Emerging Markets | Europe | Politics & Geopolitics
On 9 December, leaders of Ukraine, Russia, France, and Germany met in Paris in a Normandy format as part of efforts to resolve the frozen conflict between Russia and Ukraine over territory in the Donbas region of eastern Ukraine. The meetings took six hours, including an hour-and-a-half meeting between the Ukrainian President Volodymir Zelensky and Russian President Vladimir Putin. It was hoped that the summit would be able to iron out all the differences between the Russian and Ukrainian positions. In that, it failed. But it did manage to name the next steps on the path to resolution…
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[Market implication: bullish Russian and Ukrainian assets]
On 9 December, leaders of Ukraine, Russia, France, and Germany met in Paris in a Normandy format as part of efforts to resolve the frozen conflict between Russia and Ukraine over territory in the Donbas region of eastern Ukraine. The meetings took six hours, including an hour-and-a-half meeting between the Ukrainian President Volodymir Zelensky and Russian President Vladimir Putin. It was hoped that the summit would be able to iron out all the differences between the Russian and Ukrainian positions. In that, it failed. But it did manage to name the next steps on the path to resolution.
According to the joint statement that the Office of the President of Ukraine published, Presidents Zelensky and Putin, German Chancellor Angela Merkel, and French President Emmanuel Macron have agreed on the following:
(1) Achieving a ceasefire before the end of 2019
(2) Development and implementation of an updated demining plan
(3) Disengaging forces at three additional disengagement areas by the end of March 2020
(4) Release and exchange of prisoners based on the principle of ‘all-for-all’
(5) Holding another summit in the Normandy format within four months to discuss local elections in Ukrainian region of Donbas.
Achieving what might be realistically expected, the summit can be called a success. Initiating direct dialogue between the Ukrainian and Russian presidents is an essential step towards rapprochement and the resolving of other thorny issues such as the transit of Russian gas to Europe via Ukraine.
Importantly for Ukraine’s leadership, the summit has opened the possibilities for further dialogue without compromising Zelensky’s position. Ahead of the summit, leaders of Ukrainian opposition developed a list of ‘red lines’ for the president. So far, Zelensky has held his own on the tricky issue of the handover of control of the Russian-Ukrainian border to the east of the conflict areas. Also, he can present the final prisoner swap as a significant victory to the Ukrainian public.
As Always, the Devil is in the Detail
The Minsk II agreement of February 2016 stipulated that Ukraine would regain control over the border the next day after fair and democratic elections in Donbas (this is known as the ‘Steinmeier formula’). According to the communiqué, the four leaders agreed that the formula should be incorporated into the Ukrainian legislation. However, the Ukrainian opposition views this as one of the red lines. Together with the issue of local elections in the areas affected by the conflict, timing the border passing into Ukrainian control will likely be an essential item on the agenda of the next Normandy meeting.
Meanwhile, the current law on the Special Status in Donbas expires at the end of 2019. The version of the communiqué published by the Office of the President of Ukraine, reproduced by Interfax, includes a very vague reference to the future of the special status. But this is an issue upon which it will probably be the hardest to achieve a compromise with Russia, which insists that the special status must be cemented by a new law.
Gas Issues Still Bubbling Over
During the break in the quadrilateral discussions, Putin and Zelensky also discussed the issue of gas transit. This follows energy ministers from each country who have also discussed the matter in the last few months, including in a trilateral format (with the representatives of the European Commission). However, their discussions ended at an impasse. According to Zelensky, the eye-to-eye meeting between him and Putin has ‘unblocked’ the negotiation process. But the details still need to be thrashed out. Zelensky hinted that Russia might be prepared to supply $3bn worth of Russian gas as a settlement for the Stockholm Arbitration decision in the dispute between Ukraine’s Naftogaz and Russia’s Gazprom, awarded to Naftogaz.
In the absence of an agreement between Gazprom and Naftogaz, the current contract expires on 1 January 2020. On the gas transit issue, Ukraine is supported by Germany, which has insisted that Russia must continue importing its gas via Ukraine after the Nord Stream II pipeline is commissioned. Behind the scenes, both Germany and France must be pushing Russia and Ukraine towards entering into a new ten-year contract, which would mitigate one of the risks that have been dogging European energy security for years.
Credit Implications
On 12 December, Moody’s is due to publish the results of its scheduled review of Russia’s sovereign debt rating. In February of this year, the agency upgraded Russia’s debt by one notch to Baa3 and assigned a ‘stable’ outlook. Following an upgrade by Fitch in August, all the three rating agencies now have a ‘stable’ outlook on Russian sovereign debt. And Russia has reached a point where it cannot secure further upgrades without making peace with Ukraine. The gradual movement towards peace in Donbas, however, should help reduce sovereign risk embedded in its current ratings and unlock potential for further sovereign upgrades.
Ukraine, on the other hand, has achieved a significant diplomatic coup. By signalling its readiness for a dialogue with Russia over Donbas, President Zelensky has beefed up his bargaining position with Washington-based IMF. Following the early departure of an IMF mission from Kyiv in November, an announcement that the fund has given its staff-level approval for a new 3-year loan facility came as a positive surprise. The news came out in the early hours of 9 December, the day when the Normandy summit was scheduled, and the timing of the decision shows that the fund is keen to maintain its influence over Ukraine’s policies at the moment of a possible thaw in its relations with Russia. By manoeuvring carefully between the competing powers and compromising with Russia over Donbas on the terms brokered by key EU leaders, Ukraine could also improve its creditworthiness.
Tatiana Orlova is a macroeconomist and strategist, and the founder of Emerginomics Research. She has been covering Emerging Markets since 2001, and has pursued various roles on the sell-side across RBS, Nomura, ING & Credit Suisse.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)