A friend writes --
MARKETS ARE UNDERESTIMATING THE DANGER IN THE UKRAINE
HOPEFULLY WESTERN GOVERNMENTS ARE NOT
Friday’s rather placid market action suggests that the danger of the Ukrainian situation is not fully appreciated. Now that Putin has rejected the considerable and imaginative efforts of Western governments to give him an “off ramp” to de-escalation, it seems clear that he feels confident enough with the cards he is holding to handle the situation unilaterally with the ultimate objective of binding the Ukraine in the orbit of Russia. If he is to be dissuaded from this dangerous course it is imperative that the West hit him immediately, preferably tomorrow, with full strength economic sanctions that will give him a taste of the difficulties he will face if he persists on this course. Partial measures will not work, as he will simply respond tit for tat while tensions continue to intensify.
There are risks of course, but even greater risks in my opinion if he is not dissuaded from the course he is presently on. One person was killed and 26 injured when opposing crowds of demonstrators clashed in the Eastern city of Donetz yesterday. The Ukraine government blamed instigators coming across the border from Russia, while the Russian government blamed “far-right gangs arriving from other parts of Ukraine armed with clubs and firearms”, adding that, "Russia recognises its responsibility for the lives of countrymen and fellow citizens in Ukraine and reserves the right to take people under its protection", meanwhile massing 10,000 troops on the border.
When bullets start flying and deaths occur events have a way of getting out of hand as every action provokes a counter action. A Russian incursion into Eastern Ukraine will not be a cakewalk like Crimea, because the pro-Russian groups in cities like Donetz and Kharkiv are surrounded by plenty of Ukrainian nationalists in the surrounding countryside and thousands of other nationalists battle hardened in the streets of Kiev will also arrive to engage the enemy. Russian tanks will not be safe from Molotov cocktail throwing street fighters, and in a bloody engagement the Ukrainian army, outnumbered and under equipped as it is, would hardly be able to stand aside. Ukrainians will fight, and it would be a bloody affair.
Angela Merkel and Germany are the key, because Germany has the most extensive economic relations with Russia and is most dependent on Russian supplies of natural gas. Based on her recent remarks, it appears that Merkel is alive to the danger and experienced enough with Putin to understand his state of mind. If Merkel is willing to support full strength sanctions, the U.S., Britain and France will back her up in freezing the assets of Russian oligarchs and businesses and denying Russia access to the international banking and insurance facilities that are vital to moving the oil and gas that provides 30% of Russia’s GDP, 70% of its exports, and well over 50% of its government revenue. Full strength economic sanctions would deal a sharp blow to the Russian economy almost immediately; the ruble would drop further, capital flight would intensify, Russia’s large foreign currency holdings would melt away, the stock market sink further and capital markets would be closed to the Russian government and businesses. The nationalistic fervor currently enchanting the Russian public would quickly fade and opposition to the regime by disgruntled oligarchs and liberals would give Putin much greater discomfort than he is presently anticipating.
The current tentative European economic recovery would be temporarily set back by the effects of such an economic confrontation, but European governments acting decisively have it within their power to offset much of the damage in short order. The pressure on European energy supplies and a rise in the price of oil would be the biggest problem but alternative sources of supply are available and would soon find their way to Europe. Damage to the U.S. economy would be minimal. Western firms with investments in Russia would suffer losses but these would be minor in the overall scheme of things. Western financial markets would be roiled in the short-term, but it is in the nature of markets to bounce back smartly as soon as the dust settles with no long-term damage done.
There is no guarantee that full strength sanctions will cause Putin to reconsider his strategy and adopt a more conciliatory tone, but failure to confront him forcefully almost certainly guarantees a high level of tension for a long period of time that could easily break out at any moment into a bloody conflagration on the doorstep of Europe that would be much more costly in the long run as well as setting a dangerous precedent for other parts of the world.
Banned
Market Reactions to Ukraine
Originally Posted by Godwit
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