The Ukrainian crisis will not bring down world markets

ukraineRising tensions in Ukraine – as well as Thailand and Venezuela – have put pressure on emerging market indices; however, overall market performance, despite the escalation of violence in Kiev and other major cities such as Lvov, should not be affected. While the crisis has reawakened the never quite resolved ‘cold war’ between East and West, in this case Russia on one side and the EU and USA on the other, the stakes are too high for any one of these three parties to take on the kind of geopolitical or military action that would allow tensions to spill outside of Ukraine’s borders.

President Obama has warned Ukraine’s pro-Russian government of US retaliation, but until now, his administration has limited itself to issuing sanctions against certain officials close to Ukrainian President Viktor Yanukovich. Similarly, it is equally improbable, in the background of the Russian Olympic stage in Sochi and the effort that the Games represent in Russian President Vladimir Putin’s strategy to raise Moscow’s international standing, that Russia would send in troops to help Yanukovich in the style of Budapest 1956, Prague 1968 or Tbilisi 2008. One of the reasons is that, inasmuch as some of the western media has been trying to frame the crisis as one pitting western Ukrainians against more Russian speaking southern and eastern ones, distaste for Yanukovich cuts across any such ethnic lines, given that his pre-crisis approval rating was about 11%. It would be difficult for Putin to justify an invasion of Ukraine or Latvia (as in the last days of the Soviet Union under Gorbachev) by claiming the need to defend ethnic Russians.

The Ukrainian predicament has limited its market effect to the dollar / ruble (USDRUB) exchange rate that has touched a new five year high. Clearly, the turmoil in Kiev has highlighted the Russian economy and currency’s exposure to potential financial losses in case of a new pro-Western government – or in case of a pro-EU shift by Yanukovich. The head of the RCB (Russian Federation’s Central Bank), Elvira Nabiulina, has geared monetary policy to control the Ruble’s fluctuation bands against the Euro and the US Dollar to prevent a massive use of foreign exchange reserves to defend the currency. However, even there, Russia has large reserves of Dollars and Euros and is therefore less fragile than other emerging countries in difficulty. In other words, Russia can sustain an extended crisis in its backyard even if Ukraine cannot.

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At least 25 people were killed on Wednesday and many more on Thursday – reports suggest over 100 dead – in clashes between police and anti-government protesters in Kiev. Ukrainian dollar denominated bonds have hit free fall while and the Hryvnia, the local currency, has lost 10% of its value since the start of 2014. The Hungarian economy, which is an important economic thoroughfare for Ukrainian imports and exports, has also suffered. Russia, as Ukrainian President Viktor Yanukovych’s main ally, has agreed to pay USD$ 2 billion out of a total USD$ 15 billion package to provide some oxygen to the highly indebted Ukrainian economy. However, the market weakness has not spilled beyond the financial centers in Central and Eastern Europe or other emerging markets. What will happen if Ukraine edges closer to the unthinkable: Civil War? In a dispassionate analysis, and as coldhearted as it may sound, the world economy and global markets should not experience much more turmoil than this.

Ukraine’s economy is not very significant in the world context and its average level of foreign direct investment has also generally stood at the level of a small to medium emerging economy, not much more than other former East Bloc states and far lower than India, China or ASEAN states. Even if Ukraine were to default on its debts, it would cause a minor headache to foreign investors and lenders, but hardly enough to warrant a migraine or a full out financial crisis. Kiev is not New York, nor is it London or Berlin. Therefore, the global financial order would remain largely intact even in the event of the worst case scenario of a civil war in Ukraine. There is a precedent to support this, the Balkan wars of the 1990s as bloody and horrific as they were from a humanitarian point of view had very little or no financial implications whatsoever. Indeed, the 1990’s were also the years when the stock markets grew at their highest rates in Europe.

Ukraine is a bit like Syria in this sense. Syria is now entering the third year of a brutal civil war that has already cost an estimated 140,000 lives. However, Syria, as strategically important as it is in the region, lacks the kind of resource concentrations that would scare world markets. It has some oil and some phosphate, but so do its more stable neighbors, who are not even producing at peak capacity. Even Turkey, which has a non-resource based economy, has continued to thrive despite the Syrian spillover of refugees and tensions with its Kurdish minority. Of course, should the Russians be inspired by their Ukrainian counterparts, leading to street demonstrations against Putin’s government, and then the world economic picture might be a little gloomier. For now, apart from some picturesque protest from Russia’s punk band ‘Pussy Riot’, there is little to suggest that youth mobilized through Twitter or Facebook will be occupying Red Square any time soon.

The crisis in Ukraine essentially started last November when the European Union, in an effort to build closer ties to Ukraine, offered Kiev a very attractive aid and trade package. Russia, under Putin’s nationalist leadership, offered Yanukovich an even stronger incentive to refuse the EU’s offer. Putin drastically reduced the price that Ukraine would have to pay to import Russian gas, reducing the money it owes the Russian oil and gas giant, Gazprom, while and ensuring an aid package to keep the Ukrainian economy afloat. The EU did not make a counter-offer, leaving Yanukovich bound to Putin and the Kremlin. Therefore, there is a clear limit to how far the EU – or the United States for that matter – will go to wrestle Ukraine away from Moscow’s influence. Nobody is going to raise the confrontation with Putin in an already difficult cooperation context and especially as the White House needs good ties with Russia in order to conclude its much more strategic negotiations with Iran and Syria. Neither Russia nor the West is an innocent bystander to Ukraine’s drama.

So far, the markets have not been affected beyond some limited turbulence; in the long term, however, the standoff between the United States and Europe, on the one hand, and Russia on the other, will have reignited Cold War echoes in relationships. The fate of Ukraine is in the middle of Putin’s plan to rebuild Russian influence in the international arena. Its Customs Union with Belarus and Kazakhstan requires Ukraine’s participation. For this reason, Russia offered everything possible to persuade President Yanukovych to scrap the agreement with the EU. That said, it should be noted that Putin will just as easily scrap his ties to Yanukovich, should a better candidate to lead Ukraine – even one more favorable to the demonstrators’ demands – come forward. Putin’s concern is to safeguard Russian interests not to defend Yanukovich.


  1. Let’s hope that the inability for this conflict to have real impact on the world economy doesn’t mean the world let’s this unrest errupt into civil war…. Great article–very thoughtful and provided a more complete picture.

  2. As I note above, while tensions are rising, the country is unlikely to fragment, which would be a disaster not just for Ukraine, but for Russia, Europe. Even Russian speaking Ukrainians identify with the Ukrainian state and consider themselves to be Ukrainian – not Russian. The problem is Crimea, which has an actual ethnic Russian majority, and a strong Crimean Tatar population: to be clear, Crimea is the least Ukrainian part of Ukraine and this is where the groups advocating union with Russia are strongest – others argue in favor of total independence from Russia and Ukraine. As I hinted in the article, the uprising against Yanukovych was marked by action in both eastern and western Ukraine; statues of Lenin were smashed across eastern Ukraine and separatism (other than Crimea) was not mentioned. Ukrainians in both east and west see themselves as Ukrainians. The problem is more political – and economic, given that the East has the most productive industrial and mining centers – than it is ethnic or nationalist. This means that there are tools that can be adopted to manage the tensions. Those tools are political and the solution is to improve the democratic system such that east-west divisions and tensions might be channeled in Parliament through political parties.

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