The Ukrainian crisis is back on the radar as the group of seven countries G7 condemns a new Russian military build-up on the Ukraine border.
Russia’s Putin has referred to Ukraine as a puppet state of the west, and he defined Russia’s redline as Ukraine pivoting economically, strategically, and militarily to the west.
The Russian leader has referred also in previous speeches to “one Russia,” meaning Russia, Ukraine, and Belarus.
But opinion polls indicate that 62 percent of Ukrainians want to join the European Union and 58 percent want membership in NATO.
Nikolai Patrushev, Russia’s security council chief, called Ukraine a “protectorate”.
“Russia’s Putin has referred to Ukraine as a puppet state of the west”
Some analysts believe the root of the Ukraine crisis is Russia lamenting its imperial past.
But there is another factor why Russia is likely to fight tooth and nail to keep Ukraine within its orbit. Ukraine is the breadbasket of Europe with an abundant supply of dwindling fertile land.
According to the CIA World Factbook (2014), Ukraine produced 25% of all agricultural output in the former Soviet Union.
Memories of the Ukrainian famine of 1932–33, known as Holodomor, where an estimated five million people starved to death was not caused by a natural disaster but due to a deadly policy.
“Ukraine is the breadbasket of Europe”
The Ukrainian crisis is a hot geopolitical potato, potentially flaring up into a shooting war if tensions do not deescalate and US-Russian diplomatic relations collapse
Moreover, the reclassification of the US Nuclear Weapon Policy in the context of the Ukrainian crisis is concerning.
A US no first use policy calmed tensions between non-western states with WMDs.
The doctrine of mutually assured destruction MAD made no first use policy sane. Nuclear weapons were a deterrent, and through mutually assured destruction, we had relative peace.
But when nukes become tactical weapons, with the potential of a swift victory on a battlefield against an opposing force with conventional nukes, then it changes the dynamics.
“The US Embassy in Moscow has suspended visa and other consular services in August” – Win Investing
Worsening US/Russian diplomatic relations suggests that the Ukrainian crisis is on the wrong trajectory
The US Embassy in Moscow has suspended visa and other consular services in August and that is a headwind on business ties. Are demons dragging the world to war?
The worst-case scenario is that the Ukrainian Crisis escalates into the Four Horsman of the Apocalypse.
What are the economic impacts of this latest Ukrainian crisis?
While Ukraine only contributes about 0.2 percent of global gross domestic product, according to Société Générale 2014 data, a crisis in the region would disrupt the flow of natural gas to Western Europe and increase the cost of food commodities.
In other words, a Ukrainian crisis would hit consumers’ wallets, particularly in Europe, as it would increase food and energy costs and tip the EU into a deeper recession.
Recalling how financial markets reacted to the 2014 Ukrainian crisis could give investors/traders a heads-up
The Ukrainian crisis in 2014 rattled energy markets because a large portion of Russian natural gas for Europe moves through Ukraine. As tensions escalated in 2014, natural gas prices rose about 6 percent on the British market, and shares of Gazprom, the Russian gas monopoly that counts Ukraine as a major customer, fell more than 10 percent. Moreover, Oil prices also rose, with Brent crude futures traded in London adding 1.9 percent. What could keep the price from going higher, for now, is that in recent years Russia has chipped away at the amount of gas that goes through Ukraine by opening the Nord Stream pipeline, which bypasses the country. In addition, European countries may have been able to build up substantial gas reserves, given that the winter has been warm.
Companies that had significant interests in Russia, like BP, shares fell 2 percent in London’s as tensions escalated back in 2014.
“The Ukrainian crisis in 2014 triggered a pivot to safe-haven assets” – Win Investing
Worse impacted by the Ukrainian crisis were Russian assets
The Russian stock market MICEX index was worse impacted by the Ukrainian crisis.
The Ruble fell to a record low against the USD, as concerns spread to currencies in nearby countries like Hungary, Turkey, and Poland.
In developed markets, shares sank as well, with companies with exposure to Ukraine and Russia taking the biggest beating.
The Ukrainian crisis led to a divergence in the performance of stock indices, with Europe being worse impacted and US exchanges least affected by the crisis.
As tension escalated the Euro Stoxx 50 index of European blue chips closed down 3 percent
By comparison, the Dow Jones industrials fell 0.9, the Standard & Poor’s 500-stock index fell 0.7 percent and the Nasdaq composite index fell by a similar amount.
The Ukrainian crisis in 2014 triggered a pivot to safe-haven assets
With capital flows accelerating into treasuries and precious metals. Bitcoin’s prices slumped through 2014 and touched $315.21
Safe Haven currencies did well with USD and Japanese Yen outperforming its peers.
The price of the benchmark 10-year Treasury note rose 13/32 to 101 9/32, and its yield fell to 2.61 percent, from 2.65.
Gold perfect trade, the ultimate safe-haven asset, is likely to outperform during a Ukrainian crisis
Russia is also a big player in industrial metals, and most of the world’s major brands are significantly invested in the country. In other words, Russia is important for a range of European and American companies. Pepsi and Shares of the French automaker Renault, which also has major operations and sales there both fell 5.4 percent.
Some analysts downplayed the risk of military confrontation from the Ukrainian crisis; they argued it would lead to a low risk of global financial contagion or major blowback to Western economies.
But we disagree, as noted in this piece.
As we have stated above, the best way to monitor the Ukrainian crisis is to keep track of US-Russian diplomatic relations, so far not so good.