Ukraine conflict: Global economic crisis brewing or local problem?

The crisis in Ukraine is rippling through the global economy, but one economist suggests that by far the greatest consequences are for Russia and Ukraine themselves.

Kacper Pempel/Reuters
A man looks on next to the WIG30 index at Warsaw Stock Exchange building in Poland Monday. The rising threat of war between Ukraine and Russia sent investors scurrying for relative safety on Monday, pushing stocks down sharply and lifting gold to a four-month high.
Rich Clabaugh/Staff

The crisis in Ukraine has roiled international financial and energy markets with effects that could worsen if international tensions aren’t defused. But the greatest economic threat is less to the global economy than it is to the two nations involved, says one analyst.

In some respects, the damage may already have been done.

Russian President Vladimir Putin’s military intervention in Ukraine sends a signal “that Russia puts imperial interests above the economic interests of its country and investors,” says Charles Movit, an expert on European and former Soviet economies at the economic forecasting firm IHS.

Even if the current regional chaos is defused, the events could result in additional outflows of domestic capital from Russia – and in continued hesitancy of foreign money to come in. Russia very much needs that investment to diversify and upgrade its economy beyond the energy sector.

Meanwhile, the turmoil throws Ukraine’s economic promise, rooted in hopes of political reform and a financial rescue from Europe, into doubt.

This is dealing serious uncertainty to Western investors and energy customers.

The Standard & Poor’s 500 stock index was down about 1 percent Monday, while energy prices rose and havens like gold and the US dollar did well. The German DAX stock index fell more than 3 percent for the day.

Ukraine's acting president said Russia's military presence in Crimea was growing, Reuters reported. Russian President Vladimir Putin over the weekend claimed a right to invade the neighboring nation to protect Russian interests and the Russian-speaking population.

The military tensions raise the risk of sanctions that isolate Russia in what some call a “new cold war.” US Vice President Joe Biden warned Russia of increasing political and economic isolation unless troops are withdrawn. The European Union, too, is talking of possible sanctions.

Russia is eager not to lose its lucrative business of selling natural gas through pipelines to Europe – with a major portion of it passing through Ukraine. That could put limits on military adventurism.

Russian stock prices fell about 11 percent Monday.

For a Ukrainian government trying to reconstitute itself after the recent ouster of Viktor Yanukovych as president, a vital need is to secure outside financial help due to low reserves of foreign currency.

Ukraine is seeking help from the International Monetary Fund (IMF), which could hold the key to avoiding default on the nation’s foreign obligations.

It doesn’t help that Ukraine is behind in payments for natural gas imports that Russia wants to collect.

European nations, for their part, want to see a resolution that involves not just the stable flow of natural gas exports from Russia to the West, but also the opportunity for Ukraine to deepen its economic ties to Europe over time.

“There will be a lot of added momentum in Western Europe to find alternative supplies of energy,” and not rely so heavily on natural gas from Russia, says Mr. Movit.

Wheat prices also have jumped on news of Russia’s intervention over concerns that Ukrainian farm exports could be disrupted.

At the heart of the tension is Russia’s assertion that eastern Ukraine is within its sphere of influence as a former Soviet republic with a substantial Russian-speaking population. The peninsula of Crimea, on the Black Sea, is predominantly Russian-speaking.

Meanwhile, many Ukrainians hope to hitch their economic future more closely with Europe.

If the conflict escalates to sanctions by the West against Russia, akin to those imposed on Iran, “the financial implications for Russia could be very severe,” Movit says.

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