, of course, very important. Now whatever the outcome,
whatever the outcome and at the moment it does look very much like the Chocolate
King is going to win the election. He's around about 47%, 48% in opinion polls,
a good 30 points ahead of his nearest rival. Whatever the outcome, the Russians
will undoubtedly continue to denounce the legitimacy of the new regime in
Ukraine. However, it will be there, it will have been elected, it will continue
to work closely with the West and it will certainly have greater legitimacy in
the eyes of most of the world than the interim administration today. The
important question is going to be, will it be able to negotiate successfully
with elements in the East looking for a greater degree of autonomy? Now this is
not going to be straightforward. Ukraine is still on the brink of becoming a de
facto failed state to a significant extent. So great deal to do politically as
well as of course the undoubted large economic challenges which will face not
only the new Ukrainian administration but also the West, the IMF and the EU in
particular in supporting that administration over, I'm confident, many years.
The Ukraine question is one which has weighed heavily on markets for the last
few weeks so that's strangely enough, other than the big selloff on the second
of March, we've actually seen very little volatility being driven by this issue.
But the big question of course remains, will Russia overtly intervene militarily
in Eastern Ukraine? And the answer right now looks to be probably not. Following
Vladimir Putin's agreement that maybe the 25 May elections in Ukraine are going
to be helpful and his withdrawal of support for the referendum which did
actually take place in the East on greater autonomy joining Russia, there has
been a certain easing in the general dynamic of this crisis. And it does look
like the hurdle for overt Russian military intervention is higher than many of
us had feared at one stage. Now for all that, clearly still a great deal of
uncertainty going forward. And the reason the military intervention issue is
particularly important for markets is that if we do see that, I believe it's
extremely likely that the US would move to financial sector, banking sector
sanctions with serious implications for European banks in particular. Now a lot
of the withdrawal of exposure to Russia we've seen to date has undoubtedly been
caused not by the sanctions imposed so far but by anticipation that the
situation could deteriorate further and we get yet more sanctions up to and
including banking sector sanctions. If the perception of that risk goes down, in
the coming weeks, if the 25 May election takes place, if diplomacy continues as
it is right now to try to resolve this crisis, I do believe the markets will, in
that scenario, be able to go back to judging Russia primarily on its
fundamentals rather on the basis of perceived political risk. And right now, I
have to say that that is my base case scenario. We are moving away from the
possibility of overt military intervention without ruling it out totally at this
stage and into a scenario where diplomacy and the sort of greater stability and
maybe a little more calm begins to prevail. Ukraine moves out of the headlines,
markets will stop worrying about it and start worrying about something else