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Takeaway: Brace yourselves for more tipping points ahead.

I penned a note back before Christmas entitled “Putin’s Silver Spoon” which suggested that despite an uptick in protests and violence in the capital city of Kiev, to expect President Viktor Yanukovych to align squarely with the East (President Vladimir Putin’s Russia) and for his iron grip to eventually overcome growing rumblings in the street.

Well, in hindsight, Yanukovych’s grip was certainly far from “iron.” Surprisingly so.

Tipping Points Abound In Ukraine - pooy8

It’s obvious that Yanukovych didn’t have the full backing of his country’s oligarchs. And yet, despite Russia’s heavy hand in his pocket (Putin agreed to loan the Ukraine $15 Billion on December 17, 2013) the speed at which he exited is a puzzling tipping point. Some people are attributing it to social media. Whatever the reason, Yanukovych tried to play the heavy hand to overpower the opposition in the streets.

Yanukovych lost. He now sits in a Russian outpost.

The main actor on stage is of course Vladimir Putin who is fresh off the Sochi Olympics and has parked his troops on the Ukrainian border to reassert his power and influence at home. Putin is also attempting to up the ante in his chess match with the West and see if he can get the pro-Russian South and East of the country to leave Ukraine.

That original Russian $15B loan now appears frozen. But how big of a check will the West write to get Ukraine out the headlines and prevent a split up of the country? Remember, the EU is not interested in folding Ukraine in as a member state, nor is it interested in the country beyond its capacity as a transit hub of energy from Russia.

Here’s what is so troubling about this particular tipping point in the Ukraine: unlike the Orange Revolution of 2004, there’s essentially no leadership strength whatsoever in the opposition. Sure, there’s former PM and (recently released-from-prison) Julia Tymoshenko. And while she may be vying for a seat to replace Yanukovych, she has proven herself to be a crook, personally profiting from gas deal arrangements with Russia back in 2009.

What about Vitaly Klitschko? Well as far as the physically opposing Klitschko is concerned (he’s the 6’7” former WBC heavyweight boxing champion who heads the Udar “Punch” party), he may have size, but he lacks key experience and credibility to lead his country right now. For the time being, the country has an interim President in Oleksandr Turchynov at the bare minimum before scheduled elections on May 25th.

So, where does this power vacuum leave us? At another tipping point.

For starters, the country is bankrupt. Its 50/50 divide on support of the West vs. the East will vex any candidate, even a good one. We would postulate that money talks (once again), and to expect the next 72 hours to be critical in the how the West (European Union, IMF, and possibly United States) vs. the East (Russia) mark their stakes in Ukrainian soil.

In the near term, we’d expect any announcement about a loan package (more likely from West) and any clear signal on the political state to greatly impact its financial markets in tandem with the idea – at least from a global perspective – that the country is “secure.” For reference, most financial metrics have come off their highs following Yanukovych’s exit. That said, they remain elevated.

  • the Ukrainian 10-year bond yield is at 9.9% vs. a high of 11.3%;
  • the currency (Hryvnia) is down -21% year-to-date, but improved +7% from Thursday to Friday last week;
  • the stock market rose +25% in the last week alone.

Where does all this leave us? We believe the Ukrainian mess is a long way off from resolution—never mind the implementation of a stable, capable and functioning government.

This global chess match is bound to get interesting. Brace yourselves for more tipping points ahead.

Matthew Hedrick

Associate - Macro

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