The instability in Ukraine threatens Russia's financial crisis
Material posted: Publication date: 24-02-2014

A sharp intensification of social conflict in Ukraine and fears of a possible Russian military intervention have shaken the financial stability of Eastern Europe, turning the region into another distribution center emerging market crisis.

The Russian ruble fell to a record low against the Euro. In recent days the epidemic swept through Poland, Hungary, Romania.

"The internal problems of Ukraine unexpectedly escalated into a geopolitical clash," commented Lars Christensen from "Danske Bank". "The situation in Russia resembles the events of the war in Georgia of 2008. Market prices are formed on the background risk of Russian interference".

Any movement of Russian troops to strengthen the position of the Ukrainian government – even at the request of President Viktor Yanukovych – could lead the situation out of control, causing unprecedented since the cold war confrontation between East and West. Russia's intervention may even be regarded as a repetition of the events in Hungary in 1956, when the country entered the war, to prevent her to fall out of the orbit of influence of the Soviet Union.

After the number of victims had reached 70, the Minister of foreign Affairs of Germany Frank-Walter Steinmeier called Ukraine a "powder keg" and Polish Prime Minister Donald Tusk warned about the possibility of civil war.

Russian foreign Minister Sergei Lavrov called the demonstrators fascists, seeking to "brown revolution", similar to what happened in the 1930-ies. Moscow has accused the EU in the attempted coup by the organization of street riots.

Analyst with the French Bank "Societe Generale" régis Chatelier noted the high risk that Ukraine will be unable to service the sovereign debt (60 billion euros), hitting Russian banks. And Sberbank, and VTB are large holders of Ukrainian bonds. It should be noted that international bond funds emerging markets keep only 3% of its portfolio in Ukrainian debt securities. "The consequences of a Ukrainian default would be significant, but not comprehensive," says Chatelier.

The intention of Lviv, this Bastion of nationalism, to secede from Kiev-hot atmosphere. It is not excluded that the Ukrainian army will have to intervene to prevent a civil war.

"Ukraine on the verge of disintegration into two parts. Europe has not seen anything like it since the collapse of Yugoslavia. When hate and mistrust reached such a degree, can happen anything," said one economist from the city.

International reserves of Ukraine fell to a critical level. Received from Russia the first $ 3 billion of the 15 billion stabilization loan to allow Ukraine to survive. But further payments in question.

Russia found itself between two fires: or serious losses as a result of default of the Ukrainian economy, and growing investment in its maintenance. Applying military force to conquer the rebels in Western Ukraine, Russia may get caught up in armed conflict.

Meanwhile, the economic slowdown could begin in Russia itself. Last year was a decrease in industrial production and investments in fixed capital decreased by 7 percent. "Russia is in a risky position. The current account surplus has declined sharply," says Liza Ermolenko from the London company "Capital Economics".

The volume of international reserves of Russia is about 500 billion dollars – the third highest rate in the world, but their use during the crisis is not always justified. The experience of 2008-2009 showed that a side effect of such actions may become tougher financial regulation. The Central Bank has burned 200 billion dollars supporting the ruble, but this process destroyed part of the Russian banking system.

Last week, the Central Bank pursued a cautious intervention in foreign exchange markets, and may feel tempted to go further if the ruble continues to fall. According to experts "Danske Bank", such strengthening can be costly to the Russian economy.

Russia, in the main, managed to avoid the first wave of the crisis in emerging markets, particularly hard-hit countries with a significant current account deficit – Turkey, South Africa, Brazil. But the country was in the middle when the troubles spread to geopolitics. From the beginning, the ruble fell against the dollar by 10 percent.

Russia still has not recovered after the crisis of 2008-2009 that followed the bankruptcy of the largest investment Bank "Lehman Brothers". This is a classic case of "Dutch disease" – overdependence on the export of resources to the detriment of the production. To maintain a balanced government budget the oil price should not fall below 110 dollars per barrel. The economy will be extremely vulnerable if this year the flow of oil from Iran, Iraq and Libya would cause a collapse of prices.

The Ukrainian crisis comes amid tensions in emerging markets due to monetary tightening by the fed and the Central Bank of China. This forces some countries to take tough measures to maintain their currencies even amid economic slowdown.

As stated by the IMF at the summit of "twenty", the problems of emerging markets that pose the highest risk to the global economic recovery. Three negative factors – capital outflows, higher interest rates and sharp devaluation of the currency – can contribute to the onset of the debt crisis.

In a recent report, "Societe Generale" says that over the past 20 years the share of developing countries in world production increased from 18 percent to 40 percent, and consequently, today profound changes in these States a much stronger influence on the global economy.

Chinese banking analyst Wei Yao said that his country's authorities intend to deal with the "credit bubble", no matter how painful it was not: "Except for the painful breakthrough is not possible to stop the unsustainable loans".

Bank "Societe Generale" believes that it will be disastrous for exporters, and advises customers to prepare for the fall of stocks in emerging markets not less than 30 per cent this year.



Tags: Russia , economy , crisis , Ukraina