A further round of the Normandy Four talks took place on Monday night between Vladimir Putin, Angela Merkel, Francois Hollande and Petro Poroshenko in another attempt to try and get the Minsk II agreement implemented and to move closer to some sort of resolution of the Ukrainian issue. But if anything, the talks seem to have hit a stalemate of late. Vladimir Putin emphasised “a direct dialogue between Kiev and Donetsk and Lugansk should be a key element in the conflict resolution to achieve a full and comprehensive implementation of the Minsk agreements of February 12, 2015.” The Russian minutes also note that the Normandy Four had received a package of proposals for local elections, special status, amnesty and decentralisation that had been agreed with the DNR and LNR. But the issue remains that elections have not been held yet, the Ukrainian parliament has not devolved power to the separatist regions and Russia sees these as a required steps before it will withdraw its troops and return the border to Ukrainian control.
EU sanctions against Russia are due to expire in July and will require approval from all 28 EU states for an extension. If the current stalemate persists, another extension for 6 months looks the most likely outcome, even though the sanctions have proved ineffective. Angela Merkel, the German Chancellor, commented at the G-7 summit: “The sanctions are tied to the implementation of Minsk,” and that “We’re hoping for progress in the coming weeks, because there is some activity on this.”
We note Russia has successfully issued a 10-year USD benchmark Eurobond managed by VTB Capital at a yield of 4.75% this week. This was done without the help of any of the major international banks who were allegedly warned off the deal in case they breach sanctions that remain in place. The deal is reported to have received over USD7bn in demand although the Russians only issued USD1.75bn; the budget had authorised the issue of up to USD3bn in debt. Konstantin Vyshkovsky, the head of the Finance Ministry Debt Department stated “There wasn’t any real financial need to issue bonds,…We sold them to confirm our presence in the market, as a long hiatus is bad for an issuer, to feel out investor sentiment and understand our possibilities overall.” Thus, while the sanctions are a political statement they clearly do not reflect economic demand. Admittedly, sanctions have complicated the situation as the threat of breaching them has made it unclear whether the bonds are eligible to use Euroclear and Clearstream. Instead, Russia has used its National Settlement Depository (NSD) as the clearing system which would have prevented some investors taking part in the issue. It also remains to be seen how actively market-makers trade this bond.
A likely extension of the EU sanctions means Russia looks set to continue to ride out the storm for another 6 months. But fears of a rapid draw-down in reserves for capital outflows and maturing debt have proved unfounded; while the oil price has almost halved since June 2014 in dollar terms a weaker rouble has mitigated the impact. But year to date oil prices have recovered and the rouble has been one of the best performing emerging currencies rising ~11.5% against the US dollar.