Struggling Russia Could Blink First On Trade Sanctions

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Struggling Russia Could Blink First On Trade Sanctions
Struggling Russia Could Blink First On Trade Sanctions

Struggling Russia Could Blink First On Trade Sanctions

Russia’s multi billion dollar subsidization of it’s Natural Gas supply to the Ukraine pales in comparison to the economic cost of it’s latest moves to regain control of parts of this former Soviet country.

The courtship by Russia of the Ukraine began with the former opening the check book in an effort to demonstrate to the Ukrainian people the benefits of life under Russian control. Unfortunately for Russia, life in the EU also held economic attractions for much of the Ukrainian population.

Russia has since abandoned plans to buy the hearts and minds of the Ukrainian people, it has instead upped the stakes to the point that yesterday’s referendum on the Crimean peninsula is being internationally considered as tantamount to a pseudo annexation.

The direct cost of any military intervention by the Russians is not considered to be a burden on a country the size of Russia, it already funds a substantial military and the cost of putting it into action is only likely to be marginal.

The real cost for the emerging Russian economy is coming in the form of damage to market asset values. Russia’s stock market has fallen almost 20% since it’s escalation of the Ukrainian conflict.The Micex plunged to it’s lowest level in over a year as fears of global push back against Moscow’s actions scare off investors.

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Fear is very evident in Russian markets, the cost of insuring a 5 year Russian bond has jumped to over 250 basis points while the spread on sovereign debt yields has now reached 300 points above US treasuries.

The Ruble is second only to the devalued Argentine peso in terms of depreciating currencies this year. The struggling Russian economy does not benefit from a weak currency in the same way it’s other emerging market peers might, a large volume of Russia’s exports are energy related and as such are relatively inelastic in respect to currency fluctuations.

Markets currently consider the EU and US threatened trades sanctions as a bluff, largely because of the impact these sanctions may have on supply of Oil and Natural Gas to key EU economies. The logic being that what hurts Russia will actually inflict more harm on the EU. The reality of the situation however is that the Russian economy may be in a more precarious position than commentators think, if this is the case then western trade sanctions may be deemed a price worth paying.

To contact the reporter of this story: James Brennan at james@forexminute.com