By invading Ukraine, Putin is putting pressure on the pro-West Yatsenyuk government and sending a strong message to the West that Russia will not tolerate the loss of Ukraine from its sphere of influence. NATO’s response will be critical for gauging the commitment level of the West to challenge Russia.
In a Daily Insight last week, our Geopolitical strategists highlighted that investors must watch for signs of how committed the U.S. and EU are to wrestling Ukraine from Russia. A serious effort – combining financial aid and blank-check diplomatic support – would force Moscow to respond. However, Russia sent a clear message over the weekend that it is prepared to play hard-ball, before any aid package could be presented to the Ukraine government.
German Chancellor’s weekend phone call with Putin provides some hope. By playing the middle ground between Russia and the U.S., Germany could defuse the situation, at least temporarily. According to news reports, Russian President Vladimir Putin accepted the offer of international monitors, which may calm the situation.
A key risk in the short-term is that Russia decides to invade the rest of Ukraine, following its maneuvers in Crimea. Another risk is that the West responds with more than rhetoric. Our strategists believe that the U.S. does not care enough about Ukraine to directly challenge Russia, and there are no signs that NATO is willing to step up to a military confrontation at the moment. Therefore, the German Chancellor’s offer of monitors in Ukraine may be the beginning of a de-escalation.
Bottom Line: Ukraine should not have major implications for financial markets in the major countries, but much will depend on the response from NATO and, particularly, the U.S. However, Ukraine may degenerate into a Yugoslavia-style civil war regardless of any de-escalation of tension between Russia and the West.