Inflection Point Reached In Crisis

BMI View: Russian President Vladimir Putin's call for the postponement of May 11 referendums on independence in east and south Ukraine marks a step towards a de-escalation of tensions in Ukraine.

Russian President Vladimir Putin's call for the postponement of the planned May 11 referendum on independence in south-eastern Ukraine is a major step towards a de-escalation of tensions in Ukraine since the annexation of Crimea. We believe the chances of a military invasion by Russia have declined significantly. Despite the deaths of dozens of pro-Russian separatists over May 3-5 in Odessa, Russia did not intervene militarily, even though events over the weekend represented sufficient pretext to do so. Furthermore, if Putin's comments are sincere, Russia's efforts to destabilise Ukraine may subside ahead of Ukraine's May 25 presidential election, representing a substantial improvement to our base case scenario.

The motivation behind Putin's announcement is not immediately clear. The West has been discussing the possibility of strengthening sanctions against Russia recently, which may have prompted Putin to re-evaluate his position in Ukraine. Equally, violence between pro-Kiev and separatist protestors in Odessa indicates that the situation in Ukraine is rapidly spiralling out of control. The prospect of a civil war so close to Russian borders may have spooked Putin into attempting to contain the situation.

Small Consolation
Ukraine - Sovereign 7.95% USD2021 Bond Yield, %

Inflection Point Reached In Crisis

BMI View: Russian President Vladimir Putin's call for the postponement of May 11 referendums on independence in east and south Ukraine marks a step towards a de-escalation of tensions in Ukraine.

Russian President Vladimir Putin's call for the postponement of the planned May 11 referendum on independence in south-eastern Ukraine is a major step towards a de-escalation of tensions in Ukraine since the annexation of Crimea. We believe the chances of a military invasion by Russia have declined significantly. Despite the deaths of dozens of pro-Russian separatists over May 3-5 in Odessa, Russia did not intervene militarily, even though events over the weekend represented sufficient pretext to do so. Furthermore, if Putin's comments are sincere, Russia's efforts to destabilise Ukraine may subside ahead of Ukraine's May 25 presidential election, representing a substantial improvement to our base case scenario.

The motivation behind Putin's announcement is not immediately clear. The West has been discussing the possibility of strengthening sanctions against Russia recently, which may have prompted Putin to re-evaluate his position in Ukraine. Equally, violence between pro-Kiev and separatist protestors in Odessa indicates that the situation in Ukraine is rapidly spiralling out of control. The prospect of a civil war so close to Russian borders may have spooked Putin into attempting to contain the situation.

Nonetheless, there are several reasons to remain cautious. First, the degree of control that Putin exercises over separatists in eastern and southern Ukraine is not clear. While many of the separatists have been armed with sophisticated weaponry and frequently appear well organised, strongly suggesting Russian support and involvement, it remains uncertain whether they are directly under Russian control. Secondly, the US and NATO also report that they have seen no decline in Russian forces close to the Ukrainian border since Putin's statement.

Small Consolation
Ukraine - Sovereign 7.95% USD2021 Bond Yield, %

Although we believe the economic and political costs of a military invasion are a sufficient deterrent, there is a still a risk that Russia's earlier destabilisation efforts have been too successful. Separatist movements in eastern and southern Ukraine have highlighted just how weak the central government's control is in local regions, with local police and armed forces proving ineffective at restoring order. Even if Russia withdraws its support for separatists, it is possible that infighting between various factions within Ukraine continues regardless, ultimately leading the country down the path towards civil war. Nonetheless, we stress this is not our core scenario. Recent polls suggest that 77% of Ukrainians are in favour of unity, according to polling in April by the Pew Research Centre. Even in the eastern regions, 70% of Ukrainians are in favour of keeping Ukraine's borders intact, including support from 58% of Russian-speaking Ukrainians in these regions.

Most Ukrainians Favour Unity
Ukraine - Percentage Of Population That Believe Ukraine Should...

While we await further confirmation that Putin's announcement will translate into a de-escalation of tensions on the ground, it remains one of the first positive developments to occur since the start of the crisis. We maintain our core view that a Russian invasion remains unlikely, and we still believe that federalisation/decentralisation remains probable. Putin's comment that "the most important thing is to set up direct...full-blown dialogue between the current Kiev authorities and representatives of south-east Ukraine" suggests to us that this remains on the Russian agenda.

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