Ukraine again.

The headlines in the financial press continue to state that markets remain unsettled by unrest in the Ukraine. We're not so sure.  It's interesting to note that when we last wrote about developments there on April 8th the FTSE was at 6600. A month later the index is at a 6800 level. There have been Russia related right offs AND EARNINGS HITS - Carlsberg and Soc Gen being among a slew of companies that have seen slower Russian demand.

This isn't to say that developments in Ukraine are unimportant. The world ( and markets) could probably understand and live with a Russia that views a western leaning Ukraine as a threat to its security. NATO troops or EU officials on its border might e a step too far for the Kremlin. A neutral, modernized, country might then be a reasonable negotiated outcome. This could be beneficial to all parties, Ukrainians included. What is unsettling is whether Moscow's assertiveness marks a new strand in Russian diplomacy that wishes to intervene wherever there are 'threatened' Russian minorities. The scope for destabilization in the Baltics, Kazakhstan, Moldova, Georgia et al is something that would be profoundly more serious. As it stands we just don't know whether Moscow inspired instability in Eastern Ukraine is a post-Crimea one off , or is part of a larger and more serious change in strategy.

There are two other factors that need to be watched here. Mindful of mid-term elections and accusations he's soft on foreign policy issues, President Obama is slowly responding to Moscow adventurism by ratcheting up sanctions. Although America's diplomatic steps have been incremental and serious there is always the possibility that Congress will look for faster tougher responses. 

A second factor relates to Germany. There is much soul searching in Washington over Berlins unwillingness to support a stronger response to Russia's flouting of the recent Geneva agreement. Former Chancellor Schroder celebrated his 70th birthday with President Putin last week - a symbolic act that was well received in Moscow but raised eyebrows in London, Washington and Paris. Growing anti-Americanism in Germany is now an issue.

With Ukrainian elections scheduled later this month the conflict between Kiev and Moscow for control of the country enters a new, and heightened, phase. Moscow must decide this week whether to intervene while its forces remain on high alert or let the situation continue while western sanctions take effect. Markets will be alert to the loss of earnings and reduction in visibility that comes from tightening sanctions. Austrian banks and companies will be particularly impacted.