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The Economic Impact of An Ever Escalating Ukrainian Crisis

cartoon ukrain

The world has been in a state of shock ever since 298 people were killed last Thursday after a Malaysia Airlines plane was shot down over eastern Ukraine by what is thought to have been a Russian supplied Buk anti-aircraft system fired by Pro Russian Ukrainian rebels. The level of malicious intent to this attack is still in question with some saying it was just too sophisticated a weapon in too unsophisticated hands who wanted simply to show their muscle to the world, not commit an abhorable act of terrorism. Russia has been extremely difficult to read, most experts believe that they are directly supporting the rebels, although they deny having supplied the rebels with any weapons at all, least of which a Buk missile launcher. On Monday President Obama questioned just what exactly they are trying to hide, warning Mr Putin that Russia could face additional sanctions if they fail to take steps to resolve the crisis in Ukraine.  The fighting in Ukraine has already been reported to have claimed over 1000 lives. Its escalation has caused a great deal of concern, exemplified well by the case of six Shakhtar Donetsk football players who have refused to fly back to Ukraine after a friendly match in France due to concerns over the conflict.

So how has this crisis affected the economy? Well in Russia the effects of the Wests sanctions are certainly being felt. The richest in Russia are losing money at an alarming rate with $14.5 billion being lost compared with a gain of $56.5 in US wealth since the start of the year. This change can to some extent be pinned on what is happen150170538_putin_551796cing in Ukraine. Areas of the market, such as energies and commodities, which are currently surging, are being missed out on by Russia. Also forgetting about oil and gas we must remember that Ukraine is the 5th biggest exporter of Wheat in the world and Russia is the world leader in the production of palladium, all of these exports have taken big hits. Aside from their direct economic impact, the sanctions are causing a great deal of fear in the wealthy people of Russia who can see their billions slipping away. Billionaires such as Alisher Usmanov who is the 46th richest person in the world has seen a drop of 2.5% of his $17.7 billion wealth. Another is Vladamire Lisen who ranks at 96th richest and is worth $12.1 billion and has seen a change of $-2.4 billion. A third is Leonid Mikhelson whose fortune of $15.9 billion has decreased by $2 billion. It is a question as to how much longer the uber rich of Russia will accept Putin’s continuing policies before they rebel against him to save their fortunes from complete collapse. Indeed Russia’s economy has been stagnating for several years and even before the crisis in Ukraine, Russia was a poor bet for international investment. Peter Broockvar, the chief market analysis with the economic research firm The Lindsay Group was quoted saying “Geopolitical influences on markets are usually fleeting, and the news yesterday (July 17th) will likely be, too, but the intensification of the conflict and increased amount of sanctions will further damage the Russian economy, which was already on its heels.” This has led to Russia taking steps to diversify its economically essential energy market, just this past May Moscow signed a 30 year energy agreement with China reported to be worth around $400 billion, however the pipeline required for this exchange is years away from being a reality.

As previously stated the EU is reluctant to follow the US in its increasingly tougher sanctions on Russia. This is because despite Obama stating that the new sanctions placed are “designed to have the maximum impact on Russia while limiting any spill over effects on American companies or those of our allies,” this is still a distinct fear. Russia is a major export market for the European Union and it also relies on Russia for around one fourth of its overall oil and gas suppliPro-Russian separatists look at passengers' belongings at the crash site of Malaysia Airlines flight MH17, near the settlement of Grabovo in the Donetsk regiones, meaning that there is a real danger of Moscow restricting or even turning off these supplies in retaliation for increased economic sanctions. A big part of the problem facing the Eurozone is that they are still economically weak, working hard to recover from the recession. Mark Luschini, a chief investment strategist at the broker deal Janney Montgomery Scott explains; “The EU can ill afford to have a mishap in terms of their economic activity at a time when they’re growing at such a timid pace. It would not take much to tip them back into a contractionary mode, which they fought so hard and have seemingly broken out of. That would obviously create great anxieties across the Eurozone and once again ignite concerns about their financial system.”

Another area which could cause issues for European stability is whether we could see Ukraine coming to the point of economic collapse and require another bailout. In April the IMF agreed to lend Ukraine $17 billion over the next two years to stave off the threat of a financial meltdown. However with the ever increasing crisis the government is finding it harder and harder to meet the strict terms of the bailout. The IMF now expects that the Ukrainian economy will shrink by 6.5% this year, compared with 5 % at the time the emergency load was originally agreed. For the current program to succeed it relies on the conflict beginning to subside in the coming months.

For now I would recommend investors to closely monitor the ongoing crisis, digest the information and avoid a knee jerk reaction, the market has a tendency to sell first and ask questions later.

I hope that you have enjoyed reading this post.

Stuart Yeomans

CEO

Farringdon Group

Kuala Lumpur : Malaysia

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