Ukrainian Gambit by Putin Stings Economy as Allies Lose Billions
Comment of the Day

March 04 2014

Commentary by David Fuller

Ukrainian Gambit by Putin Stings Economy as Allies Lose Billions

Here are two brief sections from this interesting and informative article from Bloomberg: 

March 5 (Bloomberg) -- President Vladimir Putin’s brinkmanship in Ukraine has already cost some of his closest comrades billions of dollars. The other 144 million Russians may also pay a price.

Putin’s troop buildup in Crimea triggered the biggest stock selloff in five years March 3 and pulled the ruble to a record low, prompting the central bank to raise interest rates the most since 1998, when a cash-strapped government stumbled toward default. Longtime Putin ally Gennady Timchenko and his partner Leonid Mikhelson lost a combined $3.2 billion of their wealth after their gas producer OAO Novatek tumbled 18 percent.

“Russia will be the big loser of the crisis in Ukraine,” said Timothy Ash, chief emerging-market economist at Standard Bank Group Ltd. in London. “There’ll be a big hit to domestic and foreign confidence, less investment and likely increased outflows, likely losses for Russian banks with exposure in Ukraine, a weaker ruble and weaker growth and recovery.”

The tensest standoff with the West since the end of the Cold War is exposing the weakness of an economy rebuilt on the back of the energy industry. With oil and gas accounting for more than half of all exports and energy prices stagnant, the growth potential is all but exhausted, prompting officials in Moscow to sound the recession alarm even as the country’s main trading partners recover.

Vital Pipelines

Russian companies also have investments in Ukraine’s energy, defense and agricultural industries. The country is Russia’s fifth-largest trading partner, with turnover of $39.6 billion last year, according to data from the Federal Customs Service in Moscow. Exports to Ukraine were $23.8 billion, while imports totaled $15.8 billion.

More vital to Putin is Ukraine’s network of pipelines, through which state-run OAO Gazprom sends more than half of its exports to Europe, where it has a quarter of the market.

Even so, Putin is prepared to do whatever it takes to stop Ukraine from aligning with the West, said Michael Ganske, head of emerging markets at Rogge Global Partners Plc in London.

Putin considers Ukraine and its 45 million people key to his goal of building a trading bloc to rival the EU, according to Ganske. His customs union, which Yanukovych planned closer ties with, is currently comprised of Russia, Belarus and Kazakhstan, though Armenia has also agreed to join.

“Putin cares for the economy, but he cares more for the greatness of Russia and regional influence,” Ganske said. “As a former spy, Putin has this grand-Russia idea in his head and he just doesn’t accept that Russia’s importance in the geopolitical context has decreased. Putin doesn’t like the idea of Ukraine moving further away from Russia and becoming part of the EU at some stage, let alone NATO.”

David Fuller's view

This article is informative and supplies both names and numbers, fleshing out my comments in the lead article above.  It also provides some reasons for why both institutional and private investors will leave a country where risks appear to be increasing.

We are living in an era in which corporate Autonomies, including some of the biggest multinational investment institutions have emerged, as I have often discussed in recent years.  These Autonomies are infinitely larger, more prosperous and therefore more powerful and influential than ever before.  They are already wealthier than some frontier economies.  Their growth rates are stronger than most economies because they are often better managed and have far fewer liabilities.

Is this good for investors?

I maintain that corporate Autonomies are a bonanza for long-term investors, who can participate in their wealth and market success.  They are easy to monitor on price charts and you will know that you are onto a good thing while they outperform on a relative basis.  You will also be able to spot recoveries when relative strength improves after a long period of underperformance.  

Are Autonomies also good for the governance of countries? 

Yes, more often than not because board members of Autonomies will also view nations with the perspective of judges at an international beauty contest.  They will prefer to do business in countries where the trend of governance is favourable and citizens are both contributing to and benefiting from GDP growth.  The potential presence of Autonomies in countries provides an incentive for leaders of developing countries, in particular, to improve their economic governance.   

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