Friday, February 13, 2015

Reading the Tea Leaves --- the Ukraine Ceasefire

News is out now about the ceasefire agreement signed in Minsk this week. You can read the details of the agreement in the articles linked below (one from a western media source and one from a Russian media source). What we want to explore here is how this agreement impacts the future direction of monetary system change. As always, there is much more below the surface than just the headline that a ceasefire was signed. There are some potential winners and losers and also a possible hint about what this means for the future of monetary system change. Let's look at it.

First, here are a couple of news articles that describe the agreement.

Reuters - Glimmer of Hope for Ukraine

Russia Today - Ukraine Peace Deal

Those articles will give the details of the ceasefire. But there is more to this story than just that news. After all, we won't really know how meaningful the ceasefire is until we see if both sides actually live up to it on the ground. It's just a piece of paper unless it translates into real results. Time will tell on that.

Beyond the ceasefire agreement, this meeting and the agreement are important for the public perception of the parties involved. There are PR winners and losers. It is also provides a hint as to how the bigger ongoing conflict between the US/West and BRICS/East is likely to get resolved. 

Who are the winners and losers out of this meeting?

Putin- winner

This is a big PR win for Mr. Putin. He accomplishes a lot without really giving up much of anything. His presence at the meeting puts him in the limelight as the problem solver rather than the US (who had no presence in the meeting). Mr. Putin comes out of this looking like he is working hard for peace. He makes a few minor concessions, but really gives up nothing important to him. Working with the two EU leaders counters the US effort to make him look isolated. It also makes it much harder for the US to get the EU to agree with harsher sanctions. In fact, it might even cause some EU members to call for a reduction in the existing sanctions. Mr. Putin gains a PR advantage without giving up much of anything.

IMF- potential winner

The IMF was lurking quietly in the background. They have a lot at stake in the Ukraine. They are already in for $15 billion there. All the war problems caused them to have to come up with another $17 billion to prevent the Ukraine from default. A default by Ukraine would be a huge hit to IMF credibility. If this agreement holds up, the IMF can go forward with its new plan to kick in the additional $17 billion to keep the Ukraine solvent. Longer term, if the agreement holds, the IMF can emerge from this looking like a key global problem solver. Mr. Putin knows this. So this is another sign he is willing to cooperate with the IMF. Keep all this in mind over time as things unfold. This suggests he is looking to work within the IMF rather than to leave it. He could have tried to speed up a default by Ukraine to make the IMF look bad, but he didn't.

EU - potential winners

If the agreement holds up, the EU will look like they worked hard for peace and prevented the US from making things worse by ramping up arms shipments to the Ukraine. The EU will have a solid basis to pressure the US to reduce sanctions against Russia (which are hurting the EU a lot, but not the US). 

The US Hardliners on Russia - potential losers

If the agreement holds up, those in the US who are trying to paint Mr. Putin as a war monger, ramp up sanctions, and send heavy arms to the Ukraine will take a PR hit. They will look like part of the problem rather than part of the solution. Mr. Putin looks like he may have pulled off a PR coup here  because this will make it hard to continue to paint him as a war monger and will undercut the justification for sanctions.

What hint does this agreement give us on the future of monetary system change?

We noted in an earlier blog post that how the Ukraine and Greece are resolved will give us some early hints as to whether the world is moving towards the western global institutions (like the IMF) or away from them. If the Ukraine settles down and the IMF moves forward with the new aid plan there, it will boost the image of the IMF. It also shows us that Mr. Putin (and all the BRICS) are quite happy to work with the IMF and ignore the US to solve world problems. We are still waiting to see how Greece gets resolved, but there are some signs that Greece will eventually work out a deal to stay in the EU and the Euro. Despite some drama about Russia stepping in to back Greece, most analysts think a deal will be made between Greece and the EU/ECB/IMF.

If that does happen, then the early results indicate that the IMF is still firmly in place as the most influential global financial institution for crisis/problem solving. Keep that in mind as things unfold over the next year or two. We will continue to follow it here.

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