Violence Erupts Again

Violent protests have shaken the Ukraine again, leaving 26 people dead. Press reports on the protests and the most recent crackdown contain a few interesting details. For instance, the protests in the Ukraine seem to be distinguished by the fact that some of the demonstrators are armed with rifles with telescopic sights which they use to shoot at policemen. This is certainly not exactly comparable to popular political demonstrations elsewhere. Or putting it differently, this confrontation is really getting quite serious. 

According to Reuters:


“Ukrainian President Viktor Yanukovich accused pro-European opposition leaders on Wednesday of trying to seize power by force after at least 26 people died in the worst violence since the former Soviet republic gained independence.

European Union leaders said they were urgently preparing targeted sanctions against those responsible for a crackdown on protesters who have been occupying central Kiev for almost three months since Yanukovich spurned a far-reaching trade deal with the EU and accepted a $15-billion Russian bailout. The sprawling nation of 46 million people with an ailing economy and endemic corruption has become the object of a geopolitical tug-of-war between Moscow and the West. That was played out in hand-to-hand fighting through the night, lit by blazing barricades on Kiev's Independence Square, or Maidan.

Russian President Vladimir Putin's spokesman insisted the Kremlin was sticking to a policy of not intervening in Ukraine, although his point man has called for action to crush the protests. The Kremlin said Putin and Yanukovich spoke by telephone overnight, calling the events an attempted coup. Moscow announced the resumption of stalled aid to Kiev on Monday with a $2-million cash injection hours before the crackdown began.

After a night of petrol bombs and gunfire on Independence Square, black smoke billowed from a burned out trade union building that protest organizers had used as a headquarters. Security forces occupied about a third of the square – the part which lies closes to government offices and parliament – with protesters pouring in to reinforce their defenses on the remainder of a plaza they have dubbed "Euro-Maidan". In a statement posted online in the early hours, Yanukovich said he had refrained from using force since unrest began but was being pressed by "advisers" to take a harder line.

"Without any mandate from the people, illegally and in breach of the constitution of Ukraine, these politicians – if I may use that term – have resorted to pogroms, arson and murder to try to seize power," the president said. He declared Thursday a day of mourning for the dead. A senior opposition leader, world champion boxer-turned-politician Vitaly Klitschko, walked out of a meeting with Yanukovich during the night, saying he could not negotiate while blood was being spilt.

When fighting subsided at dawn, the square resembled a battle-zone, the ground charred by Molotov cocktails. Helmeted young activists used pickaxes, and elderly women used their bare hands, to prise up paving to stock as ammunition. The Health Ministry, updating the casualty toll, said 25 people had been killed in the fighting in the capital, of which nine were police officers. The police later said a 10th officer had died of his wounds.

Both police and opposition representatives said many were killed by gunshot and hundreds were injured. But the interior ministry said that five of the dead policemen had died of identical wounds from sniper fire to the head and neck. Journalists saw some hardline protesters manning barricades armed with rifles, including one with a telescopic sight.”



(emphasis added)

Obviously, the situation in the Ukraine has a geopolitical dimension. Again, just as a reminder: the deal with the EU would have involved 'co-operation with NATO', hence Russia's involvement in the form of a bailout loan. Russia simply does not want NATO ensconced in what it calls the 'near abroad', i.e., the former Soviet Republics. There is no doubt a large part of the population that is genuinely unhappy with the Yanukovich government, not least many of the people living in the non-Russian half of the Ukraine (the Ukraine's population is roughly split in the middle between ethnic Russians and Ukrainians). However, one must not forget that they were not too long ago just as, or even more unhappy with his predecessors, the winners of the 'Orange Revolution', who turned out to be just as corrupt as the Kuchma government that preceded them. One thing is absolutely certain: the demonstrators are not out there in the cold because they love Herman Rompuy and Manuel Barroso so much.

Needless to say, 'peaceful protesters' are usually not armed with telescopic rifles either. Yanukovich's many shortcomings are pretty much beyond doubt, but one wonders if he exaggerates much by calling this a coup attempt. A 34 year old judge who placed two anti-government protesters under house arrest was recently murdered.  As the article reporting this incident indicates, both sides are playing dirty:


“Ukrainian President Viktor Yanukovich is urging authorities to investigate the murder of a judge who placed two anti-government protesters under house arrest. With Ukraine's wave of unrest continuing, the murder of Oleksander Lobodenko raised concern that violence would escalate in the stand-off between the authorities and thousands of protesters. Lobodenko, the 34-year-old judge of a court in the Poltava region in central Ukraine, was shot several times in the back by two unknown assailants near his home on Wednesday, police said in a statement. Police said their main hypothesis was that Lobodenko had been killed because of his job. He had been involved in cases against anti-government activists who had occupied a municipal building. Opposition leaders see such statements as attempts by the authorities to discredit the protest movement.


Several people taking part in the protests have disappeared. Protesters blame security forces for the abductions, attacks on protesters and torching of their cars. The president has offered an amnesty to detained protesters. It is due to expire on February 17 and is conditional upon their leaving occupied public buildings. The demonstrators have already rejected the amnesty.”


(emphasis added)

Both the police and the opposition can probably be believed in the above discussed cases. Radical opposition supporters (who else?) likely murdered the judge and the securities forces are quite likely indeed 'disappearing' people – there have been numerous reports of this occurring.


Market Reaction

We want to take the opportunity and take a look at some of the market indicators accompanying the recent events. Prior to the most recent escalation, it appeared as though things were calming down. The government and the opposition were in talks, and there were even signs that the occupation of public buildings may be reconsidered. All the small improvements in the markets have of course been rendered asunder again.

First Ukraine's currency, the hryvna, which is back at levels last seen in the 2008 crisis:




The USD/UAH (hryvna) exchange rate: back to levels last seen at the height of the 2008 panic – click to enlarge.



Government bond yields have shot up sharply in the past 24 hours (we show the one year yield below), CDS spreads are at new highs and the implied default probability is correspondingly at a new high as well.



Ukraine 1-Year Bond Yield

Ukraine, one year government bond yield – a sharp increase in the wake of the latest escalation in violence – click to enlarge.



Ukraine CDS

Ukraine, 5 year CDS spread on government debt: at a new high of 1189 basis points – click to enlarge.



Ukraine default probability

The annual default probability of Ukrainian government debt based on current CDS spreads and a 40% recovery rate (as is usually assumed): 12.60% – click to enlarge.



Next a brief look at the Ukrainian UAX stock market index, both short and long term. The recent back and forth on the daily chart seems largely motivated by changing perceptions about the political crisis:



Ukraine UAX(Daily)

The UAX index daily: after briefly recovering from its late January lows, the index has plunged again as in reaction to the recent escalation – click to enlarge.



The long term weekly chart shows how badly the stock market has been beaten up first by the deteriorating economic situation and later by the growing political crisis. The most recent volatility is barely visible on this longer term chart – stocks have suffered a free-fall after reaching a high in early 2011:



Ukraine UAX(Weekly)

The UAX index weekly: the recent volatility is actually quite small compared to the 2011 crash in the index. Interestingly, the index is not at a new low (at least not yet) – click to enlarge.



At the risk of sounding a bit cynical, investors with guts and money they can afford to lose may actually regard this market as presenting an evolving opportunity. There is an 18th century saying ascribed to Baron Rothschild: "The time to buy is when there's blood in the streets." The original saying is actually believed to have been: “Buy when there's blood in the streets, even if the blood is your own."

There is certainly plenty of blood in the streets now. In view of this fact it is actually remarkable that the stock index has not gone to a new low since the 2012 panic low was put in. It has also traded at lower levels than today in the course of last year. We would usually tend to regard this is a bullish divergence, but there is one caveat: the collapse in the hryvna means that the index is certainly at new lows in dollar and euro terms. On the other hand, this means it is all the cheaper for foreign buyers.

Naturally, the risk is very high as well (that is why prices are so depressed after all). However, that is how things always are in situations such as this. In the Ukraine there is certainly no hurry to wade in given the fact that the political situation remains highly fluid and is obviously unresolved. Note that there is a very real danger of civil war in the Ukraine, so one should wait and see how things shake out on that front (see also the addendum).


Contagion (?)

Lastly, the problems in the Ukraine may have contagion effects elsewhere in Eastern Europe. For instance, the Serbian dinar has recently slumped sharply as well, prompting the central bank to postpone planned rate cuts. Although the official inflation rate has plunged from 12.8% to just 2.2% recently, the central bank has left its repo rate at a quite high 9.5% as a result of the currency rout.  Of course it is difficult to tell to what extent the moves in the dinar may simply be due to recent general emerging markets jitters, but the situation in the Ukraine probably doesn't help.

Note also in this context that Austrian banks have large exposure to these countries. They are among the biggest foreign lenders in places like the Ukraine and Serbia. In spite of having taken numerous steps to fortify their balance sheets and increase reserves to account for NPLs from the region, the level of NPLs stemming from their CEE exposure has remained extremely high.



Things are likely soon coming to a head in the Ukraine. Russia released a $2 billion tranche of its loan earlier this week, but the positive effect this has had on Ukraine's currency and bonds has completely dissipated again. Investors should nevertheless keep a close eye on the proceedings. At some point Ukrainian stocks and bonds will be a good buy – however, note our remarks in the addendum.



In the meantime, the Ukrainian government has moved to declare the protesters 'terrorists', while at least one region has declared its independence from the central government. Opposition groups have apparently managed to seize weapons and ammunition from military depots, so the situation is increasingly spiraling out of control.


“Ukrainian President Viktor Yanukovych moved to quell a growing insurgency by granting sweeping powers to the army and police after a region declared independence from his government, risking wider conflict.Reeling from the bloodiest clashes in a three-month standoff, the Russian-backed leader’s security service said today it’s undertaking a nationwide anti-terrorism operation to restore public order and protect state borders. That gives the army the right to search, detain and even fire on Ukrainians in the course of the operation, the Defense Ministry said in a statement posted on the government’s website.

“Imposing martial law requires parliament’s approval, but an anti-terrorist operation can be declared simply by informing the president,” said Oleksiy Melnyk, an analyst at the Razumkov Center in Kiev. “Authorities now have the right to arrest people, search homes and a whole range of other things in a way that would otherwise be illegal. The leader’s name is secret and everyone involved gets immunity.”

During an anti-terrorism operation, soldiers can also legally search civilian vehicles and stop car and pedestrian traffic, according to the Defense Ministry. The security service said in the statement that protesters have seized more than 1,500 guns and 100,000 rounds of ammunition from military bases, depots and government buildings, without elaborating.”


This sounds more and more like the beginning of a civil war.



Charts by:, Sober Look, Deutsche Bank




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3 Responses to “More Trouble in the Ukraine”

  • White eagle:

    Ukraine is an artificial state,like Moldavia and Bosnia.Creation of Communists and Nazis.People that are making troubles now in western part of the country and Kiev culturally belong in Central Europe.I think von Mises was born in what is today Lviv and also served Austro-Hungarian Army in that area during WW1.
    People in the east and south of the country are eastern Slavs-Russians and have been trapped in this artificial country.Just look at Crimea peninsula,Odessa,Donbas,Harkov…it is ridiculous.For example Harkov,third biggest Russian city in SSSR with very important industrial and scientific base (space,tanks,electronics,research…)is now in Ukraine but only 15 kilometers from Russia.
    Basically it is good will of Russia that this country hasn’t imploded yet.If Russians would do in eastern and southern part what Germans and Poles are doing in Kiev and western part,it would be game over for Ukraine.
    As I see it,Americans want one splendid little war (good for business and political class) and Germans are stupid enough not to see that they will pay the price if all pipelines supplying Europe are blown up.European economy would go in depression and Russian would lose a lot of revenue.Petrodollar would regain its health.
    There would be some impressive collateral damage for locals,but it is for higher good,so it is OK.
    Someone would have to explain Germans that Russian Federation is their best long term partner and not USA or France.French are not sincere with Germans.

  • bubbly:

    The leader of Neonazis in Slovakia (Kotleba) has sent an open letter to Yanukovych, expressing support for his fight against the Jewish backed insurgency. Yanukovich is in good company.

  • worldend666:

    Any bets on how long it takes Russia to swoop in and save the day with a peacekeeping mission that eventually becomes a permanent feature?

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