Investors around the world felt the crisis in Ukraine as markets responded to the situation accordingly. Oil prices for Brent went up $2.13 (2 %) for the day in Europe reaching $111.20 and the Nymex increased $2.33 (2.3%) in North America settling in at $104.92
The impact on investor confidence has reverberated around the world. Stock markets were down around the world over the prospect of further turmoil in Europe caused by the Russian invasion and occupation of Crimea an autonomous region in the Ukraine.
The American stock market (DJIA) alone dropped -153.68 points to settle at 16.168.03 on March 03.
Gold prices spiked $21.70 an ounce ending the day at $1350.30. This was an increase of 1.63%. Silver increased .18 cents to end the day at $21.41 a 0.85% increase the same day.
The first phase of the crisis has run its course where the change in the markets is mostly in response to the news coming from the ground in the Ukraine especially the Crimea.
For the typical investor one needs to determine what follows next. That is what form the response of the world community towards the Russian invasion and occupation of Crimea actually takes.
It is doubtful that there will be an armed conflict between the West and Russia over the fate of Ukraine so that leaves political and economic methods to make the invader “pay” for their incursion into another country’s territory.
One must ask what price will Russia be willing to pay to keep what it has taken in Ukraine. One must know a brief history of the area at least in the 20th century. The country attempted to gain independence several times is the last century the longest period being its brief independence after the First World War.
Khrushchev a Ukrainian by birth was the leader of the Soviet Union in 1954. To celebrate the 300th anniversary of Ukraine being part of the Russian Empire the Crimea was given to Ukraine. There was no thought at the time that this would be giving a strategic part of Russia away. Stalin a former leader of the Soviet Union had replaced the original population of Crimea (the Tartars) with Russians earlier in the century so that explains why the area today is predominately Russian.
When Ukraine became independent again in 1991 with the dissolution of the Soviet Union the issue of Crimea came to the forefront again. In 1996 Ukraine agreed to give up its nuclear weapons. It had also agreed to allow Russia to keep its naval base Sevastaspol on the Black Sea.
Putin the present leader of Russia considers the dissolution of the Soviet Union as the worst geopolitical disaster of the last century. He is eager to piece parts of the former Empire together again especially in areas where Russians constitute the majority of the population.
The general feeling in the West is that the only way to dislodge Russia from the Crimea and to discourage further Russian moves in eastern Ukraine where Russians also form the majority of the population is to take political and economic steps against the Russian government.
These steps will impact the world economy in a number of ways. It will also change numerous policies and initiatives in countries involved in the crisis. It will also effect investors around the world quite specifically.
Investors in commodities will need to determine will there be any interruption in the flow of Russian gas and oil? Will the Russians withhold supplies for any length of time from consumers in the Ukraine and other parts of Europe? This would seem unlikely in the long run because Russia needs the hard currency the sale of these commodities supply along with the other commodities that Russia sells. At present the majority of the 5 million barrels of oil that Russia sells daily goes to Europe.
Another possibility would be an embargo of Russian commodities in the West. In the short term unlikely because there is a definite need for Russian gas in Europe. Long term it will take effort to change supply lines and to set up the infrastructure for the change.
The United States has a 2 way trade of 38 billion with Russia. There may be some interruptions here if the United States decides to voice its displeasure in Russian actions through trade.
The European Union (EU) is Russia’s largest trading partner by far adding up more than 50% of the total as well as 75% of the Foreign Direct Investment (FDI) in Russia. The total of products and good and services of this two way trade adds up to over 308 billion Euros (424 billion US dollars) last year alone.
There will be attempts by politicians to look at this trade as a way to put pressure on Russia to moderate or change its behavior in the Ukraine.
There also may be attempts to freeze banking and financial assets of individual Russians as well as the Russian government itself. The value of the Russian ruble has already declined between 8 and 10% already since the beginning of the crisis. Russia has already threatened that in response to that they will no longer use or accept the United States dollar as a reserve currency and will no longer service debt to Western banks.
Travel restrictions on Russians traveling abroad have also been explored as an option. This will effect the tourist industry of course as the Russians are likely to retaliate.
The crisis of Ukraine will also change a number of issues in the United States. The cuts in the military spending advocated by the Obama Administration will likely be derailed so investors in the industries effected by this need not worry.
The oil industry is much more likely to see the construction of the Keystone Pipeline and other such pipe lines in the planning stage now that it will be seen as a national security issue. Demand for American energy in Europe may put more pressure on the American government to allow more exports of energy which will put an upward pressure on prices in North America.
Russia may be ejected from the G8 which is the organization of the top 8 industrial powers minus China. The members at present are Canada, France, Germany, Italy, Japan, United Kingdom, The United States as well as some representation for the European Union. Russia is the 8th official member. Collectively the G8 nations comprised 50.1% of global nominal Gross Domestic Product in 2012.
Russia may also be ejected from the World Trade Organization (WTO) as well but much of this will depend on what the Europeans are willing to go along with in concert with the United States.
All of these moves will have an impact on the world economy. Stock markets and commodity prices will continue to move according to events on the ground and movements of various governments in response to the Russian troop movements. Investors will need to be ready to move to take advantage of these actions.
There will be calls to expand NATO (the North Atlantic Treaty Organization) further east as well as an expansion of European trade agreements if not eventual new memberships in the community. This will bring more trade opportunities in the East and with it new opportunities of investment. (Look to see calls for the installation of the previously cancelled anti-missile sites in Poland and the Czech Republic).
One can expect rapid movement on making sure that Ukraine which is essentially bankrupt is given access to the money it will need to survive in the short run by various national and international organizations like the IMF (International Monetary Fund).
In the short run I cannot recommend new investment in the Ukraine. If the nation survives the crisis then it will be a place to definitely consider when you take into account its abundant resources and large population (45 million). Nominal GDP for 2013 was estimated to be in excess of 175 billion.
An investment in Russia is most certainly off the table unless you wish to engage in currency speculation. That is that the value of the ruble will continue to decline as the crisis lingers.
At the moment the situation is very fluid and it is not clear what actions individual countries will take. However, investors must be ready to take advantage of any movements in markets as the crisis unfolds in the coming weeks and months. An international situation of this magnitude is a great opportunity for savvy investors to make judicious investments.