The Reign in Ukraine and the Russian Repercussion

Last weekend, the people of Crimea went to the polls and voted to secede from Ukraine and join Russia. The results were overwhelming, if somewhat suspect given the heavy Russian military presence in the region. According to elections spokesmen, 96.7% of voters wanted to rejoin Russia. And while the uncertainty in Ukraine isn’t good for anyone, it’s the Russian repercussions that most investors are worried about.

Russia is the ‘R’ in BRIC and, up until a few weeks ago, was the most stable of the four biggest emerging markets. While the developments in Crimea have been a huge political success for Russia’s president, Vladimir Putin; his approval ratings have shot up to 75%. But Putin’s popularity isn’t what’s been driving the Russian economy. Europe and the United States are beginning to hash out economic and political sanctions to punish Russia for helping pull apart Ukraine. It’s these sanctions that have investors worried, or rather the severity of the package of sanctions. Just within the last few days, Russia’s deputy economic minister Sergei Belyakov used the words “economy” and “crisis” in the same sentence. With the Russian economic bear potentially slipping back into hibernation, punitive sanctions from the West are exactly what Russia doesn’t need.

And it’s perhaps Crimea’s vote that may limit the West’s ability to impose severe sanctions on Russia. The process of the referendum was flawed, but, to me, the turnout and reported landslide seems to lend a certain degree of legitimacy.  It’s quite possible that the people of Crimea weren’t happy staying with Ukraine.

The situation tends to cast the greatest shadow on the European portions of our portfolios. The trade links between Europe and Ukraine and Russia are significant. Around a third of Eastern Europe’s energy comes from Russia, and about half of that flows through Ukraine. So a protracted standoff between Russia and the West could impact Europe negatively. If there is a negative impact in Europe, it’d likely be felt broadly. Trade disruptions, energy supply disruptions, or energy price spikes could all affect profitability across the European corporate spectrum. This all comes at a time when Europe is strengthening, but by no means ‘strong.’ That said, Europe’s probably not in the strongest of positions to be too aggressive on sanctions. So, in my base case, I don’t expect sanctions that could derail the trade links.

The United States has little economic or geopolitical stake in Crimea, but there is one interesting possible effect. Ukraine is a large exporter of wheat, so uncertainties over the situation could lead to higher global wheat prices. That, in turn, should help benefit the U.S. agricultural sector.

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