The Markets

Newton’s third law says for every action there is an equal and opposite reaction. Since things became tense between Ukraine and Russia, we’ve been getting a primer on the relative strength of diplomatic, economic, financial, and military actions and reactions.

Taking things over isn’t anything new for Russian President Vladimir Putin. A decade ago, he nationalised Yukos (a large publicly held Russian oil company) after jailing its founder for tax evasion and fraud. The financial repercussions of the takeover are still rippling through the global economy. In 2012, Russia lost a lawsuit filed by foreign shareholders of Yukos Oil and was ordered to pay damages. 

Not long after the Yukos debacle, Putin lamented the demise of the Soviet Union was the greatest geopolitical catastrophe of the century. In 2014, he annexed Crimea – the first time a European nation has taken territory from another European nation since World War II – justifying the action in many ways, including by saying the Crimean peninsula should have been returned to Russia in 1991 when the Soviet Union dissolved. The West responded by imposing sanctions. 

Today, Russia’s economy is in distress in part because of sanctions, according to Bloomberg BusinessWeek. Just last week, Standard & Poor’s knocked the U.S’s debt rating down to one level above junk, and Russia’s central bank raised rates for the second time since March significantly increasing the cost of borrowing for businesses and individuals. Inflation is high in Russia – above seven percent – although, as one economist pointed out, raising rates had little to do with inflation and much to do with supporting the ruble and discouraging the flight of capital from Russia. During the first quarter of 2014, $50 billion was pulled out of Russia, and estimates suggest that amount could rise to $200 billion by year-end depending on what happens in Ukraine. 

The Russian central bank wasn’t the only one taking action last week. On Thursday, despite threats of further economic sanctions, Russia placed thousands of troops along the Ukrainian border for military exercises. Additional sanctions are likely to be imposed on Russia this week. We’ll soon have more insight into which actions speak the loudest. 

Escalating tensions affected stock markets around the world last week, and many indices finished the week lower than they started.

 
 
 

Lexington Wealth Management