Despite reports of continued fighting raging and a great deal of skepticism the latest round of shuttle diplomacy in Minsk would bring any material de-escalation in the bloody conflict that has gripped eastern Ukraine, the leaders of Russia, Ukraine, France and Germany agreed to a cease fire in the early hours of this morning that will go into effect midnight of February 15.
Given the history of failed agreements in the past, it is only natural for markets and the parties to the conflict to maintain a healthy level of skepticism over the prospects for ultimate success of the “Minsk II” accord, and to reserve judgment until actions follow the words.
But the prospects this time around are different in a few key ways.
** As we noted earlier this week (SGH 2/10/15, “Ukraine: Reaching a Limited “Minsk II” Ceasefire Accord”), the movement we detected from the Russian side in the run up to the summit was a response in large part to the quiet willingness and pressure on Kiev by the West to accept the shifting military reality on the ground and concede more territory to the rebels when it came to the contentious question of where even to draw the long elusive 50 kilometer cease-fire line. And so pragmatism has trumped ideology, and Russia is being given some of what it wants, even as it is sure to raise charges of “appeasement” by those advocating for a harder-line stance against Moscow.
** In exchange, as we also noted in that report, this agreement is materially different from the original failed Minsk Agreement of September in that Russia is now explicitly coming on as a participant to the treaty, as opposed to its role as a simple observer in Minsk I, and its sign-off on the treaty is coming from the heads of state level.
** The ceasefire will open up hope and certainly lead to calls led by the more dovish EU member states for the potential easing up of the sanctions against Moscow. The prospect for that that will certainly provide a more positive backdrop to the European and Russian economies and markets, but we expect any actual easing movement on the sanctions front to be slow in coming, assuming the cease fire holds.
** In the meantime, with an agreement in hand we believe it is highly unlikely the sanctions on individuals will be expanded next week as threatened before. The first real window for a formal review to ease sanctions would most likely be in mid-March. That date marks the original one year anniversary of the sanctions on individuals that were subsequently extended for another six months to September, but it may be too early still at that point to consider an ease. Regardless, by far the more important sanctions are the ones on the sectoral level, and those do not come under review until July.
** We also continue to expect the EU and Washington to keep the threat of escalating sanctions if the cease fire fails on the table, and for the Obama Administration to maintain the threat of supplying lethal “defensive” weapons to the Ukrainian government, even as it holds off on any actual authorization on that front.
In light of the enormous challenges that still lie ahead, in moving from a “frozen conflict” to anything resembling a lasting solution to the Ukraine crisis that would include a concrete agreement on the regional status of the rebel regions, the signatories at Minsk as we had expected have agreed only in principle and vague terms on the bigger political issues, punting a full political agreement safely until the end of 2015, a full ten months still away.
But a limited cease-fire, and even a frozen conflict with the prospect for an eventual settlement, no matter how contentious, is still a significant improvement over the escalation in hostilities and tensions of the last few months.