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    Posted April 23, 2014 by

    OritNathan and 14 other iReporters contributed to Open Story: Ukraine crisis as it unfolds
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    Russia Plays High Stakes Chess Game with Financial Markets


    Russian belligerence in the Ukraine largely continued unchecked. The global community has neither the nerve, nor the appetite for confrontation with Russia. European Union countries are heavily reliant on Russia for their energy supply, and their economic wellbeing. While the affront that Europe and the US have endured with the secession of Crimea is indeed a slap in the face, it is a sacrifice that everyone was evidently willing to make. Ukraine is less fortunate; the country has been dismembered with more unrest sure to follow. Eastern Ukraine is facing a storm of political uncertainty as separatists occupied government buildings, commandeered police stations and wrought havoc on the region. The situation devolved to such a degree that allegations of Nazi-style anti-Semitism were recorded outside synagogues over Passover. All of this uncertainty has been unfolding even as an agreement was reached between the US, the EU, Russia and the Ukraine to end the fighting. It has been reported that Denis Pushilin – the pro-Russia separatist leader has rejected the offer and the fight will continue. Pushilin’s forces fortified their positions in Donetsk even as a hard-fought agreement was hammered out by the major players.  Pushilin and his militia are calling for the resignation of the government in Kiev and for a referendum on secession. At the highest levels, both Putin and Obama remain sceptical of one another and of the likelihood that the agreement will ease tensions.

    The Economic Impact of the Geopolitical Crisis

    The EU is largely dependent on Russia for its economic wellbeing. It is estimated that some 75% of Russian investments are from European Union countries. Germany is particularly vulnerable since a substantial portion of its exports are designated for Russia. Much the same is true for the United Kingdom which relies on exports to Russia. France currently has two orders for naval ships pending with Russia – worth an estimated €2.4 billion. The US is less concerned since there is very little in the way of a direct economic dependence between itself and Russia. The US government has targeted key players in the Kremlin, including Gennady Timchenko. While Timchenko dismissed the sanctions on one hand, he admitted that his oil-trading firm was having a difficult time with the banking system. Of more importance is the fact that more capital flight has taken place in the first quarter of 2014, than all of 2013. Additionally, the Russian stock market has taken a big hit this year and lost a considerable percentage of its value. The rouble is facing mounting pressure as the burden of international condemnation continues to squeeze the currency.  The Americans are in an enviable position in this ongoing saga since the USD is the world’s reserve currency. Vladimir Putin is rueing this fact and has in the past attempted to decrease Russian reliance on the USD. Since America has the authority to levy tremendous pressure on international banking institutions by way of compliance, Russia is really at America’s mercy. To date, one major Russian bank – Bank Rossiya – faces punitive sanctions and is unable to operate foreign-currency transactions. While Rossiya was the first bank targeted, it may well not be the last. The US Patriot Act makes it possible for America to identify money laundering entities and punish them. As an example, JPMorgan Chase earned $51 million from banking fees earned from Russian investments, but they are in no mood to go against the orders of the US government when it comes to sanctions against Russia. Since the global economy is interlinked, punishment against one entity can have the unintended impact of devastating a ‘friendly’ enterprise.

    Co-ordinated Attacks Leave Little Doubt as to Russian Involvement

    The Russians insist that they have not been involved in the chaos in Gorlivka and Sloviansk. However the fact that the attacks were well-orchestrated and co-ordinated strongly suggests otherwise. Russian weapons, Russian agents and Russian errors were evident in the takeovers – since local insurgents would never have taken over an Opera house mistaking it for a government building in Kharkiv. But the West counters that in spite of Russia’s denials of meddling in the Ukraine, it has the most to gain from the crisis. Russia’s ailing economy – which relies on gas and oil, is in ruin. Russia wants to see a destabilized, divided Ukraine so that they can counter pro-European sentiment that ousted the pro-Russian government under Viktor Yanukovich in the first place. The general elections are scheduled for May 25th 2014 and Russia may well fear the outcome of a nationally-elected government.  In any event, Ukraine is the victim. Putin has abrogated international law and intervened in the domestic affairs of a sovereign state. Western willingness to act is pitiful. Russia’s Putin has calculated well ahead of time each response and how to counter-punch. Hawks in Congress are calling for punitive sanctions that would deprive Russia of forex. Indeed even Banc De Binary analysts postulate that by requiring Russia to use its own foreign exchange, it may well deplete its own reserves.

    Mini-Rally in Russian Stocks After Deal


    After the deal was reached on the Ukraine, shares of major Russian companies surged. According to the terms of the deal, all antagonists are to refrain from violence and all illegal groups are to disband. A broad national dialogue was called for and amnesty would be granted to pro-Russian separatists. However, key factions in Eastern Ukraine have rejected these proposals. Several Russian-owned enterprises traded higher including Yandex (YNDX) – up 5%, QIWI (QIWI) – up 2% and Gazprom (OGZPY) – up 5%. In spite of the mini-market rally, many investors are unwilling to place their funds into the Russian economy. The country’s policies are unknown to investors and there is no certainty regarding what Putin says and what Putin does. The Micex Index (a cap-weighted fund of the top 50 Russian stocks) has moved from an average of 1450 from November 2013 through March 2014, to an average of under 1300 for March and 1350 for April 2014. The Micex Index hit a low of 1308.93 on the 15th April and is presently at 1356.54 (18th April 2014). USA Today reported that the Micex Index has slid some 12% since February 17th and capital flight has spiked. Russian GDP growth for the first 3 months of 2014 was listed as 0.8% - far lower than the 2.5% predicted. Overall, the Russian stock market has lost 20% of its value in dollar terms.

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