Tug-Of-War Over Ukraine Jitters Markets

The stand-off in the Ukraine seems more about economics rather than politics, despite Russian President Vladimir Putin claiming the over throw of the government was a coup.

At the bottom of the argument is Ukraine is in a tug-of-war between the European Union and Russia.

Many Ukrainians see their future in Europe and their best chance of prosperity from linking with the more vibrant EU economy.

Russia sees the loss of Ukraine to Europe as a green light to other satellite nations like Georgia to approach the EU for membership.

Ukraine is an agricultural and manufacturing base for Russia. Russia would see the costs of imports rise if Ukraine was to join the EU.

Waiting for election results

Russia’s key natural gas pipeline that supplies Europe also flows across Ukraine.

Add to that Russia’s key Black Sea naval base is in Ukraine’s semi-autonomous region of the Crimea, and the threat of former Soviet states joining Europe could limit Moscow’s access to the Black Sea and the Mediterranean beyond.

The dispute has triggered market jitters. Shares prices are 5% down in Moscow and stable but with an underlying panic elsewhere.

The likelihood of any short term changes in political mood is slim.

Opinion polls in Russia show voters support protecting Russian speakers in the Crimea but reject any military operation.

Meanwhile, presidential elections are set in Ukraine for May 25. Crimea’s parliament has also called for a referendum on the region’s future.

Politicians on both sides will wait for the results and claim they are a mandate for their next course of action.

Money will settle the row

Putin will have little success arguing against the legitimacy of a Ukrainian government after the elections and a referendum in the Crimea will similarly resolve the peninsula’s future.

In the short term, investors can expect a lot of sabre rattling from the Russians and grumbles about sovereignty infractions from the West.

In the end, Russia cannot afford to face sanctions from Europe and the US – especially with the approach of  Foreign Account Tax Compliance Act (FATCA) which could see withholding taxes on Russian bank dealings in the US and possible exclusion from the world financial system.

That’s why the row will not be settled by missiles, troops and tanks.

Russia needs cash from Europe and the US. Nationalism may win short term support at home for Putin, but in the long-run, undermines the Russian economy and hurts the finances of the voters.

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