Russia and Ukraine: 5 points to understand the crisis and the impact on the economy

Russia and Ukraine crisis

The crisis between Russia and Ukraine has been going on for a long time. More recently, what was just a threat and an exchange of accusations between the presidents of the two countries has become real. At dawn on the 24th of February, we saw the first Russian attacks on Ukrainian cities, in what must be the beginning of a tense confrontation, which is expected to impact the entire world.

In this article, I try to quickly explain the reasons for the conflict and the implications for the financial markets from 5 topics. Here we go?

  1. Russia and Ukraine: how did the crisis start?

The tension between Ukraine and the Russians is not new. The territory that is now Ukraine became part of the former Russian Empire and then, in 1919, it became a republic of the Soviet Union (USSR).

With the collapse of the bloc, Ukraine sealed its independence once and for all in an agreement in 1994, thus being a very young democracy.

The most recent crisis erupted  after Russia’s annexation of Crimea , then Ukrainian territory, in 2014. Conflicts on Ukraine’s eastern border have left more than 14,000 dead since then.

Over the last two decades, Ukraine has been trying to move closer to the European Union and NATO (North Atlantic Treaty Organization).

In this context, there is still a cultural divide: while the portion that lives west of Kiev (the country’s capital) fits more with European and Western customs, the other portion that lives to the east sees more proximity to Russian culture.

In short, there is no cohesive vision in the country about this movement towards the West. The Russians, on the other hand, understand that this alliance could become a threat and are demanding a veto power to Ukraine’s entry into NATO .

  1. Do you know what NATO is? let’s remember

The North Atlantic Treaty Organization (NATO) is an intergovernmental military alliance formed in 1949, in the context of the Cold War, bringing together the USA, Canada and the countries of Western Europe against the “Soviet threat”.

The 12 original founding members of the political and military alliance are: United States, United Kingdom, Belgium, Canada, Denmark, France, Iceland, Italy, Luxembourg, Netherlands, Norway and Portugal.

Today, in addition to these initial members, the following countries are part of NATO: Greece, Germany, Spain, Poland, Czech Republic, Hungary, Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia, Slovenia, Croatia, Albania, Turkey and Macedonia.

That is, after the fall of the Soviet Union, several regions that previously belonged to the group became independent and are now part of NATO.

Ukraine is also interested in being part of the group, but the Russians seek to prevent it, on the grounds that they feel threatened by the neighboring country and that this alliance could facilitate the inflow of weapons and heighten tensions in eastern Ukrainian regions, where conflicts still occur.

  1. How are negotiations between Ukraine, Russia and NATO going?

Throughout January and February, several meetings took place between representatives of the Russian government, NATO, the US, France and England, who sought diplomatic measures to contain the Russian invasion of Ukraine, avoiding a possible armed conflict.

These encounters so far have not been successful and Russia is carrying out naval exercises in the Black Sea and Caspian Sea, at the same time as it conducts military land exercises in northern Ukraine in Belarus.

The Ukrainian Defense Ministry estimated the presence of more than 115,000 Russian troops on the border . On February 24, Russian troops arrived in Ukraine via land, sea and air.

All of this is part of a show of force that the West says is a precursor to an invasion and that Moscow vehemently denies, hitting Western countries (and especially the US) with accusations of hysteria.

  1. What is the impact of the tension between Ukraine and Russia for the economy?

The potential conflict between Russia and Ukraine can significantly move markets, especially considering the effects of Russian intervention in Ukraine in 2014, when Crimea was annexed.

One of the main effects could be a rise in the price of a barrel of oil , as Russia is among the largest producers of the commodity in the world and an eventual war could impact supply.

Oil prices are already above $100, the highest since 2014.

The commodity can remain in an uptrend, especially if conflicts are not resolved and this somehow compromises the flow in physical markets.

With the first Russian attacks, the exchanges are reflecting fears of a long confrontation between the two countries.

Furthermore, with the continuation of attacks by both sides, there could be a sharp rise in natural gas prices, given that 30% of the LNG consumed in Europe comes from Russian gas pipelines, which adds bargaining power to the country.

Agricultural commodities also tend to appreciate, especially the price of wheat, as Russia is the largest global exporter and Ukraine is among the top five.

  1. What is our base case?

A war is in nobody’s interest, but Russia is encircling Ukraine and making a point of demonstrating all its military might. In the face of all these episodes, what seems clear to me is that Ukraine does not have sovereignty in its own decisions.

Among the latest developments related to the tension is the fact that Russian President Vladimir Putin this week recognized the independence of the self-declared people’s republics of Donetsk and Luhansk, in eastern Ukraine.

We remain attentive to the next episodes and positioned in commodity companies that tend to benefit from the economic cycle and take off from the indices in the event of more severe conflicts.

Finally, I hope you enjoyed the article, and let you know that I am totally open to questions and suggestions, which I usually answer every day on my personal Instagram profile.

 

Posted by: John Labunski

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