Europe

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The EBRD’s New Scaffolding Scrapes

2020 February 21 by

The approaching 30th anniversary of the post-communist European Bank for Reconstruction and Development, with a core democracy and private sector building purpose and geographic spread to the Middle East and Central Asia, has set off a wholesale rethink after a high-level task force recently weighed in on the Luxembourg-based European Investment Bank’s future. That report urged reorientation on climate and sustainability lending in poor countries, with the EBRD as a possible shareholder in a spinoff entity. It came as the EIB’s main infrastructure project portfolio will likely come under pressure with post-Brexit budget cuts, and member countries are able to separately attract private debt and equity finance. Europeans together still hold a majority stake in the London-headquartered Bank, originally championed by a French official on the understanding it would be built elsewhere. North African nations joined after the Arab Spring and stillborn attempts to create a stand-alone Middle East body, and the target central and east Europe block now accounts for only one-third of investment, with the Southeast and MENA roughly split at 20%. Total allocation to date is around $150 billion, with Turkey replacing Russia as the leading single focus after post-Crimea sanctions suspended operations in the latter. Infrastructure and energy currently absorb half of commitments, in contrast with the early manufacturing and services footprint. 80% is loans, 15% equity, and 10% guarantees and other “de-risking’ instruments. Banking and capital markets work came to over $50 billion for 2000 projects through 2018, and an active technical assistance program recruits foreign advisers and consultants. Only a half dozen of the founding area members did not rise in income classification, and the Czech Republic “graduated” from eligibility altogether a decade ago. The US remains a large shareholder with a 10% holding, and it has emphasized geopolitical rivalry in recent years against Russian and Chinese economic and credit expansion in the area. Moscow has natural gas pipelines and drew neighbors into the Eurasian Economic Union aiming for full integration with Belarus, while Beijing’s Belt and related initiatives sprinkle $300 billion across the wider Silk Road.

A December CSIS think tank report points out that graduation policy is undefined and that “fault lines” have opened as borrowers may be tempted to turn to cheaper sources with “malign interests.” It argues that assigning a green mandate within the context of a new organization would confuse its mission and undermine a versatile commercial culture, and that expanding into Africa and other low-income regions will stretch capabilities and create additional rivalries. However on the issue of migration the EIB and EBRD could better collaborate on fresh solutions, building on the latter’s Syrian refugee support in Jordan and Turkey which also acts as a “force multiplier” for US humanitarian assistance. Rediscovery more than reinvention should be the future strategy especially with frontier capital market deepening lacking basic knowledge transfer. More countries should graduate under a clear process, and equity and guarantee volume can better balance loans. These changes should be embraced under the next President as longtime leader Chakrabarti exits the scene, and the US should not consider reducing or selling off its estimated $150 million share, which can backfire in both deal and diplomatic terms, CSIS warns.

Ukraine’s Unimpeachable New Program Sentiments

2020 January 24 by

Ukraine shares looked to reverse MSCI Index double-digit loss into the new year, as the Zelinsky government with an overwhelming parliamentary majority and no elections until local ones in late 2020 set out to ink a successor IMF deal with shared anti-corruption and privatization elements. Another $5 billion-plus extended arrangement is under negotiation, although it may be precautionary despite large public and private sector debt repayments if foreign direct and portfolio investment jumps on expected land reform and refusal to return failed Privatbank to controlling oligarch hands. The relationship between that shareholder Kolomosky and the President since they teamed on the former’s television network is at the heart of banking system and donor direction, since a clean break is presumed to firm cleanup credentials. The central bank has been the target of media and personal attacks for nationalization and criminal prosecution and asset recovery steps, with billions of dollars in insider cash allegedly spirited out of the country. Kolomosky’s wealth remains frozen despite London court action, but the cohort’s reach is illustrated by close ties with members of the Trump inner circle among associates of accused money launderer Firtash around the impeachment scandal. Lawyer Giuliani reportedly signed up several Ukrainian clients seeking diplomatic favor and competition with the Naftogaz energy monopoly. Former and current administration officials lobbied for personnel and commercial changes and were part of a push to investigate former Vice President Biden’s son previously serving on the board of a private rival, according to witness testimony to Congress.

The economic backdrop has brightened for Fund facility renewal with growth estimated at 4% through next year on 6.5% inflation in the third quarter, enabling a 100 basis point benchmark rate drop. Food prices are under control with a good harvest, and the currency has stabilized around 25/dollar on a 3% of GDP current account deficit. The 2% budget gap target is on track, and higher gas transit fees and tax collection are possible for further consolidation. Warrants in the original external debt restructuring should pay off with growth above 3%, but the 50% ratio to output remains worrisome as technocrats in Kiev mull another haircut or maturity extension proposal. Geopolitical adversary Russia has a suit outstanding from the Yanukovych era for un-serviced loans, as its banks have taken over networks in Crimea and the east. Presidents Zelensky and Putin may meet amid an unobserved cease-fire in the civil war, as thousands of families are displaced in the Donbas region without access to humanitarian relief. Russian growth is half Ukraine’s with oil exports subject to tricky production understandings with OPEC, and big infrastructure projects slow to materialize as a means also to defuse popular protests. The central bank tapered interest rates and the Kremlin drew on the stabilization fund for modest stimulus, with inflation within the 4% medium-term target. It plans to “de-dollarize” the sovereign wealth pool to avoid Washington’s sanctions ambit and ride ruble appreciation, as it also unveiled an exchange blueprint for smaller and lesser-known companies in the net to raise debt and equity locally. Despite a 30% MSCI surge share manipulation persists in creative forms, the latest a Foundation created for technology listing Yandex to ensure against state ownership removal.

Europe’s Capital Markets Marriage Altar

2019 October 13 by

With Brexit and a new central bank chief hogging the EU agenda, the financial services industry has revived the call for capital markets union set out in recent blueprints to strengthen the existing commercial and supervisory foundations and competiveness versus developed and emerging world rivals. An IMF paper notes that regional households and companies overwhelmingly rely on banks, and that relatively small national size may cost an extra 250 basis points for debt. Integration has been a goal since single market launch decades ago with alignment lacking on transparency, regulatory and insolvency practices. The survey shows “no roadblocks” or “grand bargain” need for immediate progress on cross-border private risk sharing to promote growth and absorb economic shocks. Euro area bank assets are 300% and corporate bonds 85% of GDP, but securities are less than 70% in Central Europe and the Baltics. Home bias takes half of equity allocation, and the half trillion euros investment fund industry is the main institutional and retail segment under the UCITS directive, followed by insurers and private pensions.  Hedge and private equity funds are half the US total, and derivatives through London with the associated clearing houses will likely shrink in the near term with Brexit undermining liquidity and trading. Startups are particularly unable to find funding, and the lack of portfolio diversification hurts consumption and income. The IMF polled officials and executives and charted wide variation in offering, accounting and tax treatment. Bankruptcy frameworks are separately tracked with the World Bank’s Doing Business data base across a broad range, and outside the evolving “single rulebook” the new European Securities Authority (ESMA) will enforce and monitor. However its powers are “limited” in terms of mandates and fines, the document remarks.

The 2015 action plan focused on innovation, infrastructure investment, and administrative alignment and was updated in 2017 to enable issuance of common prospectus, securitization and venture capital rules. On prudential oversight the European Parliament approved a risk-based formula this year for firms with assets over Euro 30 billion, and an area-wide personal pension model is under development. Another proposed standard will cover corporate insolvency and a consumer protection one is under consideration. The IMF recommends a central reporting system and data base as with EDGAR in the US, and faster withholding tax refund on-line. Oversight should be “proportional” and apply to critical structures like clearing houses and the largest bank-connected houses. ESMA could use independent board members and forge cooperation pacts with global counterparts in its initial stages, and debt enforcement standards are an immediate priority in view of big disparities. Capital market and banking unions should be in “healthy competition” as Europe moves away from traditional relationship-driven sourcing. The push came amid a mixed MSCI Index showing from members through August, with Greece the only positive core constituent on a 20% jump, while the Czech Republic, Hungary and Poland fell 5-10%. On the frontier Romania was up 20% and Estonia off 5%, as the Baltics grapples with pervasive money-laundering scandals carrying financial institution penalties and demanding future integrity and solidarity on the issue

Greece’s Explosive Election Odyssey

2019 August 16 by

Greek stocks up 30% on the MSCI Index through mid-year continued to surge after Prime Minister Tsipras’ snap election maneuver backfired, as his party lost to the conservative opposition which took a parliamentary majority. New government head Mitsotakis follows his father in the post previously, with an Ivy League US education and management consulting background pledging business-friendly policies. His Finance Minister will oversee a corporate tax cut, but warned of “hidden bombs” likely to aggravate the record debt load from hundreds of billions of euros in consecutive EU rescues. Contingent liabilities around state enterprises never restructured or privatized under leftist administration could complicate the 15-year repayment plan agreed with Brussels at concessional rates with a long grace period. It insists in return on maintaining stringent fiscal targets such as a 3.5% of GDP primary surplus, which the incoming Prime Minister campaigned against to boost competitiveness and higher growth than the recent meager 1-2%. Officials from the bailout facility repeated that austerity was a “cornerstone” as other regional struggles over Brexit and migration pre-empt appetite for reopening the Greek saga. A potential ally in softer terms may be ECB governor nominee Lagarde, who advocated outright cancellation as IMF chief, but her immediate priority will be another round of quantitative easing in some form to stoke anemic 1% growth and inflation. With bond-buying and commercial bank on-lending potentially exhausted, she is under pressure to follow the Japanese model into equity holding investors consider a double-edged sword. The new team will look for easy wins like slashing foreign investment bureaucracy and screening that has slowed mining projects, and the cabinet draws on well-credentialed expatriates in the hope of luring back professionals leaving over the past decade’s crisis. Right after the victory, a 7-year bond was heavily oversubscribed with a yield under 2%, as an initial vote of confidence that growth and real returns can outpace neighbors, especially as the “peripheral” story fades in Italy, Portugal and Spain. In core emerging markets the juxtaposition is increasingly with Turkey, where stocks were down 5% in the first half coinciding with the ruling AKP party’s second defeat in the rerun Istanbul major’s race. The fragmented opposition unified around a moderate candidate, as President Erdogan’s grouping has begun to splinter, with the latest defection from his former deputy Babacan. The political as well as economic consequences to loss of the biggest city are far-reaching, as big infrastructure projects and favored business relationships will come under scrutiny and could reveal more serious banking and corporate sector weakness. Around $150 billion in external credit lines must be repaid over the next year after a cumulative 40% lira drop against the dollar since 2018. Depreciation drove inflation above 20%, and quashed import demand also helpful in curbing the current account deficit. The President blamed the poll setback on central bank rate hikes to near 25%, which he claims worsen inflation in contravention of economic orthodoxy.  He sacked the governor and named his deputy as replacement in a fit of pique, and the latter immediately cut the benchmark 4% and pledged more accommodation.  Foreign investors shunned securities in their own swift sanctions on undermining independence, as the US and EU prepared to counter Russian military and Cyprus oil moves with punishm

Central Europe’s Strained Strongman Sensibilities

2019 July 14 by

Central Europe stock markets were unsettled through May, amid a raft of popular protests and backlash against insider dealings and economic policies designed to keep compromised leaders and ruling parties in power. The big three Czech Republic, Hungary and Poland MSCI components were flat to negative, with the first again a regional growth laggard at 2.5% as thousands poured into the streets in anti-Babis demands for his prosecution and resignation over business-political conflict including on EU contracts. Exports dipped 6.5% in Q1 on weak German demand, while wage pressure keeps inflation above target for the central bank’s tightening bias. Brussels has not yet condemned Prague for democratic institution manipulation as in Budapest and Warsaw, where regime allies did well in recent European elections on anti-immigrant expansionary spending platforms. Hungary’s 2020 budget is more restrictive, with a proposed 1% of GDP deficit as cohesion funds run out, but the government retains the option to loosen the purse strings while monetary policy is also slack. Domestic pump-priming is vital to preserving Prime Minister Orban’s support and to counter slumping auto sales as US tariffs go into effect. Poland is the growth champion at 6% in the last quarter on a double-digit capex bump with EU projects, on top of the 2% of GDP stimulus unveiled by Law and Justice officials heading into national elections. It took almost half the vote in the May European contest, with consumer confidence buoyed by strong retail buying. Higher inflation near 2.5% is the tradeoff, with rate hikes likely off the table until polls are completed.

In the frontier mix Bulgaria and Romania were at opposite ends with a respective 5% loss and 9% gain. The former’s net exports suffered from Turkey’s crisis, but household demand drove 3.5% growth. It is on track to enter the exchange rate mechanism’s initial stage this summer on the way to full medium-term euro adoption replacing the currency board. The timetable could be complicated by low income and anti-corruption status, as banks undergo a comprehensive asset quality review. Romania’s growth and inflation are both 4%, as the socialists leading the coalition got only half the previous result in European elections on sleaze outcry landing a former president in jail. Voters approved a non-binding referendum on court system overhaul to punish malfeasance, after a prosecutor was attacked for charging senior officials. Another election may be called for early next year, and could further swell the fiscal deficit toward 5% after promised pension hikes with no IMF program in place. The burden may fall on the central bank to tighten with the currency now a rare overweight recommendation in the area. In the Balkans, Croatia and Serbia have drawn positive notice with expected sovereign ratings upgrades, after S&P restored the former’s investment-grade in March. It is no longer in Brussels’ excess deficit procedure, with improved state company earnings balancing the budget. Formal euro accession negotiations should begin in the coming months, before another election cycle. Serbia’s structural reform record and fiscal rule setting were praised under the IMF’s policy support instrument, as President Vucic remains under pressure to purge political allies accused of wrongdoing while he treads a fine diplomatic line on Kosovo relations as a related tripwire.

Ukraine’s Sincere Gnawing Inauguration

2019 June 16 by

Ukraine stocks and bonds, after a bump on former comedian Zelenskiy’s resounding 75% presidential election haul, girded for a rough foreign policy, economic and anti-corruption transition period with the untested politician taking office. He had reform advisers for the campaign, but also a close relationship with the oligarch controlling the media outlet for the show that launched his candidacy who was implicated in fraud at the largest private bank. The central bank seized it as capital was also injected into ailing state lenders, with the system NPL ratio at 50%. The action was declared unconstitutional right before the vote, as the outgoing government likewise spurned another element of the twisting IMF program by lowering gas prices in a last ditch popular bid. The new president immediately called for fresh parliamentary polls as he seeks to lift lawmaker immunity from criminal charges. Russia offered citizenship to eastern breakaway regions at the same time, and ignored a European human rights tribunal ruling to release detained Ukrainian sailors following a Crimea incident. Fund disbursement is unlikely until the Zelinskiy team settles in and meets previous conditions, including unified bank and securities market regulation. The public sector and banks owe $10 billion in combined external debt over the next year, versus $40 billion in corporate repayment Reserves and liquid foreign assets were $25 billion at the end of 2018, with 40% banking system dollarization and high capital flight risk around political and growth uncertainty. GDP will increase 3% again this year, subject to agriculture and metal commodities price swings, and private consumption reflecting marginally positive credit growth. However the latter could be endangered if Privatbank is returned to its owner, also triggering cronyism accusations, and weak state units like the Export-Import Bank continue to run up contingent liabilities, especially as the books undergo fresh inspection.

Russian financial assets rallied in turn on the removal of incumbent hard-liner Poroshenko from office, although he vows to remain a vocal diplomatic opponent in parliament. Local equity and external corporate bond placements proliferated, and foreign investors snapped up sovereign issues on the prospect of easing regional and global tensions. President Zelinskiy signaled resumed dialogue with the Kremlin during the campaign without offering specifics, and the Mueller report conclusions in the US dismissing 2016 Trump team criminal conspiracy may stall further congressional sanctions momentum, including a government debt allocation ban. Moscow has also agreed to work with Washington to support talks between the Maduro regime and opposition in Venezuela, under the threat of civil war and millions more fleeing the country’s humanitarian and hyperinflationary collapse. However Russian growth remains flat with living standards stagnating below the wealthiest tier, and President Putin recently turned to China to drum up investment in the poor Far East around Vladivostok. A tax-free special economic zone is in place there, but Chinese companies criticize complex rules as a main business deterrent. Arbitrary rule of law is not the same red line Western partners cite as their FDI is barely positive. Jailed private equity fund managers in a dispute with Kremlin allies have requested permission to attend outside meetings ahead of the prestigious Saint Petersburg global forum as a measure of the authorities’ seriousness in mending investor ties.

Ukraine’s Comedy Candidate Cringe

2019 April 7 by

Ukraine shares struggled to stay positive on the MSCI frontier before the first round of presidential elections, where a well-known comedian leads 40 rivals in surveys ahead of incumbent Poroshenko and previous occupant Tymoshenko. The frontrunner Zelensky has no detailed campaign platform beyond establishment mocking, but reminds voters that television personalities without political experience triumphed in the US and elsewhere, although he has been accused of close association with oligarchs who dominate the media. The incumbent has highlighted a mixed reform track record, as the latest IMF program is due to expire later this year, and his willingness to confront Russia on the fifth anniversary of Crimea’s seizure as the east of the country continues in civil war. Tymoshenko, after emerging with a burnished reputation for opposing the Yakunovych regime landing her in prison, has been haunted by old state oil company corruption allegations as she assumes a populist economic policy stance. Her anti-Fund position and spending promises come as the constitutional court threw out the anti-corruption law passed to satisfy international donors and energy subsidy reductions were further delayed. Pre-election budget strains led the government to re-open a 2028 external bond but sell it directly to JP Morgan’s trading desk given larger investor doubts about growth and servicing. Prospects for GDP warrants paying off are mixed with 3% expansion forecast this year on flat EU exports and domestic consumption. Inflation is just below double digits and the currency rebound against the dollar is expected to stall after the polls. The current account deficit is stuck at 10% of GDP with remittances and international aid the main bridges as foreign direct and portfolio investment falter. External financing needs are 40% of output annually, with gross reserves only $20 billion, and another banking system rescue may be in order with the bad loan ratio still 50%. Nationalization and fraud charges against the biggest private competitor Privatbank controlled by the oligarch Kolomonsky have entered campaign debate as he owns the comedian’s TV channel and rumors fly that he is pulling the strings. Average citizens are angry at frozen living standards and the Russia conflict but have also reportedly been targeted by Moscow disinformation to sway their preferences toward the neophyte who may be inclined to friendlier relations than other chief candidates in the mix as sworn enemies. The split widened early in the election cycle with Ukraine’s Orthodox Church formally severing ties, and a consensus that the US and Europe should stiffen trade and financial sanctions after five years of battle claiming tens of thousands of lives and displacing even more.

Russian shares were up 10% on the MSCI Index through February following a sovereign ratings downgrade, but growth is only in the 1% range on a precipitous FDI drop in anticipation of further cross-border commercial curbs. 5% inflation, pension retirement age delay and higher value added tax have slashed President Putin’s popularity rating to 60%. With the balanced budget, he unveiled new social spending to regain momentum, while dismissing international investor criticism over the detention of veteran private equity executive Calvey, caught in a bank dispute with a Kremlin ally. Over three decades he managed to avoid controversy while maintaining a top reputation for performance and integrity, and colleagues invited to the summer St. Petersburg economic forum have chosen their own boycott to convey a message.

Poland’s Flourishing Family Feuds

2019 March 24 by

Polish financial assets continued to lag double-digit index bumps elsewhere, as the ruling Law and Justice Party with 40% opinion approval bid to solidify re-election support with an estimated 2% of GDP fiscal package including the “Family 500-plus” child subsidy promised in its original winning campaign. The giveaways sparked worry that the fiscal deficit could hit the Brussels warning 3% threshold after officials there have already suggested government punishment for alleged media and judiciary tampering. A lackluster result in the May European elections could prompt further spending, and under best case scenarios another victory would maintain only a thin majority, with current parliamentary control just over half of seats. Prime Minister Morawiecki and his team have been regularly embroiled in diplomatic tiffs and political scandals since the beginning of the year, including a dispute with Israel over World War II history, a generous severance bonus paid to his predecessor, and alleged bribery of the financial services regulation head. State pension increases were another component of the recent stimulus, as a private successor to the defunct post-independence system is due to roll out with compulsory large company participation but an uncertain timetable for creating new managers, and recordkeeping requirements, and portfolio guidelines, although the debt-equity balance will be more even as a possible Warsaw Stock Exchange catalyst.

The IMF’s February Article IV report underscored ambivalence as it noted the economic cycle likely peaked late in 2018 when growth was 5% on strong private consumption and public investment in contrast with persistent private weakness. The labor-intensive model is badly in need of productivity improvement with demographic and migration trends, as the job market remains tight. Inflation is on target, but capacity utilization is high and a new financial services tax will raise sector costs. Expansion this year will fall to the historical 3% range, and the 1% current account gap should slightly worsen. Credit growth overall is manageable, but is in double digits for local currency mortgages and small business lines through bank leasing affiliates. Unsecured bad consumer loans are 10% of the total, and while capital, liquidity and other ratios are sound the strategy of replacing foreign to ensure domestic majority ownership, so-called “re-Polonization,” is an overarching risk that may deter future cross-border business. Public debt should reduce to around 45% of GDP by end-decade with better tax compliance to offset social transfers.

 The financial system has “pockets of vulnerability eves as previous foreign-currency mortgage exposure has faded. The supervision authority is resource-constrained and self-regulation poses conflict when assets are 40% under government direction. On the stock market it cannot fully protect minority shareholder rights, and pension fund oversight will also be tested under the new private regime.  Banks stress testing under a separate assessment revealed limited adverse scenarios despite slipping profitability with across the board observance of Basel core principles. However  clearer resolution powers and steps are in order, and the sizeable cooperative and credit union sector escaped detailed monitoring especially in relation to commercial bank overlap. Over 500 cooperatives is a large number, and credit unions often lack due capital. The government bond market stood at 625 billion zloty in 2017, but the corporate one is undeveloped with more trading, tax and placement modifications urges to join the fixed-income family.

Turkey’s Whirling Word War Backfires

2019 February 18 by

After a Europe worst MSCI index 40% loss last year, Turkey stocks looking for a bottom bounce were caught in another round of economic and diplomatic communications tiffs replaying recent US-Ankara lira crash finger pointing. President Erdogan, with his son-in-law in charge of fiscal and monetary adjustments under no recourse to the IMF, again pressed the central bank to cut benchmark rates to fight 25% inflation, after technical recession with two consecutive quarters of contraction. Last year GDP growth came in around 1.5%, and ratings agencies predict negative 2019 numbers as construction in particular sustains a 5% dip. Hundreds of companies filed for initial protection under a new bankruptcy code setting off a supplier chain reaction, as bank bad loans could double to 6% of the total. Big retail and manufacturing names acknowledge distress, and financial shares were hammered after Akbank rushed out a rights issue for additional capital. To inject confidence and meet borrowing needs, sovereign debt issues were placed in November and in the first weeks of 2019, the former in the wake of global focus on a rare Kazakhstan offering. The lira strengthened toward 5.5/dollar in the aftermath of these operations, and a period of calm with Washington after an evangelical priest was freed from arrest after alleged support for the failed military coup. The government continued to insist on the extradition of opposition cleric Gulen in US exile, and has begun to demand the same for a professional basketball star urging protest almost picked up on travel in Asia. As a NATO ally the Trump administration approved a $3.5 billion missile sale after Ankara threatened to buy equipment from Russia, and it also got a waiver for continued oil imports from Iran following renewed bilateral sanctions. On Syria the two presidents after a phone conversation reached preliminary understanding on withdrawal of American troops battling ISIS and the Assad regime with Kurdish forces, but it degenerated into mutual accusations with Turkish tanks reportedly massing on the border as President Trump vowed economic reprisal for any anti-Kurd action. The move triggered another refugee wave, with 3 million Syrians already in the country with limited education and job access as official unemployment goes deeper into double digits.

Russia’s President Putin and his team have attempted to shift the narrative to repatriation and reconstruction, and a small contingent of returnees from Lebanon was prominent before harsh winter conditions set in to match working ones with formal refugee hiring prohibited. Debt default there is on the emergency agenda, as banks and expatriates reach their comfort limit with sovereign risk without functioning public services on 1% growth. Russian shares were barely down in 2018 at single-digit P/E ratios, and commodity recovery despite bank and energy company Western sanctions. Inflation is above the 4% target, and after a 15% ruble fall against the dollar, the central bank nudged the benchmark rate, as foreign debt investors prepare for future curbs despite US Treasury Department hesitation on global market fallout. Russia moved to eliminate dollar reserve exposure and embrace the Yuan along with the euro as a counter-measure, as Morgan Stanley pulled out of Moscow and relocated securities operations to London to face Brexit’s cross-border standoff.

Russia-Ukraine’s Brooding Border Clashes

2018 December 31 by

Russia and Ukraine stock market relative outperformance on the respective MSCI core and frontier indices was in play as a naval confrontation in Crimea sparked international condemnation and Kiev’s martial law declaration in border provinces already reeling from Moscow’s port grab. The Russian Foreign Ministry blamed stray ship provocation after forcibly boarding it and arresting sailors, while the US and Europe convened a UN Security Council session to criticize the action and threat further commercial and diplomatic sanctions. The incident preceded the annual G20 summit in Argentina with Presidents Putin and Trump in attendance and focused regional attention on the civil war in Eastern Ukraine with its heavy economic and humanitarian toll. Russian-supported rebels have taken over factories and declared their own government, while tens of thousands have been killed or fled the area 5 years after the Minsk agreement outlined a peace framework, according to outside monitors. GDP growth is set at 1.5% this year with oil above the budget’s $40/ barrel breakeven price, but sovereign borrowing continued in the wake of the latest Crimea events to close a slight deficit after VAT and pension changes. Geopolitical friction further weakened the ruble and the stock market’s valuation discount, and could send inflation toward 5% into next year prompting modest central bank tightening. State-owned Sberbank and VTB earnings were healthy in the latest reports with strong moves into infrastructure and technology to support domestic franchises, aided by depositor flight from ailing and shuttered private rivals under tougher supervision. Leading officials and executives have tried to encourage de-dollarization, with foreign reserves in the currency to be phased out in a challenge to Washington as Moscow also allies with Iran, North Korea and Venezuela.

Ukraine’s reaction was magnified by a bruising presidential contest with the incumbent Poroshenko running behind former holder of the post Tymoshenko, as both called for a harsh response. They are also dueling over a successor 1-year $4 billion IMF program after an October staff agreement was reached. Kiev passed energy price and tax hikes to keep the budget deficit below 3% of GDP and enable release of a first tranche in early 2019, but Tymoshenko’s and other candidates’ platforms oppose Fund austerity demands and pledge to roll back fuel cost increases. The fiscal package is also negative for securities markets with a 15% dividends levy, and could generate 10% inflation also due to currency depreciation with the meager less than three months imports’ reserve coverage. The 4% of GDP current account gap lingers despite a record $12 billion in remittances this year, and another Eurobond issue to ensure external financing is likely off the table until poll results are in, analysts believe. The EBRD predicts 3% growth in 2019, with both domestic consumption and investment stymied by high interest rates and political doubts. Successful privatization could boost confidence, with utility Centrenergo going on the block mid-December, but agriculture and metal exports are the mainstays drawing private equity and strategic investor interest. Eyes are also on next door Poland’s general elections at the end of 2019 which hosts the Ukrainian worker influx, with the populist ruling party still favored but experiencing an opposition incursion in recent local contests.