Western money is slowly returning to the stock and bond markets of Russia. The main reason for this is the ceasefire in Ukraine, although the situation has hardly progressed politically. This paradox may shed light on how events will unfold in Donbass.
The Wall Street Journal reported on Wednesday that 'investors have removed Russia from the penalty box.' This can be explained from an economic standpoint. The ruble has proven to be quite a strong currency this year, gaining 14 percent against the US dollar. This has mainly happened because the price of oil, which is crucial for Russia's financial health, has stabilized at a higher level than predicted - above $60 per barrel of Brent oil. And the Russian economic data, seemingly unpromising, does not indicate an impending collapse. So why not give Russia a chance, especially since it implies higher returns than most other major markets?
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This reasoning, however, only works because hostilities in Ukraine have slowed down after the signing of the Minsk ceasefire agreements in February. Continuation of the war would pose a risk of further international sanctions for Russia, unbearable for most investors.
By the way, Western sanctions against Russia have not caused significant economic harm because, when major Russian state companies could not borrow in Western markets, the government intervened to help them. Nevertheless, last year the sanctions managed to scare off investors. This was a psychological effect that has now been lifted thanks to the truce.
The ceasefire in eastern Ukraine is unlikely to be fully realized. While large-scale war has stopped and some heavy weapons have been withdrawn from the front line, fighting is still localized there. Furthermore, observers from the Organization for Security and Co-operation in Europe, who monitor compliance with the ceasefire, still have limited access to areas where pro-Russian separatists are based. A more stable peace could be expected after a deal is signed, if the Russian Federation were truly interested in ending hostilities.
Ukraine, in turn, is unwilling to grant more autonomy to areas controlled by the separatists, as stipulated by the Minsk agreements, until local elections are held in accordance with Ukrainian law.
For Russian President Vladimir Putin, it likely makes sense to find some balance, allowing investments in his country to gain momentum while keeping Ukraine on the hook. This suggests a frozen conflict scenario where there is neither war nor peace.