Battle for Ukraine
War and Impending Financial Disaster for Ukraine?

Evidence that the war in eastern Ukraine is heating up continues to mount: Russian-backed Ukrainian rebels are canceling military leave and mobilizing their full force in preparation for combat, according to a Russian state-run TV station. Several hours before the mobilization was announced, Vladimir Putin reportedly called an emergency meeting with his security chiefs and defense minister. The Kremlin-backed station quoted a representative of the rebels saying that war could break out at any time.

Moreover, on Wednesday night, the OSCE reported its finding that several storage facilities where the rebels were supposed to be keeping their heavy armaments had been emptied. The Ukrainian government has been pointing to a significant escalation by rebels this week, saying its forces are being battered by heavy weapons, which February’s Minsk treaty technically banned. The government has authorized its troops to respond in kind, and notified the OSCE.

As for Kiev, its problems sadly don’t begin or end with the conflict in the eastern breakaway regions. Between the cost of the war in the industrial heartland, rampant corruption, the dim prospects for the current government successfully to implement promised reforms, and soaring sovereign debt, Ukraine’s main problem is the sorry state of its finances. Things aren’t likely to improve on that front, as talks in San Francisco with one of its major foreign creditors—the bond fund Templeton—broke up today with no breakthrough in sight. Bloomberg:

The two-sentence statement left little scope to “read between the lines” on the state of progress, Nomura Holdings Inc. strategist Tim Ash said by e-mail. Ukraine, which needs to execute an agreement before a $500 million note falls due on Sept. 23, said Aug. 7 that this week marked the “final opportunity” for an accord.

“It’s a good sign that they are continuing discussions and not blaming each other for lack of cooperation,” said Jakob Christensen, an analyst at Exotix Partners in London, who expects creditors and the government will eventually settle on a 22.5 percent writedown to the face value of bonds. […]

“It’s a pity that after flying so far, Jaresko will leave with nothing,” Vitaliy Sivach, a Kiev-based bond trader at Investment Capital Ukraine, said by e-mail. “It looks like it’s time to prepare for Plan B — to default.”

Between a rock and a hard place, as they say. It would not be surprising to see Putin pushing a bit harder militarily in the coming days, just to see how destabilized Kiev can get.

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