The seeming sense of world cooperation we witnessed during the Russian Olympics was shattered on the closing day when President Vladimir Putin began mobilizing troops along the border between Russia and Ukraine. Within days he moved some 60,000 Russian soldiers to the border. In rapid fire, he then announced a referendum to be held in the Crimea to determine if it was to remain Ukrainian or join Russia. The referendum was held on March 16, 2014 with 82% of the vote affirming their choice for annexation to Russia by an overwhelming 95%. The next step will be for the Russian legislators to draw up the annexation documents on March 21st.
Last minute pleas by the United States and the EU to Putin to back down had failed. World leaders responded with condemnation. US President Obama called the Russian move “dangerous and destabilizing.” German Chancellor Angela Merkel condemned the “operation on the Ukrainian mainland with Russian troops.” UK Foreign Secretary William Hague called the action “illegal, unconstitutional and illegitimate.” The United Nations has called for a political dialogue on the Russian takeover of Crimea. The resolution passed with China abstaining.
While this is taking place at the diplomatic level, both sides are preparing for financial sanctions to begin as early as this week. Already bankers on both the Russian and West’s side have begun shifting assets. We are living in a new, electronic banking era when bankers can shift billions of dollars or rubles back and forth at the click of the mouse. Russian bankers have pulled some $50 billion of Russian assets from foreign banks back to Russia. On the flip side US banks have $75 billion exposure to Russia. Barclays has backed off from a deal to co-fund Essar Energy transactions with its Russian counterpart VTB, fearing that Russia would impose freezes on such deals. President Obama has authorized US Treasury Secretary Jacob Lew to freeze assets or block American companies and individuals from doing business with Ukrainian and others deemed to threaten Ukraine’s security. The EU is proposing asset freezes, visa bans on people and “entities” involved with Russia’s seizure of Crimea. (Bloomberg News)
To understand the delicate balance between the EU and Russia we turn to the energy sector. The EU is dependent on Russia for oil and natural gas supplies. At issue is the construction of an offshore pipeline stretch of the route under the Black Sea from Russia to Bulgaria. This is a $2 billion project jointly shared by Gazprom of Russia, Eni of Italy, EDF of France and BASF of Germany. Construction was expected to commence in June.
Meanwhile in FX trading the Russian ruble traded at 36.7 to the dollar, a near record low. The Russian Stock Market Index (Micex Index) fell 7.6% last week to 1,237.43. This is the lowest since 2012. Since January the yield on Russia’s 10 year bond has risen from 8% to 9.7%. With bond trades when the yield goes up, the price of the bond goes down. This action means that there is heavy selling of the Russian 10 year bond.
Moving now to the US investor, Russia’s takeover of the Crimea has set in motion a new dynamic of world events. It no longer will be “business as usual.” We can expect more volatility and price swings in world markets. Sanctions, no matter what country imposes them, hinders the free flow of trade. Our multinational corporations derive 40% of their profits from outside the US. Some of their supply chains could be disrupted, The energy sector will be in sharp focus worldwide, especially in the EU which is dependent on Russian oil and natural gas. Brent crude is already selling at a high premium to West Texas Intermediate crude (WTI). There could be some short plays on Russian inverse ETFs. As with any crisis there will opportunities on both the long and short side of markets