Ukraine Crisis Has Spill Over Effects Beyond Russia, Deutsche Bank Says

Mar 3 2014, 5:11pm CST | by

Ongoing tensions between Ukraine and Russia have serious implications for investors, particularly Russian equities. But Russian investors won’t be the only ones to take a hit.

Deutsche Bank said on Monday that the entire situation “bodes bad for all Russian assets, but also for the entire region of Eastern Europe, including Turkey.” As it is, Ukraine political woes have pushed oil futures higher today. Brent crude closed at its highest levels all year to $111.20, with West Texas Intermediate oil rising 2.3% to $104.92 for the April futures contract.

In equity markets, the Market Vectors Russia (RSX) exchange traded fund settled 6.8% lower, while the ruble returned some of its losses against the dollar today after a rough opening session.

The iShares MSCI Turkey (TUR) ETF underperformed the benchmark MSCI Emerging Markets Index by nearly 100 basis points to settle 2.8% lower.

Ukraine and Russia have been at loggerheads for weeks. It all started late last year when Ukraine’s president Viktor Yanukovych rejected a trade deal with the European Union in favor of closer ties with Russia. Many pro-European Ukrainians took to the streets in Kiev to protest Yanukovych, calling for his ouster and arguing that the president was not acting out of the national interest but taking orders from Vladimir Putin in Moscow instead.

Russia later gave Ukraine a nearly 50% price cut on natural gas, and offered the economically weak country a $15 billion aid package. But with Yanukuovych gone from Kiev and pro-Western technocrat Arseniy Yatsenyuk in his place, tensions have heated up between Moscow and Kiev. Over the weekend, Russia warned of sending more troops to the Crimean peninsula following an alleged attack by unknown Kiev gunman on Crimean government offices. Many pundits who follow the two countries closely suspect a civil war in the worst case scenario, with Crimea becoming even more independent from Kiev and leaning more towards Russia.

Deutsche Bank’s view is that Crimea will no longer be governed by Kiev, but won’t be controlled by Moscow either. Most likely it will receive a status of a special territory, with Russia having a larger influence than it does now. Russia’s historic Black Sea Fleet is docked at a naval base on the peninsula, so the country already has a strong military presence in southeast Ukraine.

Deutsche Bank also doubts that Russia will invade Ukraine’s mainland and will seek to avoid a military conflict.

But that won’t ease pressure on Russian assets anytime soon. And likely not until Ukrainian elections scheduled for May.

Both Russian and Ukrainian asset markets are expected to decline further, according to Deutsche Asset & Wealth Management. Wide-spread contagion will be dispersed across asset classes. Russian energy companies are likely to be hit especially in case of delayed or failed payments for natural gas deliveries from Ukraine. Global fixed income markets should remain better contained unless the crisis evolves further and turns into a full fledged military conflict. Global equity markets, trading near all-time highs need to be monitored closely for signs of wider contagion. And currency markets may see some support for safe-havens like the dollar, yen, and Swiss Franc in particular. Emerging market currencies will remain under pressure.

“We think Ukraine is likely to end up in a different place than Syria,” said Jan Dehn, head of research at Ashmore Group in London. “Ukraine already has a new government and much now depends on the strength of its leadership. Its primary task is to establish economic stability, which in turn will generate greater legitimacy. Strong leadership will also force the E.U., U.S. and Russia to work on Ukraine’s priorities, not the other way around.”

Putin received approval for the use of troops in Ukraine from parliament this weekend, but Russian officials like Foreign Minister Sergei Lavrov swear that does not necessarily mean he will use it. Putin has support of a majority of the Crimea population. Much less support in most of Ukraine.

A referendum on the future of the region will be held on March 30th with the likelihood of a pro-Russian outcome for Crimea. According to Russian Television, there were pro-Russia rallies in Donetsk, Lugansk and Kharkiv, Ukraine’s industrial heartland.

The Obama Administration has threatened sanctions and isolation of Russia in the case of an over-reaction. The E.U. has condemned any military moves by Moscow, but has not sided with Washington on sanctions. Russia is a major natural gas supplier to Europe, so sanctions could prove just as costly. Meanwhile, China has issued a rather ambiguous official commentary about the whole sordid affair, coming out in support of territorial integrity.

For now, this appears to be a Russia vs. the West re-enactment of old historic wounds in the Crimea.

If the crisis remains focused on Crimea and no further intervention within Ukraine evolves, financial markets may deem this event as regional, Deutsche Asset & Wealth Management said in a note to clients today. In the best case scenario, global contagion should be limited and recede after initial sparks.

Source: Forbes Business

 
 
 

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