Special Report on Ukraine Crisis
Thanks to a subscriber for this balanced report by Pierre Fournier and Angelo Katsoras for National Bank. Here is a section:
A negotiated settlement on the future of Ukraine will take time to achieve, and uncertainty will continue to affect Russian markets, the ruble and foreign companies operating in Russia. An eventual compromise will require the “military neutrality” (i.e., no membership in NATO) of Ukraine, and economic relations with both the EU and Russia (a status which some have called “Finlandization”). A more decentralized federal system of government in Ukraine, which would empower the regions dominated by ethnic Russians, and perhaps impede the full integration of Ukraine into the EU is also likely. Clearly, a negotiated solution is in the best interests of the West, Russia and Ukraine itself.
An escalation of sanctions and trade embargos would be highly detrimental to Russia and the EU, whose trade relations have increased markedly in the last decade. Europeans, particularly the Germans, have shown little interest in applying sanctions that would hurt their economies and could eventually impact the availability and price of natural gas coming from Russia. Similarly, the Russians - whose economy is weak and vulnerable - will be reluctant to jeopardize natural gas revenues from Europe and their credibility as a reliable long-term supplier. Cutting off supplies to Europe (which gets 33% of its natural gas from Russia) would ultimately prove self-destructive. The loss of Western FDI would also inflict severe damage to the Russian economy.
Russia will, of course, continue to attempt to destabilize Ukraine in the hopes of deterring its former Republic from becoming a close ally of the West. A further military incursion appears unlikely, however. Over the years, Russian actions in Georgia and Moldova have achieved only modest results, and along with the annexation of Crimea, herald the decline of an empire rather than a Russian resurgence. Overall, while the risks of miscalculation should never be underestimated, the path of least resistance remains a negotiated settlement of the crisis.
Here is a link to the full report.
The situation in Ukraine has captured a great deal of attention from the media and will of course be of great concern to many Eastern Europeans who remember the era of the Warsaw Pact and who now cherish their national sovereignty.
It is worth considering what Russia’s goals are in destabilising Ukraine and what it will cost them. Russia will run a deficit in order to absorb Crimea. It is open to question whether it can afford to absorb additional portions of Ukraine. To do so would put a great deal of additional pressure on the Russian economy before one even begins to factor in the potential for additional sanctions.
One cannot rule out the potential for irrational actions or the possibility that Russia calculates that some short-term pain will result in long-term gains. Generally speaking autocratic regimes resort to spurring nationalist fervour when they are under pressure from a deteriorating economy rather than at the height of their powers. Therefore while the potential for an escalation of tensions might not be the best course of action for Russia it remains a possibility subject to conditions within governing regime.Back to top