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Ukraine leaders fight over how to handle economic and political pressure from Russia while their market tumbles, the fallout from this could spread…

The unilateral withdrawal of President Viktor Yushcenko’s Our Ukraine party from the ruling democratic coalition on Tuesday placed the already battered Ukrainian Stock market under further pressure as the hard line pro democracy leader (whose face is still scarred from a poisoning that he believes was the work of Russian agents) continues to accuse Putin’s cadre of attempting to destabilize his country and his former coalition partner Prime Minister Yulia Tymoshenko of pursuing a course of appeasement.

With political crises exacerbating the effects of global financial meltdown, the Kinto cap weighted Ukrainian index (KINDEX) reached levels this week more than 55% below where it started the year –prompting PFTS exchange President Iryna Zoria to call on Kiev to pursue stimulus measures similar to those adopted in Moscow. Zoria also decried the National Bank of Ukraine's policy of fighting inflation by withdrawing funds saying that it “impedes the fight against the liquidity crisis and is not in line with the measures of international financial regulators.”

Relations between Russia and Ukraine (never good) have been in steady decline since Kiev first stated its desire to join NATO, but the pace has accelerated sharply since the events of August. Yushcenko’s party issued a manifesto on Ukrayinska Pravda’s website yesterday which will do nothing to ease tension:

“…..Our Ukraine demands that possible coalition partners condemn the act of military aggression by the Russian Federation against Georgia, strive for the immediate restoration of Georgia's territorial integrity and the withdrawal of Russian troops from sovereign Georgia; condemn the use of Ukraine's territory for waging a military attack by the Black Sea Fleet of the Russian Federation against Georgia…………….
……………The Our Ukraine People's Union insists on the need to diversify energy sources and to ensure the pumping of oil via the Odessa-Brody oil pipeline from Odessa to Brody.”

Until now the Russian response has been limited to threats ranging from potential tariffs on Ukrainian exports to Russia (the Russian market currently accounts for 25% of the Ukraine’s total sales abroad) to the expulsion of diplomats but, as rhetoric heats up so does the possibility of sanctions from Moscow.

It is very important to note that roughly 75% of all of Ukraine’s natural gas supply either originates from, or passes through Russia. Additionally, Ukraine is also the conduit for an estimated 85% of the natural gas that Russia supplies to EU markets. Any move by Putin to use Russian energy supply as a means of punitive action against Kiev could help local instability spill into the broader European energy market rapidly.

Andrew Barber
Director