Monday, January 5, 2015

Pressure on the Ukraine Ramps Up in Early 2015

The Ukraine will be a key area to watch in early 2015. In the ongoing chess match between Russia and the West, the Ukraine is clearly the pawn in the game. As always, money is a big key to who gains the advantage. Time is becoming a factor for both sides as financial pressures build up and money is running out.

For the West (represented by the IMF and NATO), the Ukraine government is running out of time to stay solvent. The latest IMF estimates are that they will need an additional $15 billion in loans above and beyond the original $17 billion that was projected. The economy has not performed as well as hoped for and the ongoing military conflict with rebel troops in the eastern Ukraine is costing a lot of money. Russia knows this and probably thinks it can outlast the West. A default by the Ukraine government will embarass the IMF and the West and make it more difficult for them to bring the Ukraine into the EU and NATO fold. So Russia is likely to do anything it can to keep the Ukraine engaged in costly military conflicts in the east with the rebel forces.

On the flip side, Russia is reeling from the combination of sanctions (not a big deal by themselves) and the crash in oil and gas prices (this is the real pressure point on Russia). The West probably thinks it can outlast Russia and, as it's economy gets worse, the Russian people will begin to falter in their support for Putin. They are holding out the carrot of more loan money to the Ukraine in exchange for the Ukraine moving towards joining NATO. This is something that will enrage Russia

But right now it is unclear if the IMF can come up with the additional money needed to keep the Ukraine solvent for all of 2015. How this turns out will provide a big clue as to who is winning the ongoing chess match for now. And the clock is ticking for both sides as we watch to see who can hold out the longest before running out of money.

We have the potential here for some fireworks in early 2015 that may set the tone for the whole year. If the West can keep the Ukraine afloat and get it to move towards NATO, it will be viewed as a political defeat for Russia. Russia may also look at this as a direct threat to their homeland by NATO. We can anticipate a more intense response from Russia if things go this direction.

On the other hand, if the Ukraine gets bogged down in an endless costly military conflict with rebel troops supported by Russia, it may cause the amount of loan funds needed to stay solvent to soar even higher. If it is forced to default this will be an ugly and embarrasing political defeat for the West and the US. Both sides know all this.

None of this looks good and is the kind of thing that could easily lead to a much bigger military conflict in the area. Which ever side suffers the political defeat may lash out in response militarily or in other ways (more damaging cyberattacks?). The IMF has to come up with the extra money for the Ukraine pretty soon, so this is the first big key to watch for in this situation.

Update 10 pm: 

This Russia Today article shows that pressure is being felt by all sides. Europe is kind of in the middle of this conflict and will have a much harder time holding out for sanctions than the US which is not as close to the problem or as directly impacted financially (yet). Tension is clearly developing on both sides as the costs of this conflict are really starting to be felt.

Update 1-6-15:

Financial Times runs this article on the propects of a Ukraine debt default and notes "time is running out". Ukraine bonds are crashing as investors try to unload them. If they default, does the IMF still keep floating more loans to the Ukraine?

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