Mitchell Thomas, The Daily Record Newswire
Earlier this year, financial markets were startled by unrest in Ukraine that actually began just two months before the end of 2013. Indeed, Russia has been under the shadow of the global community since the fall of the Soviet Union in 1989. In large part, this has been the driving factor behind President Vladimir Putin’s attempt to reestablish Russia as a dominant military and economic power.
A brief synopsis of the events as they have unfolded follows.
After a decision made by then-President Viktor Yanukovich to establish an economic alliance to Russia versus the European Union, an eruption of civil unrest occurred by Ukranian citizens voicing their dissatisfaction. In the midst of violent protests and attempting to defend his decision, Yanukovich was ultimately forced to flee the country and seek asylum in Russia after the Ukranian parliament voted to remove him as president.
When a new government was appointed just days later, Russia responded by putting 150,000 soldiers on high alert. Although Crimea’s leadership ultimately voted to join Russia, President Putin’s parliamentary approved invasion into Ukraine was poorly received by the European Union and U.S. leaders. In response, both implemented various sanctions against some of Putin’s closest allies and those responsible for Russia’s actions within Ukraine.
From Russia’s perspective, Putin has realized that the United States’ citizens are weary of conflict after their prolonged commitment to disputes in Iraq and Afghanistan. Putin also realizes that the European Union is apprehensive of conflict because of their 30 percent dependence on Russian oil and gas.
Moreover, because Europe is beginning to finally show signs of an economic improvement from recession levels of only a few years ago, an interruption in energy could severely disrupt this long awaited positive momentum. Because of these reasons, rhetoric by leaders in the U.S. and European Union has largely been ineffective on Putin and Russia’s decisions.
While the intervention by outside influences continues to be weighed and the likelihood of increasing economic sanctions against Russia looks to be the only viable option for the west, the neighboring nations of Romania, Poland and Belarus also feel the threat of a possible infringing Russian influence on their countries.
Looking forward, Ukraine appears to be a test for how much support the NATO Commission is willing to commit to reach a favorable outcome. From a political and military standpoint, if left unrestricted, boundaries are likely to be redrawn and the potential for an overt cold war could be in the design stage.
From an economic and financial perspective, parameters of risk versus reward within these regions will be also be reassessed, thwarting current valuations and adding volatility. Overall, the expedient flight of capital and the devaluation of the currency by both Russia and Ukraine leave both economies in a paralyzed state.
Indeed, this has already been reflected by S&P’s recent downgrading of Russia’s sovereign debt to just one notch above junk status. The cost of doing business in the future will therefore be more expensive until a more decisive, long-term agreement is reached.
Given this, the poignant question would be: Is Russia willing to sacrifice a temporary economic setback for a long-term geographic acquisition? So far, the answer by Russia seems to be “yes,” and the citizens of Russia have recently given Putin an 85 percent approval rating for his choices throughout the Ukraine crisis. This is a direct counter to what was expected with the implementation of sanctions.
Looking at Russia in the context of other recent examples of western nations attempting to contain political turmoil, investors have had distinct challenges in evaluating future risk. Taking a look at Egypt’s changing leadership, North Korea’s nuclear armament, Syria’s civil war, and Iran’s procurement of a nuclear bomb, each of these circumstances illustrate that rhetoric and sanctions alone are not enough to reignite confidence for each of these regions.
Although emerging markets should not be avoided entirely by investors, the events in Ukraine have reiterated the importance of utilizing a professional investment adviser and constantly reassessing the geopolitical risks within your portfolio.
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Mitchell Thomas is an international equity analyst/portfolio manager/head trader for Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. Offices are located at 183 Sully’s Trail, Pittsford, N.Y. 14534, (585) 586-4680.
