The Russian-Ukraine Crisis and its Effect on the Global Economy

May 2, 2014


As many market watchers are in the thick of earnings season, waiting to hear their daily dose of both good and bad news, the Russian-Ukraine crisis continues to loom in the background.

Since essentially annexing Crimea from Ukraine more than a month ago, life has obviously changed in this peninsula. Crimean residents are facing an identity crisis and their everyday lives have been turned upside down.

Food imports have dropped thanks to messy rules. Cheese and pork have been banned by Crimean authorities from the Ukraine. Ordinary items, such as yogurt, are unavailable and recently, McDonald’s and Metro, a large Germany supermarket chain, have closed their doors.

Many multinational businesses are trying to stay away from potential sanctions by running sites in Crimea while air travel connections have stopped except to Russia. Banks have been closed and now Crimea runs on Russian time even though cellphones go back to Ukrainian time.

While the effects may be local, the crisis’ tentacles are extending globally.

Russia May Undergo a Recession

In March, the World Bank warned that with the annexation, Russia could fall into a severe recession in 2014 amid the West deciding not to employ trade sanctions.

A report by the group has forecast that Russia’s gross domestic product (GDP) could contract by 1.8 percent this year if the crisis continues.

The World Bank said via Reuters, “An intensification of political tension could lead to heightened uncertainties around economic sanctions and would further depress confidence and investment activities. We assume that political risks will be prominent in the short-term.”

The Economic Ministry has said it needs to revise its Russian growth forecast for the year (at 2.5%) but as it neared the end of the first quarter, it estimated “around zero” for quarterly growth.

Commodity Prices on the Rise

So much for the winter drought in the western U.S. and Brazil, the Crimean conflict is also affecting commodity prices including natural gas and agriculture products such as corn and wheat.

This comes as Russia provides around one third of the EU’s oil and gas with around 40 percent of gas exported through the Ukraine. Rising prices will first go through the EU and then trickle over to the U.S., said Duch Darin, an economics professor in Florida.

He recently commented via the Voice of America, “When it gets worse and worse, it will affect the EU, and when the EU’s economy is affected, the US economy is affected, as the US has difficulty exporting its goods for sale in the EU.”

But not everyone agrees about the effect on the EU from this crisis. A leading European central banker recently downplayed the possible economic effects.

European Central Bank Governing Council member and head of Germany’s Bundesbank, Jens Weidmann, said via the Wall Street Journal, “The economic significance of Ukraine is relatively small; there’s no noteworthy danger for the global economy or the euro zone” from the crisis in Crimea.

He added the economic consequences from the conflict will probably have a greater effect on Russia than on either Germany or the countries that utilize the euro.

Are Treasury Notes Measuring Market Fear?

Back in the United States, volatility has been dominating market headlines thanks to the crisis (along with other factors) and one product feeling its effects has been  10-year Treasury Notes; they saw a bounce in prices in mid-April, which led one seasoned trader to opine whether this product is gauging investors’ fears about the markets.

Speaking on CNBC back on April 14, Art Cashin said that as the market has incurred triple-point jumps, it has moved in tandem with the Treasury notes:  rising as yields increased while falling lower as yields dropped.

Cashin said to the business channel, “If there’s troop movements or real hostility, the first place they’ll see that is in the 10-year. Everybody talks about the VIX, but the new fear gauge is in fact the 10-year. If you took this morning apart minute by minute, you would see that stocks have reacted exactly with the 10-year.”

Fast forward a week and 10-year notes are still on the rise. This comes as the Foreign Minister of Russia, Sergei Lavrov, said on April 23 that an attack on the Russians in Ukraine will be seen as a strike against Russia. The notes responded with a 9/32 rise (yielding 2.691%), reported the Wall Street Journal.

As numerous factors continue to be at play during this crisis, the markets will constantly be impacted by this. Additional contributors could be potential sanctions and elections.

Stay tuned as we will keep you informed of their effects on the markets are they develop.