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World markets bounce back on hopes Ukraine tensions will ease

Military personnel, believed to be Russian servicemen, march outside the territory of a Ukrainian military unit in the village of Perevalnoye outside Simferopol, March 4, 2014.

David Mdzinarish/Reuters

Stock markets in Europe and Russia rallied and oil fell after Russian president Vladimir Putin ended military exercises in Western Russia, raising hopes that tensions will ease in the Ukrainian crisis.

In a press conference Tuesday, Mr. Putin gave no sense that he would withdraw from Crimea and that he would do whatever it takes to protect Russians in Crimea. But he said there was no need to send Russian troops into mainland Ukraine. At the same time, he did not rule it out, calling it a "last resort."

In essence, he presented a stay-the-course strategy that was neither an escalation nor the de-escalation that the West wants. He also said that the natural gas discount offered by Russia's Gazprom to Ukraine was about to end. The prospect of paying higher gas prices will make Ukraine's financial situation worse, ensuring it will need a bailout from the International Monetary Fund.

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Russia's stock market climbed more than 3 per cent in Tuesday morning trading after a near 11-per-cent plunge on Monday, the sharpest decline since the 2008 financial crisis year. European indexes also gained, with the FTSE-100 climbing 1.2 per cent. France's CAC index was up 1.4 per cent and Germany DAX up 1 per cent.

Brent crude fell 1.5 per cent. Commodities climbed on Monday after investors unloaded equities and fled to safe havens, such as oil and gold. Natural gas prices tumbled after a climb of almost 10 per cent on Monday.

But investors remained cautious because the situation in Crimea, in Russia's far south, remained potentially explosive. Russian troops have taken full control of the peninsula, which is home to Russia's Black Sea naval fleet, and various reports said Tuesday that pro-Russian troops fired warning shots into the air as about 300 Ukrainian soldiers, who had been stationed at an air base, demanded their jobs back.

The shots were said to be the first fired by soldiers in Ukraine.

Russian shares that got slaughtered on Monday made a tentative return, though the gains were not enough to erase the losses. Gazprom, the state-controlled gas company that supplies half of Ukraine's gas and a quarter of western Europe's, climbed 5 per cent after an 11-per-cent loss on Monday, when investors took fright over the prospect of supply disruptions if Russian troops were to invade the Ukrainian mainland.

Gazprom has threatened to end the gas discount offered to Ukraine in December, as part of a broader bailout package. At the press conference, Mr. Putin said "Gazprom will not go back to oil prices. Gazprom does not want to extend the current price, because the agreement was to review them every three months."

The markets lost their edge of panic as U.S. secretary of state John Kerry arrives in Kiev, the Ukrainian capital, today for talks with the interim government.

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Mr. Kerry has warned that Russia faces a range of economic sanctions designed to punish Mr. Putin, though no plan has surfaced. He may offer the interim government in Kiev an aid package. Ukraine is close to falling off the financial precipice and is negotiating an emergency loan package from the International Monetary Fund valued at $15-billion (U.S.) or more.

Germany's foreign minister, Frank-Walter Steinmeier, said he welcomed the end of Russian military exercises in western Russia. "It is important to explore every possibility to prevent a collapse into violence, " he said, according to a Reuters report.

When asked about sanctions, Mr. Steinmeier said they may come "if we don't see decisive steps in the next one and a half days in terms of coming to an international agreement, for example, on the creation of a contact group with which Russia is ready to work."

Analysts and economists are taking the view that any sanctions are unlikely to be punitive because the Russian, European and North American economies are more closely linked than they were a decade or two ago. Many big companies, from British oil giant BP and Canada's Kinross Gold to beer maker Carlsberg and France's Renault Nissan have substantial operations in Russia.

At the same time, Russia's role as the main gas exporter to Europe means that it would be fearful of losing access to its most valuable market.

Follow me on Twitter: @ereguly

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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