Ukraine

In a brief statement this morning, Turkish military authorities have admitted that:

• *EIGHT TURKISH F-16 JETS TRACKED RUSSIAN PLANE IN BLACK SEA
• *TURKEY SCRAMBLED F-16'S YDAY AS RUSSIAN PLANE NEARED BORDER

Which appears odd given this was a "military exercise" that we are sure the Russians had cleared with neighboring nations that it would be entering their airspace. The Turkish air force has been busy recently following the failed 'drunk' Sochi hijacking and Syrian intercepts.

Amicable resolution between Russia and the Ukraine as the market seems to be suggesting, or not? Watch this clip of what happened just hours earlier at the Belbek air force base, in which Russian troops fired warning shots aat approaching Ukrainian soldiers and you decide.

Of course, US equities are large and in charge in the flight-from-safety as marginal money pushes S&P futures back up within a smidge of record highs (hey, why not, Ukraine is 'fixed' right?) but away from stocks, even USDJPY (that pillar of equity confidence inspiration) is not rising as fast. Treasuries and gold are being sold but again not back to levels pre-Ukraine-esclation from Friday. European stocks are surging but not as ebulient as US stocks. Russia's MICEX has bounced, recovering aroung half its losses and Ukraine bonds are rallying (as is the Hyrvnia).

While the world digests the recent Putin press conference in which he appeared to superficially soften his stance on the Ukraine, US SecState John Kerry lands in Kiev while the state department announced that sanctions against Russia are "coming in a matter of days", and as the US announces it is preparing a $1 billion aid package for the Ukraine, which despite the toned down rhetoric by Putin just lost the Gazprom discount for natgas due to non-payment meaning its reserves will be depleted even faster, suggesting a far greater urgency to providing funding for the Ukraine in what some have said is now a fight between Putin and the IMF, as the latter tries to drain what little funds remain in the nation, while the former urgently seeks to keep it afloat.

• No need to use military force in Ukraine for now: Putin (Reuters)
• Russia Orders Drill Troops Back to Bases (WSJ)
• Ukraine premier agrees to reforms for aid package (FT)
• Japan Base Wages Rise for First Time in Nearly Two Years (WSJ)
• Only the algos are trading: Citigroup Joins JPMorgan in Seeing Trading-Revenue Drop  (BBG)
• Vietnam sends blogger to prison for critical posts (AP)
• At White House, Israel's Netanyahu pushes back against Obama diplomacy (Reuters)
• Obama to offer new tax breaks for workers in election year budget pitch (Reuters)
• China Banks Show Too-Connected-to-Fail Link to Shadow Loans (BBG)
• Ex-BOK Deputy Lee Named to Head South Korea Central Bank (BBG)
• No mortgage origination problem in the UK: Mortgage approvals climb to six year high (Telegraph)

Since Ukraine is the only wildcard variable in the news these past few days, it was to be expected that following i) the end of the large Russian military drill begun two weeks ago and ii) a press conference by Putin in which he toned down the war rhetoric, even if he did not actually say anything indicating Russia will difuse the tension, futures have soared and have retraced all their losses from yesterday. And not only in the US - European equity indices gapped higher at the open this morning in reaction to reports that Russian President Putin has ordered troops engaged in military exercises to return to their bases. Consequent broad based reduction in risk premia built up over the past few sessions meant that in spite of looming risk events (ECB, BoE policy meetings and NFP release this Friday), Bund also failed to close the opening gap lower. At the same time, USD/JPY and EUR/CHF benefited as the recent flight to quality sentiment was reversed, with energy and precious metal prices also coming off overnight highs.

Futures are soaring and are just shy of their record high first following news that the Russian military drill has ended, even if Russian troops stationed in the Crimea remain, but more importantly driven by a just completed press conference by Vladimir Putin in his residence outside of Moscow, in which the Russian leader appears to have softened his stance on Crimean aggression, saying he does not consider adding Crimea to its territory. What the market is focusing on is the repeat of Putin's stance that he will not be sending troops to the Crimea yet (even though they are there already), and that he suddenly appears concerned about the impact on markets and the fallout from sanctions.

We had previously warned that Putin's "trump card" had yet to be played and with Obama (and a quickly dropping list of allies) preparing economic sanctions (given their limited escalation options otherwise), it was only a matter of time before the pressure was once again applied from the Russian side. As ITAR-TASS reports, Russia's Gazprom warned that not only could it cancel its "supply discount" as Ukraine's overdue payments reached $1.5 billion but that "simmering political tensions in Ukraine, that are aggravated by inadequate economic conditions, may cause disruptions of gas supplies to Europe." And with that one sentence, Europe will awaken to grave concerns over Russia's next steps should sanctions be applied.

While it has gotten to the point where the propaganda is so bad on both sides of the Ukraine crisis, that any numbers thrown about are ridiculous, made up gibberish more fabricated than anything the Chinese Department of Truth or US Bureau of Labor can possibly goalseek, it is worth pointing out that according to AP, Ukraine's ambassador to the UN said 16,000 Russian troops are now deployed in the Ukraine. This was "revealed" at the third emergency Security Council session meeting in the last four days, shortly after Ukraine's fugitive president requested Russian soldiers in the strategic Crimea region "to establish legitimacy, peace, law and order," Russia's U.N. ambassador said Monday, contradicting the president's own comments last week. But the piece de resistance, regardless if the real number of Russian troops in the Ukraine is 1,000 or 100,000, was the following:

• DOD CALLS ON RUSSIAN FORCES IN CRIMEA TO RETURN TO THEIR BASES

Wait, so the US Department of Defense, that of the United States if it was somehow unclear, suddenly has authority to control the troops... of Russia?

Kyrgyzstan was once known for its Tulip Revolution, a name the followed the trend of color-coded revolutions in Georgia and Ukraine. The ouster of the corrupt regime of President Askar Akayev in 2005 gave those Kyrgyz aspiring for a better future cause for hope, but expectations were quickly dampened. Akayev’s successor Kurmanbek Bakiyev suffered the same fate, with his removal from office in 2010. The North-South political divide has only widened in the years since the overthrow. Protests in Kyrgyzstan are commonplace, with 782 in 2013 alone - a staggering number for a tiny republic, as Russia has monopolized the Kyrgyz Republic’s energy, defense and transportation industries transforming it into a Russian client state and military bulwark.

Putin’s decision to back himself into this corner has been derided by the Western media as a strategic blunder but it is actually a textbook example of realpolitik. Putin has created a situation where the West’s only alternative to acquiescing in the Russian takeover of Crimea is all-out war. And since a NATO military attack on Russian forces is even more inconceivable than Putin’s withdrawal, it seems that Russia has won this round of the confrontation. The only question now is whether the new Ukrainian government will accept the loss of Crimea quietly or try to retaliate against Russian speakers in Ukraine—offering Putin a pretext for invasion, and thereby precipitating an all-out civil war. That is the key question investors must consider in deciding whether the Ukraine crisis is a Rothschild-style buying opportunity, or a last chance to bail out of risk-assets before it is too late.

Russia’s seizure of Crimea is the most naked example of peacetime aggression that Europe has witnessed since Nazi Germany invaded the Sudetenland in 1938. It may be fashionable to belittle the “lessons of Munich,” when Neville Chamberlain and Édouard Daladier appeased Hitler, deferring to his claims on Czechoslovakia. But if the West acquiesces to Crimea’s annexation – the second time Russian President Vladimir Putin has stolen territory from a sovereign state, following Russia’s seizure of Georgia’s Abkhazia and South Ossetia regions in 2008 – today’s democratic leaders will surely regret their inaction. When Chamberlain returned from Munich, Winston Churchill said, “You were given the choice between war and dishonor. You chose dishonor and you will have war.” Obama and other Western leaders face a similar choice. And if they choose dishonor, one can be certain that an undeterred Putin will eventually give them more war.

The Big Picture: The U.S. and NATO Have Been Trying to Encircle Russia Militarily Since 1991

The (ironically named) United Kingdom is the first to openly raise concerns over trade sanctions against Russia. As The Telegraph reports,

"Britain is preparing to rule out trade sanctions against Russia amid fears that the Ukraine crisis could derail the global economic recovery"

Perhaps it is the fear of a massive liquidity suck out from London's real estate market (or its banking system) that has the Brits on edge. We suspect Germany will be close behind as they eye exploding gas and oil prices and their dependence on Russia's marginal production.

Having explained the Ukraine "situation" in one map, it appears the inter-connectedness of Ukraine and Russia is becoming any increasingly problematic part of the current crisis. As Reuters reports, absent Russian gas, Ukraine's natural gas stocks can meet just 4 months of demand. The modest silver-lining is that the stocks are generally in the west of the country (away from potential Russian intervention) but it bears noting that Ukraine meets around half its gas demand through Russian imports (and Russia has cut supplies in the past). The situatio is not just energy though as Bloomberg notes, that Ukraine relies on Russia for about 30 percent of its global trade activity, compared with Russia’s 6 percent dependency on Ukraine. However, Ukraine has another big problem - while it would like $3bn in IMF loans, that will not even cover interest and principal payments through June...