The major news story of this week concerns the Ukrainian region of Crimea, now under de facto Russian military occupation after the collapse of its government earlier this year. If you ask the Russians, they are just doing their part to stabilize an otherwise unstable country that remains under the control of an illegitimate government. Former Ukrainian President Yanukovych was removed from power by parliament in February and has since fled to safety in Russia. The United States, however, sees Russia as an aggressor, and this week imposed trade sanctions on Russia and froze the assets of individuals the Obama administration has identified as being involved in the invasion of Crimea. European leaders have threatened sanctions of their own if Russia fails to withdraw its troops from Crimea, but have been hesitant to pull the trigger as Russia is a significant trade partner for many European countries.
Yesterday the Moscow-backed regional government of Crimea set a referendum for 9 days from now to ratify its recent decision (via parliamentary vote) to secede from Ukraine and join Russia, a proposal that about 75% of parliament supported. However, the decision (allegedly) rests in the hands of Ukrainian citizens who will vote on March 16 for reunification with Russia or to remain within the Ukraine, and a simple majority will (again, allegedly) decide the outcome.
Perhaps the most significant development here in the US is that Democrats and Republicans finally agree on something! House Speaker John Boehner (and other Republicans) praised the sanctions laid down by Obama, even going so far as to say that Congress would work to give the president more tools to battle Russian President Vladimir Putin.
It doesn’t take an expert to see what Putin is doing—forcing Crimea’s hand by deploying Russia’s military to control the region (and government) under the disguise of “stability,” then turning around and saying Russia isn’t interested in annexing Crimea, adding that “only the citizens themselves can determine their own future.” The US and the rest of the world have no interest in allowing Russia to all but invade its neighbor and exert its will on Crimea and its people, many of whom wish to remain a part of Ukraine. “In 2014, we are well beyond the days when borders can be redrawn over the heads of democratic leaders,” said Obama, who specified that the sanctions are punishment for Russia’s violation of Ukraine’s “territorial integrity.”
Global markets (including the US) fell sharply Monday owing to further escalation of the crisis, but recovered most of their losses the very next day. The consensus seems to be that Russia will eventually find itself backed into a corner with very few supporters (none of whom is willing to defy the US and its allies) and will have no choice but to come to an agreement. The quick rebound also suggests that investors aren’t too worried about the result of the March 16 vote—it appears the issue isn’t whether or not Crimea remains part of Ukraine or joins Russia, but whether or not Russia takes the diplomatic way out in a timely manner or has to endure further “punishment” before it plays nice.
The Russian economy, on the other hand, is being hit hard by a combination of political instability and looming trade sanctions. The Russian Ruble is down anywhere from -8.8% to -11.5% against major world currencies since the start of 2014, while the Moscow stock market has fallen about -18.2% in dollar terms . Russia, as of 2011, ranked #2 (behind Germany) on the list of the world’s largest net exporters, and is thus highly reliant on other countries to buy their goods (mainly natural gas and oil). The last thing it needs is an ongoing political standoff with major world powers that would make its economic situation even worse.
We have no idea what the March 16 vote will yield (and it’s likely to be rigged anyway), or if we will even get to that point before a resolution is reached that enables Russia to save face in exchange for their withdrawal of troops from Crimea. But the political and economic implications are greatest for Russia and Ukraine, and for Russia’s trading partners in Europe who may be forced to take an economically risky stand against Vladimir Putin.
Make fun of Congress all you want, but at least we don’t have to worry about being invaded by Canada or Mexico!
Dr. Ken Waltzer MD, MPH, AIF®, CFA, CFP®
Founder and President – Kenfield Capital Strategies (KCS)
Director of Business Development – Kenfield Capital Strategies (KCS)
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