Tag Archives: russia

Crimean Dilemma: Russia’s Gambit Provides an Interesting Game Theory Experiment

This weekend, Tyler Cowen wrote a great piece in the New York Times discussing how the Crimean crisis can be viewed through a game theory lens. Game theory has been an incredibly framework for understanding foreign affairs since the mid twentieth century, when nobel winning economist and political scientist Thomas Schelling pioneered its use. During the Cold War, game theory provided a very relevant framework for understanding the actions of the US and Russia. Because both countries had nuclear arsenals that could wipe out each other (and take the rest of the globe with them) any threat of nuclear attacks was sure to be mitigated by mutually assured destruction. The threat of nuclear attack, therefore, was not a credible commitment from either country. Now as Russia plays the belligerent role again, it makes sense to turn back to game theory to try to better understand their actions.

First off, Cowen presents four game theory concepts that are relevant to the current situation in Crimea: (1) nuclear deterrence (2) tipping points (3) market deterrence and (4) credibility and consequences. To briefly summarize each of these points:

  1. Nuclear deterrence: This point is simple, but also very worrying – if Ukraine had nuclear weapons, they would have been much more capable of deterring Russia military intervention in the region. In fact, before 1995, Ukraine did indeed have a significant nuclear arsenal after the fall of the Soviet Union but they agreed to give them up after safety assurances from the US and Russia. The fact that Russia reneged on this agreement could make the appeal of attaining nuclear weapons stronger for countries like Iran.
  2. Tipping point: This point I find to be interesting, as it is less obvious than the first. Cowen argues that the world has been relatively peacefully over the last 25 years since the fall of the Soviet Union as new governments have peacefully formed in its wake and we have reach a relative equilibrium. Now, however, most of the situations that are capable of being peacefully resolved have been and we may be on the precipice of a “tipping point” towards more prevalent violent conflict resolution.
  3. Market deterrence: The point here is that financial market punish reckless military actions such as the Crimea gambit. The Russian stock market fell 10.8% the day they invaded Crimea but as the Economist brings up, financial shocks are probably less politically harmful in Russia than the US. Russia has an oligarchical elite that engage in cronyism with the Kremlin – many of whom could have received advanced warning about such a military escapade and positioned themselves to profit. On this point I slightly disagree with Cowen – while Russia is certainly exposed to financial markets more than they were during the Cold War, Putin can be reasonably sure that short term fluctuations in markets will not do significant political harm.
  4. Credibility and consequences: I believe that this is probably the most important issue raised. The question Cowen raises is how much credibility does the US lose by not acting to protect Ukraine as we pledged to do in the 1995 agreement? American self interests are not really on the line – Ukraine is more in Russia’s traditional sphere of influence and has limited economic and political ties to the US. Therefore any commitment to intervene may not be very credible. The consequences of this will be most interesting in Asia, where commitments to intervene for small Pacific countries that could one day face Chinese hostilities may be seen as not credible after the US response to Crimea.

Overall, I think Cowen has brought up several interesting points which have given me a different perspective when looking at this situation. At this point, it looks like the potential to be a prisoners dilemma type of scenario. While Russia and the US would be best off on the whole if they could cooperate to come to a reasonable compromise, the payoff of Russian defection is very high (they get to annex Crimea). They do not believe the US will credibly retaliate forcefully, which would be the worst outcome for everyone, so they defect and gain Crimea as a result. It will be interesting to see what the consequences of this repeated game are for both sides.

How Long Can Russia Hold Out?

Today, as the US and other leaders of the now G7 group of nations shunned Russia and its antics in Ukraine, a clear message was sent to the former Soviets: change your actions or there will be severe consequences. The G7 agreed to economic sanctions of Russian energy, finance, banking, and weapons industries until the country backed off of its annexation of Crimea. Instead of the G8’s annual meeting in Sochi this upcoming June, the now G7 will instead travel to Brussels and have their meeting there. (WSJ)

The question now I believe is to what extent will these sanctions be successful and how does that compare with other economic damage being done purely due to the political and economic unrest created by Putin’s actions. What I am getting at here has to do with the cost benefit analysis of the sanctions. For the US, as explained in this WSJ article, sanctions against Russia really would not have much of an effect as only 1% of annual US trade occurs with Russia. The meat of the sanctions would come from European countries and as shown by the following graphic, could hurt Europe as much as they do Russia:

Screen Shot 2014-03-24 at 10.15.46 PM

 

 

 

 

 

 

 

With almost 160 billion euros worth of oil and gas sent to the European Union in the first 9 months of 2013, there is substantial demand that would have to be gotten elsewhere if the EU were to in fact, sanction like the G7 is talking about. It is also unfortunate for the EU that over 15% of their gas needs come through Ukrainian pipelines that Russia could feasibly have some sort of control over now as well. Russia is the EU’s 4th largest trading partner and has substantial banking and automotive ties in the EU countries to boot. So obviously the G7 has something much more complicated than just sanction and wait going on here.

The good news here though, is that the G7 may not even have to impose as extreme of measure as are being talked about due to the unrest in the financial markets in Russia. As news broke of the tense situation back towards the beginning of March, Russian stock indexes dropped as far as 10% in a single day and have continued falling since. These are accompanied by massive losses in value in the Russian Ruble and the MICEX Russian Index (not hedged against losses in currency value) has fallen to almost 30% losses on the year at points. Accompanied by massive capital outflows from Russia and it becomes feasible that Russia could enter a recession without the US or the G7 ever having to do anything more than threaten to sanction. (Bloomberg) This is the most interesting part of the whole story I think, that while these threats of sanctions can be quite complicated as well as costly, there is really nothing as clear as Russian oligarchs losing over 20% of their wealth as quickly as Putin can send troops to the Ukraine.

The next time Mr. Putin asks his friends for a little money from the private sector and they do not have it, he may come to regret the path he has taken here on the Ukraine.

 

(Revised) 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  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 last Sunday decided they would join Russia.

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 ex ports 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. So far, Crimea has voted in favor of joining Russia, and the US has responded with sanctions on individuals close to Putin, and tensions (specifically between Russia and Ukraine) continue – as expected. Hopefully, tensions will ease soon, but I don’t see Crimea being returned to the Ukraine in the near future, making it a difficult situation all around. In terms of the benefits to Russia, I see them as completely outweighed by the costs, in this annexation of Crimea.

Russia’s Capital Outflow Problem

The United States’ sanctions against Russia may actually benefit Putin and the Russian economy as a whole, argues Politico magazine. The article outlines a problem that has hurt Russia economically over the last two few decades. As in many countries, there is an incentive for the wealthiest Russians to place their assets in offshore accounts. Since a little over 100 Russians hold over 35 percent of the country’s wealth, the money that these oligarchs send offshore accounts for massive capital outflows.

While some Russians laughed the sanctions off, including one of Putin’s aides who said that the only thing he needed from America was Tupac’s music, which he could download online, the sanctions make holding assets abroad risky for these wealthy Russians. If they are forced into bringing their wealth back to the Russia, they will have to invest in Russian businesses and other projects. This kind of action strengthens Russian’s economy and also reinforces Putin’s power. If the Russian wealthy can hide their money offshore, Putin cannot control their money nor them. With all of this money back home, Putin assures that these oligarchs won’t do anything that would put them in jail and have the government confiscate their assets. This kind of effect would be much needed as Putin’s Russia is facing a lot of economic difficulties, including a very weak Ruble.

While all of the ongoings with the Crimea have shaken the Russian markets (which was down about two and a half percent today), Putin seemed eager to defy the United States’ sanctions against Russia. These sanctions were criticized for being too weak, but if Putin thought that he stood to gain from defying them anyways, it didn’t matter how strong the sanctions were; it will benefit him anyways.

While Russia’s capital outflows may be turning around, the European economy may be harmed in all of this, as the Wall Street Journal argues. This would stem from European reliance on Russia’s energy exports and over $150 billion in European bank claims in Russia.

Whatever the collateral damage on the European economy, Putin clearly was eager to march into the Crimean peninsula, heightening tensions with the United States and other countries. With Putin’s dominating control over Russia, it would be surprising to me if he didn’t see a benefit to doing this, lending credence to the opinion of the Politico article; that Putin stands to gain by bringing Russian money back to Russia: mostly in his control over the Russian elite. There is a reason that some think he is the most powerful man in the world.

Revised: Weak Economic Sanctions Likely Will Have No Effect on Russia

Last Sunday marked a big day in world history as Crimea voted in favor of seceding from Ukraine in order to join Russia. The annexation of Crimea will be the biggest annexation of a European territory in many decades. The vote came with a lot of opposition from the United States and the European Union, as both parties made announcements of sanctions to be carried out against Russia. President Obama’s first round of sanctions included the “blacklisting” of seven Russian politicians and four Ukrainian politicians believed to have supported the annexation of Crimea. The European Union responded with the blacklisting of 22 Russian politicians, with four being listed by both parties. Putin and his cronies responded to these light sanctions with laughter. Vladislav Surhov, a Putin aide who was blacklisted by the United States, responded to news of his sanctions by saying, “What interests me about the United States are Tupac Shakur, Allen Ginsberg, and Jackson Pollock. No Visa is needed to access their works. So I’m not missing anything.” Many of those “blacklisted” aren’t believed to have any foreign assets, so the effects of this first round of sanctions are extremely minimal. (WSJ – Russia Moves Closer to Absorbing Crimea, Despite Sanctions)

As a result of the weak sanction proposals announced by the US and the EU today, it is believed that Putin will make an announcement tomorrow in Moscow announcing the absorption of Crimea. The US and EU will likely respond to this announcement with stronger rounds of sanctions against Russia. Currently in Washington there is legislation being drafted to broaden the sanctions to any company doing business with any blacklisted Russian individual or company. The current proposal is very similar to the sanction proposal announced in 2007 by the Bush Administration against Iran. The sanctions imposed against Iran effectively reduced Iran’s oil exports by half and froze the international banking system in Iran, effectively crippling the Iranian economy. Despite the similarities in sanction proposal, any proposal will likely be limited due to Europe’s reliance on Russian trade.

According to Eckhard Cordes, the Chairman of Eastern Committee of German Business, “Tough economic sanctions would quickly weaken not only the Russian economy, but also Europe’s economy.” Over the past two decades many European firms have invested billions of dollars into Russia to take advantage of a European market with robust growth opportunities. As a result many of Europe’s largest firms, such as BP, Societe General, Danone, and Royal Dutch Shell, have significant assets in Russia that they rely on for a large portion of their revenue. As a result of the influence of many large European firms, it is hard to see any significant sanctions being enacted against Russia. As put simply by Frederic Oudea, the CEO of Societe General, “both regions have too much to lose.” This belief was portrayed in the markets today as many of these companies with large exposure to Russia traded up. (WSJ – Response to Crimea Vote Sets Western Companies on Edge) Simply put it is believed that the self-inflicted costs of sanctions far outweigh any benefits from the sanctions.

Furthermore, the announcement of the sanctions seemed to have minimal constrains on firm investments in Russia. Despite Ford announcing that they will be seeking consulting on their investments in Russia, many analysts said that they believe further sanctions will not affect many European firm’s ability to collect revenue on their Russian assets. Overall, the current sanctions, as well as Europe’s reliance on Russian trade, seem to be forecasting all impending threats towards Russia as discredited. Unless, the EU is willing to take economic concessions in order to sanction Russia it seems unlikely that they can provide Russia with a credible threat. As the EU continues to move through their recovery, it seems unlikely that they would make any sanctions that would jeopardize their economic recovery.

(revised) US’s outlook for Natural gas exporting

The current conflict in Ukraine is attracting a lot attention. Weeks ago, in order to against the counter force from EU countries, Mr. Putin played his trump card: raise the natural gas price in Ukraine. As a big country that riches in all kinds of natural resources especially energy, Russia has been holding the pipelines that transfer natural gas into EU and making the dominate strategy in this game. It is reported that more than 30% of gas in EU is provided by Russia.

So far the west have threated to commit sanctions on Russia’s action of occupying the Crimea region, however due to the problem of natural gas, those commitments are more like to be non-credible threatens. The head countries in EU like UK and German are bounded by such a concern, and the graph below from NYT can shows that major buyers of the Gazprom – Russia’s largest state-owned natural gas company.

0305-for-webGAS-artboard_1

We can see that German and Britain are in the list. Actually according to this article in WSJ, Six countries in Europe import 100% of their gas from Russia, and an additional seven rely on it for at least half. It is beyond doubt that Russia has its considerable influence on the attitudes of the EU countries on this affair. U.K. Foreign Secretary William Hague said European nations may need to “recast their approach” to Russian energy purchases if the crisis isn’t resolved.

Also reported in WSJ, Obama’s government is taking measures to curb the Russia’s stranglehold over EU’s natural gas supply. US is currently one of the biggest natural gas production nations in the world due to one of its most advancing tech in this field names fracking. The strategy is increasing natural gas exporting to EU from US thus undercut natural gas imported from Russia. Compare to Russia, US has big cost advantage. As the graph from BP’s official site showed below, natural gas price keeps falling over recent years in North America. The price in US is far lower than that of Asia and Europe.

In this strategy of US, big oil and gas production firms like ExxonMobil benefit a lot from it, while environmentalists and small manufacturing companies strongly oppose such a claim. In my point of view, it is unstoppable for US government to apply this strategy.

There are several reasons why US didn’t doing so in the past:

1, Exporting more natural gas will increase the price of it in US. Currently the natural gas price in US is almost 1/5 of that in Japan, which is a big advantage for US manufacturing industries that rely heavily on gas as raw material. More export means less gas available in US, and the price will likely rise.

2, Protecting domestic natural resources and environment. Natural gas is a crucial strategic resource that its export needs to be limited. Also the large-scale exploiting of gas can cause severe environment problem.

3, Technology limitation. Since the gas exploiting technology in the past is not so advanced, the available gas reserves were bounded. People were afraid of gas shortage once they export more natural gas to foreign countries.

However, the current situations are changed dramatically. So it’s a good time for US to develop its gas export industry for several reasons:

1, Boom in natural gas reserves. Thanks to the new tech named “fracking”, now there are more gas available underground that can be exploited and meet the exporting need.

2, Increase domestic gas price. Because of the increase in gas reserves, now the prices are too low to let gas production firms making profits. Economically, it is needed to increase export to raise domestic prices and develop gas transmission infrastructures.

3, Curbing Russia’s power over EU. The political pressure in Ukraine is the main push force for US’s decision of increasing gas export.

Overall, the US strategy is a good news for the reason that it may help a lot to the establishment of the global natural gas market, which will benefit the people around the world and accelerate the process of clear energy movement.

 

Stocks Don’t React to Crimea News

After the news about Crimea’s vote to leave Ukraine and join Russia, there was the possibility of seeing a reaction in the stock market. However, people are relieved to see that the U.S. stock market rose, despite potentially-problematic political tensions with Russia. It seems like for now, the situation is not severe enough to prompt a significant disruption in the market. A Wall Street Journal article explains that “the outcome matched market participants’ expectations… prompting investors to unwind cautious bets meant to protect against potential market-spooking headlines. Looking ahead, investors are awaiting details of any economic penalties to be imposed on Russia by Western leaders, who have said a Russian annexation of Crimea would be illegal.” This morning, the official sanctions were announced by President Obama: “sanctions on specific individuals responsible for undermining the sovereignty, territorial integrity and government of Ukraine…second, sanctions on Russian officials — entities operating in the arms sector in Russia and individuals who provide material support to senior officials of the Russian government.”

The sanctions are very limited, only concerning specific individuals tied to Putin’s government. So the stock market, in ignoring the Crimea news, is not likely to be affected by this announcement either. “U.S. stocks climbed, rebounding after last week’s selloff, as investors took Crimea’s widely expected vote to secede from Ukraine in stride.” The Dow Jones Industrial Average rose 192 points, or 1.2%, to 16259 in today’s trading. The S&P 500 rose 18 points, or 1%, to 1860. The Nasdaq Composite Index also rose 45 points, or 1.1%, to 4290.

And good indicators continue to pronounce themselves in favor of recovery. Federal Reserve data showed U.S. industrial production rose 0.6% in February (which was higher than expected). Capacity utilization increased to 78.8% (a slight, but important change). Alan Gayle, director of asset allocation at RidgeWorth Investments, says that the data supports the notion that U.S. economic growth is still on track, and a series of weak points around the start of the year were mostly about severe winter weather than a falter on economic recovery.

Thus, the good news today is two-fold: stocks rose despite the news from Crimea (which is a good sign persistent, stable recovery) and the recovery seems to be strong. At this point, growth is slow but steady – which may be exactly what the economy needs. If we saw excessively-fast growth and stimulus, we would be more concerned with inflation than the economic recovery. It is best to focus on this kind of current growth, which seems to be relatively stable.

Weak Economic Sanctions Likely Will Have No Effect on Russia

Yesterday marked a big day in world history as Crimea voted in favor of seceding from Ukraine in order to join Russia. The annexation of Crimea will be the biggest annexation of a European territory in many decades. The vote came with a lot of opposition from the United States and the European Union, as both parties made announcements of sanctions to be carried out against Russia. President Obama’s first round of sanctions included the “blacklisting” of seven Russian politicians and four Ukrainian politicians believed to have supported the annexation of Crimea. The European Union responded with the blacklisting of 22 Russian politicians, with four being listed by both parties. Putin and his cronies responded to these light sanctions with laughter. Vladislav Surhov, a Putin aide who was blacklisted by the United States, responded to news of his sanctions by saying, “What interests me about the United States are Tupac Shakur, Allen Ginsberg, and Jackson Pollock. No Visa is needed to access their works. So I’m not missing anything.” Many of those “blacklisted” aren’t believed to have any foreign assets, so the effects of this first round of sanctions are extremely minimal. (WSJ – Russia Moves Closer to Absorbing Crimea, Despite Sanctions)

As a result of the weak sanction proposals announced by the US and the EU today, it is believed that Putin will make an announcement tomorrow in Moscow announcing the absorption of Crimea. The US and EU will likely respond to this announcement with stronger rounds of sanctions against Russia. Currently in Washington there is legislation being drafted to broaden the sanctions to any company doing business with any blacklisted Russian individual or company. The current proposal is very similar to the sanction proposal announced in 2007 by the Bush Administration against Iran. The sanctions imposed against Iran effectively reduced Iran’s oil exports by half and froze the international banking system in Iran, effectively crippling the Iranian economy. Despite the similarities in sanction proposal, any proposal will likely be limited due to Europe’s reliance on Russian trade.

According to Eckhard Cordes, the Chairman of Eastern Committee of German Business, “Tough economic sanctions would quickly weaken not only the Russian economy, but also Europe’s economy.” Over the past two decades many European firms have invested billions of dollars into Russia to take advantage of a European market with robust growth opportunities. As a result many of Europe’s largest firms, such as BP, Societe General, Danone, and Royal Dutch Shell, have significant assets in Russia that they rely on for a large portion of their revenue. As a result of the influence of many large European firms, it is hard to see any significant sanctions being enacted against Russia. As put simply by Frederic Oudea, the CEO of Societe General, “both regions have too much to lose.” This belief was portrayed in the markets today as many of these companies with large exposure to Russia traded up. (WSJ – Response to Crimea Vote Sets Western Companies on Edge) Simply put it is believed that the self-inflicted costs of sanctions far outweigh any benefits from the sanctions.

Furthermore, the announcement of the sanctions seemed to have minimal constrains on firm investments in Russia. Despite Ford announcing that they will be seeking consulting on their investments in Russia, many analysts said that they believe further sanctions will not affect many European firm’s ability to collect revenue on their Russian assets. Overall, the current sanctions, as well as Europe’s reliance on Russian trade, seem to be forecasting all impending threats towards Russia as discredited. Unless, the EU is willing to take economic concessions in order to sanction Russia it seems unlikely that they can provide Russia with a credible threat. As the EU continues to move through their recovery, it seems unlikely that they would make any sanctions that would jeopardize their economic recovery.

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.

Whose a Greater Concern?

It seems there are a lot of major issues in the world today, from the Venezuelan protests, to the continued problems in the Middle East, and the significant issue of Russia planning to annex part of Ukraine. The last issue comes with a threat of weakened US Russia trade, as the two major countries are at odds about Russia’s actions in Ukraine. However, when asked about what issues threaten US economic growth most, many economist agree that the major threat comes from China’s slow growth.

There are a few reasons Chinas slowed growth is seen as the biggest threat. For starters it has already occurred for the past two months, with both shrinking industrial production and slowing retail sales. On top of the internal issues, China currently has the worlds second largest economy. Such a large economy means that they have a significant impact on international trade flows.

Economist view Russia’s possible annexation of Crimea as an issue that will not likely directly affect the US. Instead they predict the annexation to negatively impact both Russia and Ukraine stock prices while only slightly spilling over into the US through energy markets. I understand the prediction of the energy market spillover, as Russia is a huge producer of crude oil and natural gases. However I don’t think that the consequences will stay in the Russia and Ukraine.

Taking a look at some of the political factors and some may see that Russia annexing any part of Ukraine will have much greater global impact. First, the US has always been considered the most powerful countries in the world, but through recent events countries have been undermining the authority of the US. Russia ignoring the threats from the US of consequences if they annex part of Ukraine is just another example of a foreign country ignoring the impact the US has. The other factor is the a nuclear free world. Back in the 1990s Ukraine agreed to give up its Soviet Union nuclear stockpile in agreement for the promise to remain a sovereign state with protection from other major world powers. Russia annexing part of Ukraine shows that the treaty was not upheld and will make it extremely difficult to convince other countries to give up their nuclear programs in the future.

So in the short run I’d agree that the Chinese economy is a greater threat to the US economy, but in the long run I could see Russia annexing Ukraine as a much greater issue.