Spotlight on Ukraine: Riots in Kiev, EU Weighs Sanctions, Emergency Meetings; Fear of Default Contagion Spreads

The situation in Ukraine grows worse by the day. Here is a recap of recent events.

Bloody Riots

Reuters: Ukraine police charge protesters after nation's bloodiest day

Ukrainian riot police charged protesters occupying a central Kiev square early on Wednesday after the bloodiest day since the former Soviet republic, caught in a geopolitical struggle between Russia and the West, won its independence more than 22 years ago.

At least 18 people, including seven policemen, died on Tuesday during hours of violence between security forces and civilians who have staged protests against President Viktor Yanukovich since last November.

Many were killed by gunshot and hundreds more were injured, with dozens of them in a serious condition, police and opposition representatives said.

The riot police moved in hours after Moscow gave Ukraine $2 billion in aid for its crippled economy which it had been holding back to demand decisive action to crush the protests.

Nationwide demonstrations erupted after Yanukovich bowed to Russian pressure and pulled out of a planned far-reaching trade agreement with the European Union, deciding instead to accept a Kremlin bailout for the heavily indebted economy.

EU Weighs Sanctions, Emergency Meeting Called

Financial Times: EU weighs sanctions against ‘authors of violence’ in Kiev

Europe’s top diplomats have been summoned to an emergency meeting in Brussels today after EU leaders called for sanctions against the Ukrainian government in response to a bloody crackdown that killed more than two dozen people.

The push for sanctions against Viktor Yanukovich, Ukraine’s president, and his allies marks a significant shift for the EU, which has so far insisted on a diplomatic response to the crisis. But it is not guaranteed the unanimous support required by the 28-member bloc, amid fears from some member states that a harder approach could push the country closer to civil war.

A group led by France and Poland will push for sanctions at an emergency meeting of foreign ministers in Brussels. Although they are backed by Germany and the Czech Republic, several countries – including Italy, the Netherlands and Finland – are reluctant to move quickly. Spain prefers a diplomatic solution rather than sanctions.

The Obama administration said on Wednesday that it had placed 20 Ukrainian officials on a visa blacklist as a result of the violence in Kiev on Tuesday.

In the first sign of the EU’s economic pressure coming to bear on Ukraine, the head of the EU’s investment bank said that it had halted investments there. Werner Hoyer, president of the European Investment Bank, said that he had suspended activities in Ukraine, where the EIB has pledged to invest more than €1bn since 2011 in ventures such as a metro line and an air traffic control system.

Civil War Feared

Financial Times: Ukraine Facing Most Dangerous Hour for Many Years

The crisis in Ukraine appeared to be spinning out of control on Wednesday, leaving the former Soviet republic facing its most dangerous hour not just since independence in 1991 but for many decades.

While anti-government protesters tore up cobblestones along Khreshchatyk, Kiev’s main avenue, as weapons to resist a second night-time assault by riot police, Donald Tusk, Polish prime minister, warned that the world might be witnessing “the first hours of a Ukrainian civil war”.

“There is no civil war between the east and west of Ukraine,” said Olexiy Haran, a political scientist and member of the protest co-ordinating committee. “There are no people in the east of Ukraine who are going to die for Yanukovich.”

But a civil war was under way, he added, between “the people of Ukraine, and the Berkut [special police] and titushki” – the nickname for hired, pro-regime thugs that authorities have used in Kiev and elsewhere to beat up protesters.

With only about 4,000-5,000 Berkut police, and perhaps 15,000-20,000 well-trained and equipped interior ministry troops, analysts say the government would struggle to prevail over widespread and determined opposition, especially in the west. But plenty of blood could potentially be spilled along the way.

“This week we realised it isn’t easy to resist when you’re not armed and you are facing people who are using real bullets,” said Mr Haran.

Ukraine Leader Denounces Coup

Reuters: Ukraine leader denounces coup bid, West readies sanctions.

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.

The White House urged Ukraine to pull back riot police, call a truce and talk to the opposition. But the Ukrainian security services said they were launching an "anti-terrorist operation" across the country after the seizure of government buildings, arms and ammunition dumps by "extremist groups".

Protesters 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 instead.

The sprawling nation of 46 million, with an ailing economy and endemic corruption, is the object of a geopolitical tug-of-war between Moscow and the West. That struggle was played out in hand-to-hand fighting through the night, lit by blazing barricades on Kiev's Independence Square, or Maidan. As dusk fell on Wednesday, protesters braced for more police action.

After a night of petrol bombs and gunfire on Independence Square, black smoke billowed from a charred trade union building that protest organizers had used as a headquarters.

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 their bare hands, to dig up paving to stock as ammunition.

Amid a tense standoff in the central Kiev square, thousands of protesters, many masked and in combat fatigues, confronted police across makeshift barricades for a second straight day.

Priests intoned prayers from a stage while young protesters in hard-hats improvised forearm and knee pads to protect themselves against baton blows. Others prepared petrol bombs.

"They can come in their thousands but we will not give in. We simply don't have anywhere to go. We will stay until victory and will hold the Maidan until the end," said a 44-year-old from Ternopil who gave only his first name of Volodymyr.

Ukraine has been rocked periodically by political turmoil since independence from the Soviet Union more than 22 years ago, but it has never experienced violence on this scale.

Debt Default Contagion

Financial Times: Violence increases fears of debt default contagion

The worsening violence in Ukraine is adding to the strains on emerging markets, as investors weigh the risks to neighbouring economies and the potential for a Ukrainian debt default to trigger a renewed sell-off in the assets of other countries.

The chaos unfolding in Kiev hit central and eastern European currencies on Wednesday, with Poland’s zloty falling 0.5 per cent to 4.1478 against the euro. Hungary’s forint, already under pressure from persistently dovish monetary policy, fell about 1 per cent to 227.43 against the dollar, while the Romanian leu slipped 0.6 per cent. Fears over Ukraine also exacerbated a sharp fall in Russia’s rouble.

Donald Tusk, Poland’s prime minister, urged the country’s parliament “to prepare Poland and Europe for the most dramatic possibilities”, in a speech that showed the degree of concern felt in the country most directly exposed to Ukraine’s turmoil.

“The implications for neighbouring countries should not be underestimated,” said Simon Quijano-Evans, head of emerging market research at Commerzbank,” noting that investors had previously underplayed the risks of unrest around the Arab world.

“A default could have a destabilising impact,” said Koon Chow, head of emerging markets strategy at Barclays Capital. Ukraine could only be a trigger for a return of gloom to emerging markets – but with emerging markets still fragile after the last month’s sell-off, and political crises deepening from Venezuela to Thailand, “we didn’t need much”.

On behalf of Mish readers globally, I send best wishes to the citizens of Ukraine.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com