Ukrainian conflict back to the ground

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Jan Dehn, head of Research at Ashmore discusses the situation in Eastern Ukraine which is reaching another critical stage, the uncertainty in Brazil after a presidential candidate is killed in a plane crash and good reasons to discount the data in India.

Russia and Ukraine

The biggest development in the crisis engulfing Ukraine and Russia is that the main theatre of conflict has moved from the international stage (sanctions, mutual recriminations between EU/US on the one hand and Russia on the other, etc.) to the ground in Eastern Ukraine, where Ukrainian forces have made considerable gains against pro-Russian separatists and where Russia has dispatched a large aid convoy towards the conflict area. Sceptics view the convoy as a pre-text for a subsequent invasion. Optimists regard this gesture, plus the fact that Ukraine is making gains on the ground and the ‘radio silence’ from the main super powers, as a sign of important diplomatic efforts behind the scenes; after all, costs are now mounting for both the EU and Russia and there will be voices that will be making the point that Ukraine is simply not worth it. That is, Europe and Russia risk throwing the baby out with the bathwater. Both optimists and sceptics could yet be proven right: even serious talks behind the scenes can be derailed by events on the ground and therefore spark yet another round of escalation, as the downing of the Malaysian airliner showed.


An echo of the giant sucking sound that was the World Cup still resonates through the Brazilian economy. Retail sales for June declined 0.7% mom, at least in partly an indication that Brazilians turned their attention to football rather than conspicuous consumption. There is now likely to be a modest rebound in retail spending over the next few months, but a strong rebound seems unlikely. Aside from the loss of credibility of the economic team, which has had a detrimental impact on business confidence, uncertainty increased sharply this week when Eduardo Campos, presidential candidate for the PSB party, was killed in a plane crash. Campos was not expected to win, but his death could now thrust Marina Silva, his erstwhile vice-presidential candidate, into the position as PSB presidential contender. In many ways, Marina is a more formidable political force than Campos. She is widely regarded as honest and principled. She is from the North East and she commands a strong following (she polled 20% of the vote in the first round of the previous presidential election). She is left of centre and could take votes from President Dilma Rousseff, but her economic policies are expected, for the most part, to be better than those of the current administration, so she could also win support from the centre-right. The uncertainty caused by Campos’ death will begin to decline once new polls are published. For now, the main implication of Campos’s demise is that it turns this election into a potential three rather than a two-horse race.


Taken at face value, India delivered a genuinely unpleasant set of macroeconomic numbers this past week. Industrial production, at 3.4% yoy, fell well short of the expectation of 5.6% yoy, while CPI inflation in July spiked to 8% from 7.5% in June. However, these numbers should be discounted somewhat. The industrial production number was dominated by more volatile items, while core production was up 4% yoy, well above the 2.9% yoy rate of the past six months. The inflation number may also be due to temporary effects, notably volatile food prices. After all, wholesale prices actually moderated significantly from 5.43% yoy in June to 5.19% in July. In general, we expect the central bank to manage inflation risks with a high degree of sophistication and based on a recent joint press conference between Finance Minister Jaitley and Central Bank governor Rajan suggests that both men are on the same page regarding the importance of maintaining price discipline.

In an unrelated development, the Reserve Bank of India proposed a further liberalisation of access for long-term investors to India’s quota-protected domestic bond market. This is good news, but in our view the authorities are still too cautious. The proposal to let Sovereign Wealth Funds and central banks greater access is similar to China’s early stage capital account liberalisation, which also began with the restrictive QFII and CIBM schemes aimed mainly at official sector institutions, but then gradually granted a broader range of institutional investor access via the more liberal RQFII scheme on a selective basis.

So far, India is maintaining the quota system, so its markets will not be eligible yet for inclusion in the main benchmark indices. We think India will continue to gradually liberalise market access and eventually qualify for index inclusion.

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