- EU and US tighten sanctions targeting Russian individuals, but wait with economic sanctions…
- …global financial market impact is waning, though assets from the region remain at risk
- Eurozone consumer confidence reaches highest level since end of 2007
EU and US tighten sanctions against Russia…
President Putin on Friday signed legislation completing the process of integrating Crimea into Russia. In reaction to the Russian moves, the EU and US have tightened so-called ‘stage 2’ sanctions recently. The EU expands the list of officials receiving visa bans and asset freezes from 21 to 33. The US also expanded its blacklist, which now includes around 30 core decision makers as well as five businessmen and one bank with links to the Kremlin. The West has also prepared ‘stage 3’ economic sanctions targeting Russia’s economic interests directly, including a ban on arms exports; these will be used in the case of further Russian intervention in Eastern Ukraine or elsewhere. We think that the EU (which proved rather divided during its latest summit) will continue to take a measured approach, given its strong energy ties with Russia and also taking into account the risk of retaliation. In addition, Russia has agreed with the instalment of an OSCE observer mission in Eastern Ukraine. These considerations make an ‘Iran-style’ boycott look unlikely. In the absence of a severe military escalation or an Iran-style boycott, we think that the effects on global markets should be contained. Still, downward risks stem from potential developments in the Russia-leaning Eastern parts of Ukraine. Meanwhile, the EU and Ukraine signed the political provisions of an Association Agreement on Friday; a full Association Agreement could be signed after Ukraine’s presidential elections in May, should the elected government prove pro-European. An IMF support package, essential to prevent Ukraine from default, will likely be announced at short notice, backed by an EUR 11 bn contribution from the EU and other bilateral contributions.
…but global market impact is waning
Although developments in Ukraine continue to catch the headlines, financial markets appear to be less interested. At the start of last week, sentiment was improving somewhat because of the perception of a lower probability of a full-blown crisis. This resulted in a slight recovery of the Russian ruble and gold prices falling under pressure. Gold received some support from the increased tensions between Russia and Ukraine, but these tensions do not account for the largest part of the rally since the start of this year. In fact, weak US data (weather related) and a weaker US dollar were more responsible for the rally in gold prices. Moreover, US Treasury markets completely pushed aside the events in Ukraine last week. The more hawkish than expected Fed last Wednesday was the reason for the change of heart. The graph below shows that US 10-Y Treasury yield rose more substantially since the end of February, driven by monetary policy expectations, than it dropped during the period starting at the end of November (when the tensions started) until the end of February.
Regional assets remain at risk
Recently, the sell-off in Russian stocks and the Russian ruble have come to a halt and they even showed a very modest recovery. However, the Ukrainian hryvnia has dropped further and the sovereign CDS spreads on Ukraine and Russia have continued to widen. As we expect tensions to remain for now (but no escalation), prices of these assets will remain volatile.
Eurozone consumers more optimistic
Consumer confidence in the eurozone (flash estimate) as measured by the European Commission increased from -12.7 in February to -9.3 in March, reaching its highest level since the end of 2007. Details have not yet been published, but confidence probably improved on the back of a slowly recovering labour market (employment in the eurozone grew by 0.1% qoq in Q4), easing fiscal consolidation and a rosier outlook for the eurozone economy in general. The rise in consumer confidence fits into our scenario of moderate growth in private consumption in the coming quarters.