Tag Archives: Crimean Peninsula

Russia Hurt By Ukraine Crisis

The crisis in Ukraine is far from over, even though the major protests have ended and former president, Viktor F. Yanukovych, has fled the country. Yanukovych still claims to be President, but is essentially out of the picture for now. But the troubles in Ukraine, and particularly the possible (and likely) succession of Crimea, are putting a damper on the Russian economy. For those not familiar with the situation, Crimea is a peninsular, autonomous parliamentary region in southern Ukraine which consists of predominantly-Russian peoples. It became a part of Ukraine when it gained independence with the breakup of the Soviet Union in 1991. Crimea mostly sympathizes with Russia, and the elections on Sunday will decide whether they will join Russia. They are expected to decide in favor of this.

So what if Crimea wants to join Russia, why should the world care? Well for one thing, Ukraine does not want to lose Crimea. And since the EU and the United States are sympathetic to the new Ukraine (planning to give $15 billion in loans, grants, and investments), these countries are condemning Russia’s push towards the acquisition of Crimea. The economic implications imply that trade with- and investment in- Russia will be reduced, and the effects will be felt in the Ukraine, the EU, the US, but mostly in Russia.

According to an article from the Financial Times, Russian companies are pulling billions out of western banks, in fear that the US will place sanctions over the Crimean crisis and that this could lead to an asset freeze. The fear alone, something we are well aware of in economic expectations, has had significant impacts on the Russian economy. The yield on Russia’s 10-year government bonds increased from 8% in January, to 9.7% on Friday. Also, the rouble is trading for 36.7 for a dollar (almost at its weakest rate in history). Russia’s top 10 billionaires are suspected to have lost $6.6 billion in their combined net worth, over this past week alone. “Strobe Talbott, president of the Brookings Institution, who served in the State Department under Bill Clinton, said: “The irony is that the Russian banking sector has made quite a lot of progress in plugging into the global system. That means it is vulnerable, and a good lever for applying pressure.”” Evidently, the Russian banking sector is going to suffer deeply – not only from possible sanctions, but from the expectations surrounding them.

Europe and the US are expected to impose travel bans and asset freezes on certain individuals close to Russian President Vladimir Putin, at first. And Russia is thus expected to respond with the same restrictions. Investors have already pulled $33 billion out of Russia in January and February, and that figure is expected to near $55 billion by the end of March, according to Russian investment bank Renaissance Capital. On top of this, Russia will face costs to maintain Crimea: estimates are that it will have to commit to roughly $10 billion per year over the next five years in order to build infrastructure, support pensions and pay social benefits to the region’s 2 million citizens.

Russia will experience a significant effect from all of this, as well as the EU and US. But effects on western countries will be miniscule compared to those in Russia. The EU’s exports to Russia account for 1% of EU GDP, while Russian exports to the EU are worth nearly 15% of Russian GDP. Germany has significant investments in Russia, and its impact is expected to be at most 0.1% to 0.2% on economic growth, over the next 12 months. This would be rather insignificant for the European recovery. The US is expected to see similar effects.

Thus, it is important to consider the vast implications of the crisis in Ukraine. Mostly, we should expect to see the Russian economy suffer after the Crimean decision to join Russia. However, the long-term effects are unclear. I suspect tensions will ease within a year, and sanctions will be reduced, allowing trade and investment to increase close to current levels. This is assuming that Crimea does in fact vote to join Russia, and that the European and American recoveries are not significantly interrupted.

(Revised) Crimean Peninsula and Why We Should Not Look into Russian Market.

Today, I would like to talk a little bit about what is going on in the news with Ukraine and the Crimean Peninsula. I will also discuss some of the implication we might see from economics stand point in relation to Russia. I should also apologize from the beginning for any mistakes and misunderstandings alike, but historical accounts sometimes show discrepancies depending on where and how it is told.

So what of Ukraine and its history? Ukraine is the second largest country in Europe and part of its territory includes the Crimean Peninsula (the red part on the image below). The CP was the well known battle ground for Europe in mid-19th Century from 1853 to 1856 for the Crimean War. It was sort of the war between Catholic and the Orthodox, but it was more of rest of the Europe and Ottoman Empire fearing Russian power becoming stronger.

Crimea_in_Ukraine.svg

The Crimean War resolved nothing much as Europe would go ahead and have the WWI 60 years later anyways. Towards the end of WWI Ukraine enjoyed much independence as a result of Communist Revolution in Russia, but by that I mean there was endless violent faction conflicts from 1917 to 1921. Ukraine became part of USSR in the end. After Stalin took over Russia, Ukraine suffered from starvation due to the agriculture policies. Also, after WWII, Stalin deported all indigenous people of Tartars in Crimean peninsula to Central Asia. Fast forwarding to 1991 and the breaking up of USSR, Ukraine once again became independent (over 90% of Crimean Peninsula people voted to be independent from Russia). However, Ukraine remained pretty close ties with Russia unlike other former USSR members like Estonia which is part of EU today.

In 2004, there was an election in Ukraine. Russian-friendly Viktor Yanukovych won against his opposition Viktor Yushchenko. Yushchenko ended up leading a massive protest known as the Orange Revolution in Kiev, the capital of Ukraine. As a result, there was a second election and Yushchenko won this time.

Despite his victory, Yushchenko was a bad leader overall. There were oppositions from Russian-friendly Ukrainians in the Eastern parts of Ukraine. Also, he couldn’t take the austerity measure to keep down the national debt. His close ties with EU infuriated Russia, which resulted in stopping of gas supply from Russia in 2006.

By 2010, there was a next election and this time, Viktor Yanukovych won. However, in 2013, after he claimed that he would denounce ties to EU and become more friendly to Russia, protest broke out again. By Feb 2014, Yanukovych fled, and a temporary government was established until the next election. Russians as a response to this was send troops into Crimean peninsula (estimated at 20,000 against 12,000 Ukrainian troops). The purpose of this according to Russians are to protect ethnic Russians and military bases in Eastern part of Crimean Peninsula. And this is where we stand right now.

Why does this matter? Well, for one thing, it is a violation of territorial integrity by international law. After all, Crimean Peninsula is still Ukrainian. Also, the tension between the NATO and Russia has heightened. I should also remind you that with Euro Crisis not too long ago, nationalistic sentiments are prevalent in Europe

This may not be as serious as second cold war as many claim, but I believe there definitely are some heightened tensions around the globe.  Not just in Europe, but see the territorial disputes in East Asian countries. Near militaristic conflicts between China and Japan is one example.

What of economy as a result? The Micex Index of Russia had fallen 7.8% since last week. Bond yields keeps creeping up–another signs of higher volatility– and Russian Rubles have gone down as much as 10%. American stocks market shows some worries too. See graph below for some reality checks on Russian assets.

Screen Shot 2014-03-12 at 10.04.15 PM

Screen Shot 2014-03-12 at 10.04.29 PM

I came upon an article that said Russian stocks are too cheap to ignore right now, but I beg to differ. Buying Russian assets at higher risk premiums is outright against American national interest. All the while we speak against the Russia’s violation of international law and their undemocratic ways of doing things, we are still giving away money to fund the very things we criticize.

What is U.S. doing then? One of the biggest obstacles between Ukraine and Russian relationship is Ukraine’s heavy dependence on Russia for energy, especially natural gas. This has caught American lawmakers’ attention that U.S. should be more active in U.S. natural gas export, selling liquified gas all the way over to Eastern Europe. I think this is a poor management of current issues. The cost of infrastructure and transportation cannot be ignored. This another ‘treat-symptoms-not-the-cause’ sort of deal. Sure, this will give Ukrainians some independence from Russia, but it will take too much time to even moderately replace the Russian energy supply. I think austere diplomatic approach from US and EU as only viable solution as of right now.

The word Ukraine by itself means “borderland.” The country has long been a borderland between the West and the East. I think what Ukraine needs is a stability and a good relationship with both EU and Russia for the good of all.

Crimean Peninsula?

Today, I would like to talk a little bit about what is going on in the news with Ukraine and the Crimean Peninsula. I will also discuss some of the implication we might see from economics stand point in relation to Russia. I should also apologize from the beginning for any mistakes and misunderstandings alike, but historical accounts sometimes show discrepancies depending on where and how it is told.

So what of Ukraine and its history? Ukraine is the second largest country in Europe and part of its territory includes the Crimean Peninsula (the red part on the image below). The CP was the well known battle ground for Europe in mid-19th Century from 1853 to 1856 for the Crimean War. It was sort of the war between Catholic and the Orthodox, but it was more of rest of the Europe and Ottoman Empire fearing Russian power becoming stronger.

Crimea_in_Ukraine.svg

The Crimean War resolved nothing much as Europe would go ahead and have the WWI 60 years later anyways. Towards the end of WWI Ukraine enjoyed much independence as a result of Communist Revolution in Russia, but by that I mean there was endless violent faction conflicts from 1917 to 1921. Ukraine became part of USSR in the end. After Stalin took over Russia, Ukraine suffered from starvation due to the agriculture policies. Also, after WWII, Stalin deported all indigenous people of Tartars in Crimean peninsula to Central Asia. Fast forwarding to 1991 and the breaking up of USSR, Ukraine once again became independent (over 90% of Crimean Peninsula people voted to be independent from Russia). However, Ukraine remained pretty close ties with Russia unlike other former USSR members like Estonia which is part of EU today.

In 2004, there was an election in Ukraine. Russian-friendly Viktor Yanukovych won against his opposition Viktor Yushchenko. Yushchenko ended up leading a massive protest known as the Orange Revolution in Kiev, the capital of Ukraine. As a result, there was a second election and Yushchenko won this time.

Despite his victory, Yushchenko was a bad leader overall. There were oppositions from Russian-friendly Ukrainians in the Eastern parts of Ukraine. Also, he couldn’t take the austerity measure to keep down the national debt. His close ties with EU infuriated Russia, which resulted in stopping of gas supply from Russia in 2006.

By 2010, there was a next election and this time, Viktor Yanukovych won. However, in 2013, after he claimed that he would denounce ties to EU and become more friendly to Russia, protest broke out again. By Feb 2014, Yanukovych fled, and a temporary government was established until the next election. Russians as a response to this was send troops into Crimean peninsula (estimated at 20,000 against 12,000 Ukrainian troops). The purpose of this according to Russians are to protect ethnic Russians and military bases in Eastern part of Crimean Peninsula. And this is where we stand right now.

Why does this matter? Well, for one thing, it is a violation of territorial integrity by international law. After all, Crimean Peninsula is still Ukrainian. Also, the tension between the NATO and Russia has heightened. I should also remind you that with Euro Crisis not too long ago and nationalistic sentiments are prevalent in Europe

I see this as another sign of second cold war.  Not only in Europe, but see the territorial disputes in Asia between China and Japan (there are also disputes between Korea , Japan and Russia too). The Micex Index of Russia had fallen 6% since last week. Bond yields keeps creeping up–another signs of higher volatility– and Russian Rubles have gone down as much as 10%. American stocks have gone down as a general effect from this tension too. Some say that Russian stocks are too cheap to ignore right now, but I beg to differ. I see Americans buying Russian assets at a higher risk premium is in some sense against our national interest. All the while we speak against the Russia’s violation of international law in many aspects, we are giving the money to continue their plan.

The word Ukraine by itself means “borderland.” It has been a borderland between the West and the East for a long time. I think what Ukraine needs is a stability and a good relationship with both EU and the Russia for the good of all.