Monday, March 10, 2014

Ukrainian Crisis – Economical Implications

An intensification of tension between Russia and Ukraine last Monday put the global markets under stress. Any geopolitical conflicts hits stocks hard and the current one was no different. The Dow Jones dropped 226 points or 1.4%. Russian stocks and many global indices suffered. Such sell-offs in stocks is sure to turn investors to safer assets such as gold and treasury. The benchmark German bond yield fell to 1.58% as prices climbed, the yield on the benchmark UK bond fell to 2.66%, and the yield on the benchmark US bond also fell to 2.607%. Let us examine some of the multi-pronged impact of such a geopolitical crisis.

For the countries involved, in this case Russia and Ukraine, their stock markets also experienced a sell-off. Stock investors pulled money out of Russia, which lead to the record fall of the Russian ruble against the euro and dollar. The Bank of Russia tried to limit the crisis by raising interest rates by 1.5% without much success. The current conflict might influence ratings agencies to re-evaluate their views on Russia and might lead to downgrades, which will further lead to capital flight.

In Ukraine, the yield on the country’s 10-year dollar denominated bond moved from 10.33% to 10.53% and the yield on dollar denominated Ukrainian bond maturing in 2014 surged to 43%. The hyrvnia, Ukrainian currency dropped by 22% from the start of the year. Ukraine is already plagued with problems such as lack of growth, overvalued currency, and dwindling foreign exchange reserves.

Companies and countries with significant exposures to Russia and Ukraine were affected. Oriflame, Nokian Renkaat Oyi, Fortum Oyi, Carlsberg, Metro AG, and Ferrexpo are some among the companies that have significant exposure in Russia or Ukraine. All these companies experienced significant downfalls in their stock price. Brent oil increased 2% because Russia is one of the world’s largest producers of oil and the market fears that any escalation in conflict might disrupt oil flows.

As the US and EU threatened  light sanctions such as suspension of military cooperation and visa restrictions on officials and individuals we should have a retrospection on how such geopolitical crises have affected the market in the longer run. Will the sell-off last? Although it is still early many unknown events could add further confusion. According to the research conducted by Sam Stovall, chief equity strategist at S&P Capital IQ, in most crises stocks experienced selling pressure but did not take long to rebound and recover those losses. The bottom line is that any future declines could be steep, but they are likely to be contained quickly.

This article was compiled from the following sources –
1. “How Stocks React to Geopolitical Uncertainty”, Steven Russolillo, WSJ, 3/3/2014
2. “Ukraine Crisis Roils Global Markets”, Clare Connaghan, WSJ, 3/3/2014
3. “Ukraine Crisis Escalation: Analysts and Investors React”, Serena Ruffoni, WSJ, 3/3/2014
4. “Global Stocks Fall on Ukraine Unrest”, Dan Strumpf, WSJ, 3/3/2014

Dr. Subramanian “Subbu” Rama Iyer is an assistant professor of Finance at UNM Anderson School of Management. Click here to contact Dr. Iyer.

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