After months of posturing from Russia and the West, yesterday’s shooting down of Malaysia Airlines MH17 over Ukrainian airspace could accelerate the conflict.
While many had hoped that the tragedy might spark Russia to reverse its support of Russian Separatists in Ukraine’s East, Putin’s initial comments suggest he is ready to double down.
Dr. Nicolas Spiro, an expert in sovereign risk who has covered central European affairs for The Economist, offers further commentary on why things could get worse:
1. The east-west standoff over Ukraine had already been escalating before yesterday’s downing of Malaysia Airlines flight MH17 and is now at its most intense since the crisis erupted in late February. Yesterday’s tragic aeroplane crash has all the makings of a game-changer as far as the Ukrainian crisis is concerned. If there’s something that could take this dangerous Cold War-era standoff to a whole new level, this is it. A Rubicon has been crossed in terms of the “internationalization” of the Ukrainian crisis.
2. The initial response on the part of Moscow to blame Ukraine for the crash shows the extent to which the Putin administration is at daggers drawn with the West – in particular the US – and underscores how difficult it’s going to be to “de-escalate” the crisis in east Ukraine. Not only has the MH17 crash significantly upped the stakes in the east-west standoff over Ukraine, it threatens to turn what has been a slow-burn civil war in the Donbass region into a much more dangerous proxy battle between Russia and the West with much more significant implications for markets. Geo-political risk has gone up several notches over the past 24 hours – not least given the Israeli ground offensive in Gaza. If there’s a glimmer of hope, it’s that the MH17 disaster proves to be the much-needed catalyst for a significant and meaningful shift in Russian policy towards Ukraine. However, this would need to happen very quickly.
3. Russian assets, which had been benefiting from market perceptions that the worst of the Ukrainian crisis was over and that more aggressive western sanctions against Russia were unlikely, are again under strain. However, it’s possible that markets, which continue to brush off all sorts of country-specific and geo-political risk events after brief periods of nervousness, will perceive the MH17 crash as a development which forces Russia to change course and disassociate itself from the separatist insurgents in eastern Ukraine. This looks like wishful thinking for the time being.
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