Ukraine, Putin & market impact
City Index March 3, 2014 9:39 PM
<p>No more discount Russia’s agreement with Yanukovych enabling the Ukraine to buy Russian gas at a discount may not be renewed at month-end after the […]</p>
No more discount
Russia’s agreement with Yanukovych enabling the Ukraine to buy Russian gas at a discount may not be renewed at month-end after the fall of the Russia-backed government in Kiev.
Teetering on the verge of bankruptcy, Ukraine is in dire need to contain the cost of its gas imports and keep the remainder of Moscow’s $15 bn loan to the extent that:
i) it walked out of an economically valuable trade deal with the EU and;
ii) it was willing to lower the cost of lease to the Russian navy fleet in Crimea.
The main reason Russia will insist on keeping Ukraine in “friendly” hands is to secure its Europe-bound gas exports, most of which pass through the Ukraine. A 1/3 of Russia’s gas is exports via Ukraine. Russia is far from bankrupt, but it remains eroded by a falling currency and deteriorating current account balance.
Russia stands out from most emerging market nations in that it boasts a current account surplus, instead of a deficit, but such positive balance its at lowest level since Q4 1998, while the nation’s official international reserves have reached $498.9 bn, the lowest in 3 years. The ruble has fallen to 4-year lows against the USD and is vulnerable to further declines near 40.00.
But no risk premium
Just as Russian troops remain beyond their legally authorized borders in Georgia for over 4 years, they are doing the same in Ukraine. There was no noise from the West over Georgia and there is unlikely to be any NATO military engagement beyond the token show of verbal interventions. One possible route is for the US & EU to impose economic sanctions on Russia and risk exacerbating the fall in the ruble. Putin will avoid this by eventually compromising/ agreeing over setting elections in Ukraine, while keeping control over Crimea.
Market volatility will arise from any signs of:
i) armed altercations inside the Ukraine triggered by Russian troops;
ii) announced cuts in gas flows to Ukraine/rest of EU
The chart below reveals the expected divergence between gold and bond yields as the former gained on the broadening reality that Fed tapering is no equivalent to tightening of market conditions and the latter dragged by US data weakness. The Swiss franc is quickly closing on the yen as the year’s strongest performing currency as the events in the Ukraine intensified from demonstrations in late autumn to human casualties and a government collapse this year. The recent divergence between falling yields and record-breaking equities has finally waned as stocks react to the reverberations in the Ukraine.
The Swiss franc is likely to garner fresh gains due to its isolation from the EU and reinforced role as a refuge for any capital flows away from the Eurozone in the unlikely event that Germany is dragged into the conflict. The Japanese yen may also continue gaining due to its geographical isolation from the region, its usual role as a safe haven and capital flow spillovers from ongoing slowdown in China.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.