Ukraine Crisis Rocks Russian Stocks, Currency

March 4, 2014

PUTIN’S GAMBLE

Ukraine Crisis Rocks Russian Stocks, Currency

FTMDAILY.COM – Furious beating of the war drums over Ukraine sent Moscow’s benchmark MICEX stock index falling by 10.8% on Monday, instantly wiping out over $56 billion in market value of Moscow’s publicly traded companies. Meanwhile, Russia’s currency (the Ruble) fell to its lowest level ever against both the U.S. Dollar and the Euro.

Russia’s central bank responded by selling nearly $16.6 billion worth of gold and foreign currency exchange reserves in a feverish attempt at staving off currency speculators. Additionally, the central bank surprised the markets with a steep interest rate hike, from 5.5% to 7%.

The geopolitical and economic realities behind this burgeoning crisis are nothing new. Put simply, Europe is Russia’s top natural gas export market. And approximately 50% of Russia’s exported natural gas to Europe flows through one country: Ukraine. While there are obviously other deep issues in play, what we have here is a clear case of pipeline politics.

In recent days, Russia has used its role as Ukraine’s primary energy player to pressure Kiev into submission. As the national conduit for Russia’s connection to European markets, Ukraine has been given steep discounts on the natural gas flowing through its country. However, the contract for these discounted rates is set to expire on the last day of March. With tensions flaring in the region, and Kiev nearing bankruptcy, everything is now uncertain.

Meanwhile, Mr. Putin has been desperately attempting to create a new Eurasian Union to solidify Russian might and to counter the expansion of Europe. Ukraine was to play an important role in this new economic union. Now, it seems the only way for Russia to prevent the fall of Ukraine to the West is through force… or at least the “threat” of force.

Leaders of the G-7 countries have condemned Russia’s recent move into Ukraine. Publicly, the West has tossed around the idea of applying sanctions against Russia. But if the West attempts to place economic sanctions on Russia, Mr. Putin could (and quite possibly would) simply turn off the gas flowing into Ukraine — and thus, into Europe.

Due to the potential economic fallout, the UK has already begun backtracking on the idea of sanctions. According to the Telegraph:

“Britain is preparing to rule out trade sanctions against Russia amid fears that the Ukraine crisis could derail the global economic recovery.”

So far, Mr. Putin remains defiant in the face of a growing chorus of global critics. He continues to act without regard to threats from the West, pointing to support from his allies in China. In fact, there are even reports from Polish radio that Russia is beefing up its military presence along the borders of Poland and Lithuania.

Mr. Putin has worked hard to build a global reputation as a no-nonsense authoritarian ruler. Therefore, he has little political capital to gain from backing down. This is what makes these unfolding events in this tumultuous region so concerning.

Stay tuned…

To see one ETF we expect to climb higher on these current tensions (along with an potential entry price and an exit price), click here.


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