The escalating political crisis in Ukraine – incursion of the Russian forces in Crimea -- has left the investors and world leaders worried about how the country’s instability could roil the global economy.
The political turmoil is rooted in the country’s strategic economic position. It is an important conduit between Russia and major European markets, as well as a significant exporter of grain.
However, post-Soviet era, it is a weakened economy.
According to CNNMoney, Ukraine’s plans to tap Russia for $2-billion in emergency funding fell apart, leaving the country sliding towards economic disaster.
Until last Thursday, the eastern European country was relying on a $15-billion bailout by Russia to service its debts and pay for its imports. But, it seemed Russia developed cold feet as anti-government protests escalated, followed by the ouster President Viktor Yanukovych. The Ukrainian finance ministry cancelled the planned bond sale late Thursday.
“The Russian military mobilisation into Crimea has once again brought the spotlight to deepening risks in Ukraine, reinvigorating debate over how escalating geopolitical conflict may impact broader market risk sentiment. Now, that Russian troops have already mobilised to secure Russian interests in Crimea, hedging for this fait accompli makes little sense,” said a Nomura note.
It said that while the present crisis, undoubtedly complicates Ukraine’s economic challenges, further escalating the risk of a sovereign credit event, the key questions, going forward, centre on the extent to which Moscow will further escalate tensions in its effort to pre-empt the emergence of a future NATO/EU member on its borders, and the extent to which Kiev and its Western backers move to aggressively counter Russia’s incursion.
Here are five reasons the world’s largest economies are watching what happens in Ukraine. (Courtesy: KCRA.com/CNNMoney).
*An important tie: Ukraine is an important tie between Russia and the rest of Europe. Russia supplies about 25 percent of Europe’s gas needs, and half of that is pumped via pipelines running through Ukraine. Moscow has cut off that flow in past disputes with Kiev and a disruption could push up energy prices for businesses and households.
*Sanctions on Russia: One prospect on the table would be the unusual circumstance of a top-10 global economy placing sanctions on another. But Secretary of State John Kerry said Sunday the US is “absolutely” willing to consider sanctions against Russia. President Obama, he added, “is currently considering all options”.
*European and world trade could be impacted: The impact could be felt beyond Europe if the world’s supply of grain is impacted. Ukraine is one of the world’s top exporters of corn and wheat, and prices could rise even on concern those exports could halt.
*Ukraine govt in debt: Ukrraine owes $13 billion in debt this year and $16 billion comes due before the end of 2015. Without help, the country appears to be headed for default. It’s not clear who would supply the needed economic assistance, especially after the ouster of key Russian-aligned officials prompted Moscow to freeze a $15-billion bailout and there is no comparable alternative in sight.
*Ukraine isn’t the only fragile emerging market: Ukraine’s instability comes at a difficult time for emerging markets worldwide, which are seeing growth slow as the Federal Reserve eases its economic stimulus. The situation in Ukraine could lead investors to reassess the risks of other emerging markets slowing economic growth.
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