Catch 22 in Crimea

06 March 2014   Category: News, Asia, Europe, Russia   By Asia Asset Management

In response to current events in the Crimea, Maarten-Jan Bakkum, senior emerging market strategist at ING Investment Management (ING IM), believes that the solution will be political with both sides set to lose too much from a military conflict.

“Russia has now admitted that it has occupied a strategic position in the Crimea. So Russia is jeopardising its relationship with the West and focusing purely on military interests, even at the risk of economic consequences.

“All eyes are now on that relationship with the West, which is under heavy pressure as Russia is apparently completely ignoring what the rest of the world thinks. And from that point of view, the concerns are valid. On the other hand, the economic interests are all so great and no one, therefore, benefits from this situation. I am therefore expecting pragmatic politicians to make every effort to get this situation under control as quickly as possible.

“How Ukraine reacts is also a concern. Politically speaking, there is little stability at the moment and the country is struggling with an economic crisis. Further action from Russia could therefore lead to a revolt and perhaps even civil war.

“If things were to escalate, there would be an impact on the West; primarily due to the consequential rise in oil and gas prices. For European countries, Russia is an important party in the energy market and a lot of gas comes to Europe via Ukraine. Germany and the Netherlands also have huge interests in Russia.

“If the situation escalates, oil prices could rise, as could gas prices. Russia has threatened to cut off the gas supply before and that could happen again now. Naturally, this situation is undesirable, especially as the economic recovery is still so fragile. After all, in the worst-case scenario, the economic recovery could falter as a result of higher energy costs.”

“In terms of the economic outlook for Russia, you have to look beyond this crisis. Russia still has a current-account surplus, for example, and oil prices are relatively stable. The valuation of Russian companies is positive, too, but investors should not start considering investing in Russia too seriously at the moment. In my view, it is still too early to start buying Russian stocks.”