As everyone knows, Russia recently intervened in the Crimean province of Ukraine in order to protect the Russian ethnic majority there from the new pro-western Prime Minister. Politically, this has created a big crisis due to Russia violating Ukrainian sovereignty. The US and EU have been forced to toe the line between all out confrontation with Russia and supporting Ukraine through any means possible. While the political landscape is a complete mess, the economic repercussions aren’t any better. The Ukraine hryvnia was down .5% against the dollar today while the Russian stock market has been down 22.7% and the Ruble is down 9.9%, the second weakest currency against the dollar of the 24 emerging market currencies. Citigroup analysts have dropped Russia’s 2014 growth forecast for GDP from 2.9% to 1%. The effects of the Ukrainian/Russian crisis has been felt in other emerging markets and developed markets as well. Airlines have cut earnings by 5% due to raising oil prices and a slow down in emerging markets due to the Ukrainian Crisis. The movement of Russian troops into the Crimean peninsula has also caused the price of Natural gas in Europe to increases. Russia’s control over the price of natural gas in Europe has the potential to harm the economic comeback. Right now, the EU is dependent on Russia for over a quarter of their natural gas. If Russia cut off gas flowing through Ukraine, it would effect 14% of European gas consumption. The potential energy problem is further exacerbated by Germany’s shift to green energy. Germany recently issued a moratorium on new drilling which will make it even more reliant on Russian gas. Poland, which has a strong fracking industry, relies on Russia for 2/3’s of Poland’s gas. The Polish Prime Minister recently stated that Poland plans on diversifying their energy to make it more difficult for Russia to influence Europe. Unfortunately, I don’t see Europe being able to diversify their energy quickly enough. Russia will have a stranglehold on Europe until they are able to become less reliant on Russian gas.
The EU is not completely helpless against Russia though. The EU has a three-stage plan in the works to penalize Russia. The first is to suspend trade and visa liberalization. I believe that this is the best course of action over military action because 4 out of 5 of their import and export partners are either in the EU or the US. If the EU and US apply sanctions to Russia, then it would be logical that their allies like Japan would apply sanctions as well. At the end of the day, I don’t see the EU apply sanctions or Russia cutting off Ukraine and EU oil supply because it would throw both of their economies into crisis. After the sovereign debt crisis, I don’t see EU risking a rise in interest rates due to a drop in trade with Russia. If the global economy wasn’t still recovering and the US could supplement Europe’s need for natural gas, I could see the EU and US favoring a tough stance, but now, I don’t see anything changing.