Financial Comment: Has Russia crossed a red line?

Has Russia been given 2 weeks to wake up? 

The decision by The Parliamentary Assembly of the Council of Europe (PACE) to strip Russia of the right to vote until April 2015, and the decision to extend the sanctions against Russia by the European Council until September 2015 were taken on January 28 and 29. These decisions can be considered as first official proofs of the much talked-about new, and heavy, wave of Western sanctions against Russia. It seems as if the bombing of Mariupil on January 24, which left 30 civilians dead and more than 110 civilians wounded, was the red line which Russia crossed, probably in an attempt to scare Ukraine and the West. So far, it seems, the effect has been the opposite.

Prior to Mariupil, there had reportedly been the struggle among the EU member states to ease the sanctions. Now, the sanctions are extended and new persons and organizations will be included in the sanction list within a week. Importantly, in announcing its decision, PACE condemned “…covert military action by Russian troops inside eastern Ukraine”, which seems to have been the first official recognition of the Russian aggression in Ukraine by the EU. This kind of statement is supposed to change the logics of the European approach to the crisis. This is not some support of some insurgents anymore. This is a recognition of the war which one nation is waging on the other, which is happening in direct proximity to the EU border.

On this background, the current rumours that Russia has been given two weeks by the West to end the aggression or face economic destruction, seem credible. The Russian financial markets seem to be preparing for this kind of scenario. Russian ruble posted its historic low against the US dollar on January 29, at 69.39 for 1 dollar. The Russian RTSI stock index dropped 2.34% on the same day. Although the renewed weakness in the oil price, with a barrel of Brent again below US$49.0 on January 29, could also be the contributor.

Many observers are talking about a potential decision by the EU Council planned to be taken on February 12 to cut Russia off the global interbank payment system SWIFT. The near future will show whether this is true and, if so, whether this option is only playing the role of a “big stick” to scare Russia, or it is being considered seriously. This kind of decision would disrupt the Russian economy and also damage the global economy too. However, the West may well be serious about it: the Western world seems to realize that, in the absence of military actions to help Ukraine, it needs to speed up the economic war with Russia if it doesn’t want an all-out war in Europe. The recent announcements by the U.S. and the EU about decisions to provide Ukraine with more than $4 billion in additional loans fit this puzzle.

By: Ukrainian Credit Union Limited