Ash update on Ukraine, September 4, 2014

watch the battle for Mariupol over the next few hours with the 11am
Friday ceasefire looming I would not be surprised to see separatist/Russian
forces try and take the city. This would provide a land bridge to Crimea (which
is really struggling given it is now cut off from energy, water, and markets in
Ukraine), but also wrestle control of two of Ukraines largest steel plants. This
would provide a huge bargaining chip for Moscow, and would also make rump-
Ukraine much less sustainable.

LONDON, Sep 4, 2014 (UBO) Standard Bank chief emerging market economist Timothy
Ash provided the following update reflecting his analysis of the situation in Ukraine as of
16:17 today:

A few comments on Ukraine for the day:

First, I think it is now crystal clear what Russias strategy towards
Ukraine is if it was ever unclear. The aim is to force a military
stalemate on the ground, to create a frozen conflict on the ground in
Donbas, and then force Kyiv and the West to come to Moscow to
negotiate and to deliver on Russias objectives No Nato, No EU and
No Maidan. Russia has proven over the past week through more direct
military intervention south to Mariupol, and around Donetsk/Luhansk
with more formalised Russian military units deployed that it is willing
to continue to up the military ante to halt any Ukrainian military
advance. Warnings from President Putin that his tanks can also be in
Kyiv in two weeks were also perhaps a threat that Russia can also
further extend its intervention. This is all about forcing Kyiv to submit
to Russian demands note my piece yesterday which further set out
likely scenarios. I hold by these.

Suffice to say though that any Ukrainian leader would not find it very
difficult to concede to Russian demands it is inconceivable now that
the Western orientation will be slowed or even reversed, and
Federalism equals the death of an independent Ukraine, as simply put
Ukraine would disintegrate. Indeed, note the KMIS poll from earlier
this week, which showed a marked shift in voter preferences ahead of
the late-October early parliamentary elections, decisively to pro-
statehood parties, with perhaps only sub-10% likely supporting a pro-
Russian stance. Hence any compromise which fails to deliver the
return of Donbas to Ukraines control will be political suicide in Ukraine
for any political party.\

Second, how can we interpret announcements yesterday from both
the Putin and Poroshenko camps that efforts are being made to secure
a ceasefire?

My take is that Poroshenko cut some deal at the last weekend EU
Council meeting whereupon he agreed to give peace another chance,
as the price for agreement from the EU/US on further and more
effective sanctions being rolled out on Russia. Indeed, Poroshenko
even said as much at the weekend, following the EU council meeting.
Poroshenko is not a confrontational style politician and his first
preference would be for peace. He is thus trying to go the last leg to
get a peace agreement highly commendable. The problem is that
Putins seven point peace plan is just not saleable in Ukraine ahead of
the parliamentary elections and indeed arguably never now in
Ukraine, given the political shift towards Ukrainian statehood.
Poroshenko will demand the disarming of separatists, the departure of
foreign (Russian) troops, and then Ukraines control over the border
note therein Yatsenyuks plans to build a wall/formalised border
structure. I cannot see Putin agreeing the disarmament of rebels, or
the withdrawal of Russian troops, until Poroshenko agrees to
constitutional reforms, for example, a Federal political structure for
Ukraine, with regions potentially having a veto on Ukraines
geopolitical orientation. This is just a non- starter now in Ukraine,
where over 50% of the population now back NATO membership -
note therein the bill currently before parliament to remove Ukraines
non-aligned status. Putin seems to have agreed to OSCE monitoring of
the Russo-Ukraine border, but this is after significant Russian
arms/man-power has already been located into Ukraine horse,
door, bolt immediately comes to mind. And if separatists need
reinforcing, I would think that OCSE monitors would be easily swept
aside or marginalised to the extent that their monitoring abilities
would be compromised.

Putins seven point peace plan was strategically timed, just as the EU
is debating further sanctions, and ahead of the NATO meeting in
Wales. This was presumably aimed at curbing momentum towards
agreement over further sanctions we have seen similar peace
initiatives prior to EU, G7 and NATO meetings. Soon-after Russia has
moved to further escalation in Ukraine indeed remember the Minsk
summit where straight after the Putin-Poroshenko handshake, Russian
troops crossed the border and drove on towards Mariupol.

On the ground there is scant evidence of the ceasefire holding, with
the Ukrainian military reporting over a score of individual fire-fights,
and over 100 Russians soldiers killed in the past 24H. It also reports
now 837 Ukrainian soldiers killed, and over 3,000 injured.
International observers report over 2,600 total deaths through this
conflict, but this seems to exclude those on the rebel side, and
Russian deaths. My sense is that the latter death toll is at least equal
to the losses on the Ukrainian military side even much higher.

That said, Poroshenko is suggesting that Ukrainian forces will hold fire
from 11.00 on Friday, on the assumption that the latest round of the
Minsk peace talks is confirmed for Friday. He has also suggested a
stage by stage peace plan, which has to be signed on Friday the
question is though who signs it. Russia has said it is not party to the
conflict, so cannot sign. Whereas the government in Kyiv has said that
it will not negotiate with terrorists aka the leadership of the
separatists.

I still struggle though to see a ceasefire lasting there are too many
players on the ground e.g. how will Poroshenko control volunteer
battalions on the ground, which have recently suffered heavy losses
and appear set for vengeance.

I am indeed left with a sense that both sides are just going thru the
motions here on the ceasefire front, trying to win political capital with
some Western governments, and hoping the other side blinks first, or
ultimately fails to agree to their peace terms the sides are still
diametrically opposed in terms of what they want.

Therein, watch the battle for Mariupol over the next few hours with
the 11am Friday ceasefire looming I would not be surprised to see
separatist/Russian forces try and take the city. This would provide a
land bridge to Crimea (which is really struggling given it is now cut off
from energy, water, and markets in Ukraine), but also wrestle control
of two of Ukraines largest steel plants. This would provide a huge
bargaining chip for Moscow, and would also make rump-Ukraine much
less sustainable.

Third, it seems that more (still pretty feeble) Western sanctions will be
rolled out now against Russia. This comes after France announced
that the conditions were not right for the delivery of the Mistral
warships to France. If La France is making such a sacrifice you can
rest assured that it will expect everyone else to also bear their fair
share of the burden. I think the EU will approve the latest European
Commission recommendations for sanctions, in full, with the US also
coming along board. Their implementation though may be linked to
the implementation of the ceasefire.

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The Ash commentary above represents a personal view, is not investment advice or
Standard Bank research, but may contain extracts from published research.