The Russian humanitarian aid convoy left Ukraine last weekend and is safely back in Russia despite numerous speculations around it and constant delays. On Monday 25 August 2014, Russian markets took the news calmly with the Russian rouble staying around its opening levels throughout the first half of the day.
At the same time, today, Russia's foreign minister, Sergey Lavrov, told Russian TV channel Rossiya 24 that the country is planning to send another aid convoy to Ukraine. He also mentioned that decentralisation of Ukraine should be discussed.
This week main focus will be on tomorrow's event in Belarus's capital Minsk, where top officials from the Eurasian customs union and from the EU and Russia's president Vladimir Putin, including the foreign affair Chief and Trader commissioner, are meeting with president Poroshenko. Whether or not Poroshenko and Putin succeed in negotiating, the event should be considered as very positive by the markets as it will be the first negotiation talks since the short meeting of two presidents in Normandy in early June 2014. One of the topics will be future gas supplies through Ukraine's territory.
On Saturday, German chancellor Angela Merkel visited Kiev and met with President Petro Poroshenko and other Ukrainian top officials, welcoming the Poroshenko-Putin meeting that will take place tomorrow. During the meeting in Kiev, Merkel promised EUR500m to rebuild the infrastructure in eastern Ukraine. An additional EUR25m was promised 'for refugee accommodation sites'. According to Bloomberg, Merkel stated that no new sanctions against Russia were envisaged so far. We see the statement as new support for our base case scenario.
On Sunday 24 August, Ukraine celebrated its independence day. During the parade in Kiev, Poroshenko promised to increase military spending by USD3bn in the next two years. However, fighting in eastern Ukraine continued and several eastern Ukrainian cities remain in full control of rebels. For example, in Donetsk, insurgents paraded imprisoned Ukrainian soldiers yesterday.
Last week, we cut our 2014 GDP forecast for Ukraine from -5% y/y to -8% y/y. This is because military operations by the Ukrainian army in the country's eastern parts to quash action by federalisation and independence movements are putting the future of the IMF programme at risk, private consumption growth has turned negative and Ukraine is mulling over economic sanctions against Russia.
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