A Note on Ukraine / Putin…

This is no good news…

While I am watching the escalating crisis in Ukraine, markets have been reacting negatively today and are considering how this evolving crisis could destabilize the global economy further.

The news hit global financial markets today, alarming many of us who had already been nervous about shaky emerging market economies. Many investors selling off shares particularly in companies with exposure to Ukraine and Russia. Russian and Ukrainian markets felt the biggest impact today, with the Moscow benchmark MICEX index dropping 9.4%, and the ruble falling to a record low.

Ukraine is weak, but is an important channel between Russia and major European markets. Russia supplies 25% of Europe’s gas demand, and let’s not forget that half of that is pumped via pipelines running through Ukraine. Russia has cut off that flow in past disputes with Kiev and another disruption could push up global energy prices significantly.

There has been talks of economic isolation for Moscow as Barak Obama and his European allies are “currently considering all options”. Possibility of such sanctions must be on the mind of Vladimir Putin which is looking very seriously at the economic components of his military and diplomatic moves.

The fact is that Russia is dependent on the international economy in a way that wasn’t true a decade ago. More than half of its foreign trade is now with EU countries and not to mention that it depends on European imports to keep its stores filled, and to keep the standard of living that Russians have gotten accustomed to. I believe, regardless of the decision on imposing sanctions, Russia’s political relationship with the West will likely go on a bitter path.

Putting aside the emerging political noise, what is happening in Ukraine today is adversely impacting Europeans and the World. Ukraine is one of the world’s top exporters of corn and wheat and prices could rise even on concern those exports could halt.

The other side of the crisis has to do with Ukraine’s government debt and desperate needs for assistance. In order to avoid a total collapse in the coming weeks, Kiev needs money now. Kiev owes $13 billion in debt in 2014 and $16 billion coming due in 2015. Without any help the country appears to be headed for default. Last week, Moscow has halted a $15 billion bailout and I don’t see a comparable alternative in sight. However, there is a glimpse of hope from the IMF as it is currently consulting with other bodies to help raise the $35 billion Ukraine says it needs.

This is no good news for emerging markets, although Ukraine is not the only fragile market. Instability in Europe comes at a difficult time for emerging markets worldwide which is seeing slower growth. No one will be immune in the Ukraine crisis. Global investors will reassess the risk of other emerging markets slowing economic growth, Russian banks will be hurt, which have leant heavily to Ukraine.

In the business of politics, bad news is usually good news — for somebody else. Could this be the good news for the Putin Doctrine? Time will certainly tell…

I will be closely following the serious and rapidly unfolding developments in Ukraine.