Ukraine sets up snap elections as West raises pressure on Russia

By bne IntelliNews July 25, 2014

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Ukraine's interim government resigned on July 24 in a move designed to spark snap elections. Meanwhile, with the violence in eastern Ukraine unabated, international pressure continues to build on Moscow. 

Ukrainian Prime Minister Arseniy Yatsenyuk resigned after pro-Ukrainian parties UDAR and Svoboda quit the coalition interim government. The move is clearly part of a plan to instigate early parliamentary elections in a bid to harness pro-Ukrainian sentiment as Kyiv looks to defeat the separatist forces in the east. "Russia is hardly likely to appreciate this, as whatever pro-Russian elements in parliament are left they are likely to be decimated," suggests Tim Ash at Standard Bank.

Under the Ukrainian constitution, the president has the right to dissolve the parliament if no majority is formed within 30 days. That sets up elections for October 26. Teneo Intelligence notes that President Petro Poroshenko "hinted at this scenario in late June." 

The plan is also intended to further legitimize the Kyiv authorities following June's presidential election. "Parliament’s refusal until now to self-disband… had exacerbated the general perception of stasis within the political establishment," writes Alisa Lockwood at IHS Country Risk. "Elections are therefore essential to rebuild the legitimacy of the government and parliament in the eyes of the public."

Meanwhile, it's hard to imagine the various pro-western parties doing much to improve the fractious tradition in Ukrainian politics during the campaign. "The situation with internal politics is likely to remain volatile and complex," point out analysts at VTB Capital.

No let up

The political manoeuvring also makes any letup in the violence in the east of the country even more unlikely. It puts Kyiv in a race against time to put down rebel forces in order to hold a full vote. Fierce fighting continues in the east of the country as Ukrainian forces press rebel positions in Donetsk and Luhansk, with the civilian population attempting to flee or hide. 

Meanwhile, with accusations still rife around the shooting down of flight MH17, the West continues to raise the pressure on Russia to withdraw the support it accuses Moscow of giving the separatist forces in the east. The US claimed on July 24 that Russia is firing artillery over the border at Ukrainian positions - the first western allegation of direct Russian participation in the fighting.

Washington also said Russian weapons supplies to the rebels are rising. "We have new evidence that the Russians intend to deliver heavier and more powerful multiple rocket launchers to the separatist forces in Ukraine," US State Department spokeswoman Marie Harf said. "I would expect the US to respond by more/expanded sanctions," states Ash. 

The same day, EU officials met to discuss expanding sanctions against Moscow. While it announced the addition of 15 new individuals and 18 enterprises to the list, it continues to struggle to find agreement on wider measures as various countries fret over damaging their business relations with Moscow. According to newswires, the bloc is set to resume talks on July 25 over a plan seeking to cut Russian state-controlled banks off from capital markets, as well as implementing exports of arms and energy technology.

Banning EU investors from buying equities or debt of the likes of Sberbank and VTB would be a palpable hit on the Russian economy. The shallow domestic capital market means banks rely heavily on western money - Russian state banks raised almost half the €15.8bn they tapped last year on EU markets according to Reuters - while the state behemoths have come to dominate the local banking market in recent years. 

Yet such a strong step would surprise many, with Moscow maintaining its mastery of splitting EU states. "There are evidently still significant gaps in EU members’ positions," note VTB Capital analysts. "It is quite possible that substantive deliberations on the 'further targeted measures' will be deferred to the next EU summit, currently scheduled for 30 August."

However, expanded sanctions - or just the threat - are already having some effect. The European Bank for Reconstruction and Development (EBRD), which committed over €700m to Russia in the first half of 2014, announced on July 23 that it is pulling any new investments in the country.

Such a move will have a ripple effect, diverting investment flows to other markets. "Media quotes of, for example, the Norwegian sovereign wealth fund cutting exposure to Russia if the state imposes sanctions, do their part in pushing flows," according to analysts at Commerzbank, "with Poland, Turkey and South Africa "benefitting" substantially this week, especially on the local currency side."

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