IS THE CRIMEAN CRISIS COMING TO A BOIL?

"Russian companies are pulling billions out of western banks, fearful that any US sanctions over the Crimean crisis could lead to an asset freeze, according to bankers in Moscow. Sberbank and VTB, Russia’s giant partly state-owned banks, as well as industrial companies, such as energy group Lukoil, are among those repatriating cash from western lenders with operations in the US. VTB has also cancelled a planned US investor summit next month, according to bankers. The flight comes as last-ditch diplomatic talks between Russia’s foreign minister and the US secretary of state to resolve the tensions in Ukraine ended without an agreement. Viktor Yanukovich has been ousted but Russia is flexing its military muscle, fearing a threat to its interests in Ukraine Markets were nervous before Sunday’s Crimea referendum on secession from Ukraine. Traders and businesspeople fear this could spark western sanctions against Russia as early as Monday. Yields on Russia’s 10-year government bonds rose close to 9.7 per cent on Friday, compared with less than 8 per cent in January. The rouble hit 36.7 to the dollar, near to its weakest rate on record. It also emerged on Friday that Russia’s top 10 billionaires, led by Alisher Usmanov, had lost a combined $6.6bn of their net worth over the past week, according to research firm Wealth-X. Russian equities, which showed more weakness on Friday, have lost 20 per cent of their value since the start of the year. “You don’t need to have sanctions in place to cause economic turmoil,” said Christopher Granville, managing director of Trusted Sources, an emerging markets research firm. “The expectation is enough.” Strobe Talbott, president of the Brookings Institution, who served in the State Department under Bill Clinton, said: “The irony is that the Russian banking sector has made quite a lot of progress in plugging into the global system. That means it is vulnerable, and a good lever for applying pressure.” Data published by the Federal Reserve Bank of New York sparked speculation that the Russian central bank was also reducing its vulnerability to potential sanctions. The data showed a drop of $105bn in Treasuries held by foreign institutions for the week ending March 12. “We can only speculate about who might have decided to move their securities out of the Fed and into a third-party custodian, but one obvious candidate is Russia,” said Lou Crandall at Wrightson Icap. Russia held $138.6bn in US government debt at the end of December, according to the US Treasury. One senior Moscow banker said 90 per cent of investors were already behaving as if sanctions were in place, adding that this was 'prudent exposure management'".

Patrick Jenkins, Daniel Schafer & Jack Farchy, "Russian companies withdraw billions from west, say Moscow bankers." The Financial Times. 14 March 2014, in www.ft.com.

"Dozens of Russians involved in Russia's gradual takeover of Crimea face U.S. and EU travel bans and asset freezes on Monday, after six hours of crisis talks between Washington and Moscow ended with both sides still far apart. Moscow shipped more troops and armor into Crimea on Friday and repeated its threat to invade other parts of Ukraine in response to violence in Donetsk on Thursday night despite Western demands to pull back. EU diplomats will choose from a long list of 120-130 possible Russian targets for sanctions on Sunday, as pro-Moscow authorities who have taken power in Crimea hold a vote to join Russia in the worst East-West confrontation since the Cold War. Several diplomats dismissed a German newspaper report that said the list would include the heads of Russia's two biggest companies, energy giants Gazprom and Rosneft. U.S. Secretary of State John Kerry said Russia would be guilty of a backdoor annexation of Crimea if its parliament ratified the Crimea referendum, which is taking place after an armed takeover of Crimea and gives voters no chance to say "no". He has warned Moscow that U.S. and EU sanctions could be imposed as soon as Monday if the referendum goes ahead, although U.S. officials said after Kerry's marathon meeting with Russian Foreign Minister Sergei Lavrov in London on Friday the door was still open for more talks. Lavrov played down his own ministry's threats, saying Moscow had no plans to invade Russian-speaking eastern Ukraine, where pro-Moscow groups have occupied state buildings. But he said Russia would respect the referendum result. Russia's stock markets tumbled and the cost of insuring its debt soared on the last day of trading before the Crimea vote.... The Russian Foreign Ministry, responding to the death of at least one protester in Ukraine's eastern city of Donetsk, repeated President Vladimir Putin's declaration of the right to invade to protect Russian citizens and "compatriots".

Andrew Osborn & Lina Kushch. "West prepares sanctions as Russia presses on with Crimea takeover." Reuters. 14 March 2014, in www.reuters.com.

With Sunday's forthcoming referendum by the population of Crimea of whether or not to secede from Ukraine and join the Russian Federation. It would appear from the lack of results of the Kerry-Lavrov discussions to-day that there is not much room for optimism about what is going to occur in the new few days. Judging from the various tea-readings that one can engage in, when reading comments by 'sources' close to the rulers of the Kremlin, as well as what one hears about Russian activity in the financial markets, Russia will openly welcome Crimea's accession to the Russian Federation. And will perhaps at that time, perhaps engage in open activity to oust and or force the surrender of Ukrainian forces still remaining in Crimea. At that point in time, fighting may spread from the Crimea to other parts of Ukraine, if Russian forces choose to carry things further. I for one, regardless of the affects that Western sanctions might have on Russian businesses and the general Russian economy, refuse to believe that Putin, will engage in a policy of va banque, by invading the rest of Ukraine. For Putin, the whole Crimean imbroglio has been first and foremost one dealing with domestic politics ('primat der Innenpolitik'), with only secondarily the geopolitical aspect (the possible 'loss of Ukraine') 1. It may perhaps be the case, that Putin has no interest in the economic aftermath of crippling economic sanctions on the Russian economy as some have cogently argued 2. However, that argument overlooks the fact that the stability of Putin's regime is au fond, dependent upon having a functioning economy. And if not only the Russian stock market but the banking system and a good number of the heavily leveraged major businesses suffer disruption due to Western sanctions then it is indeed count-down for the continuance of the entire regime. As former Russian Finance Minister, Kudrin recently admitted 3.

1. For the interpretation that Putin's policies would primarily that of primat der Aussenpolitik, see: Wojciech Konończuk, "Russia’s Real Aims in Crimea". Carnegie Endowment for International Peace. 13 March 2014, in www.carnegieendowment.org For the converse, see: Gordon M. Hahn, "The West's Overplay and Putin's Calculus and mis-calculus". Russia Another Point of View. 12 March 2014, in www.russiaotherpointsofview.com.

2. Philip Hanson, "Forget sanctions: Putin has already traumatised fragile Russia." City A.M. 10 March 2014, in www.cityam.com

3. Courtney Weaver, Jack Farchy and Catherine Belton, "Putin ally warns on cost of sanctions". The Financial Times. 13 March 2014, in www.ft.com