This blog looks at the Russia-Ukraine conflict and how this might affect the global markets and global economy.

Background

Ukraine has a long history. Interestingly one of its most famous exports was and is the classical musician, Trikovsky.

Ukraine first became independent from what is now Russia in 1917 but then later merged with the Soviet Union in 1919. With the collapse of the Soviet Union in 1991, under Mikhail Gorbachev, Ukraine once again became an independent state. Typically, the inhabitants of Eastern Ukraine are Russian speaking and think of themselves as Russian; Inhabitants of western Ukraine speak Ukrainian and think of themselves as Ukrainian.

Current Affairs

Ukraine remains the main transit route for Russian natural gas sold to Europe, which earns Ukraine about $3 billion a year in transit fees, making it the country’s most lucrative export service. Following Russia’s launch of the Nord Stream pipeline, which bypasses Ukraine, gas transit volumes have been steadily decreasing. In 2004 more than 120 bcm of Russian gas was transported through Ukraine; this figure dropped to just 84 bcm in 2012.

Clearly this is a major point of conflict for Russia and Ukraine there are knock on effects for the rest of Europe. Russia-Ukraine gas disputes left many countries with a significant drop in their supplies when Russia cut off all natural gas supplies passing through Ukraine in 2009 and 2006.

Ukraine also has Europe’s third-largest shale gas reserves at 1.2 trillion cubic meters (tcm). There are two potentially large shale gas fields: The Yuzivska gas field located in Donetsk Oblast (province) and Kharkiv Oblast, both in Eastern Ukraine.

Let’s be cynical and assume that the Russia-Ukraine conflict is about ‘natural gas’ and therefore money, power and control. Let’s assume also then that, quite understandably, Russia don’t want another competitor in the European gas market, especially one so close to home and so they are funding the separatist uprising in Ukraine in order to secure their interests, just as the US attempted to in the Middle East not so very long ago.. and coincidently are now starting to again.

The powers in Ukraine want to retain their independence so they can build their economy as an independent state, unfortunately for the western Ukrainian powers that be, half of their country, the east half, the part with the shale gas, do not want this.

So where do the Rest of the World (RoW) come in?

No western country wants Russia to have a monopoly on gas supply otherwise we are at the Russian’s mercy in terms of gas pricing, supply, etc., so, it is in our interests to object to this conflict when sadly we turn our back on so many other wars going on in the world at the moment.

Here’s the big question. Did Russian separatists down the Malaysian MH17 plane?

There is no concrete evidence for this. Objectively speaking and without concrete evidence, it could just have likely been the Ukrainians who did this to create anti-Russian feeling and to create pro Ukrainian sentiment. Clearly our western media ‘loves to hate Russia’ as it sells papers, so, this could have been a ruthless but strategically correct move by the Ukrainians. The facts are that, there is no concrete evidence to prove either case. My heartfelt condolences go to the families of those victims.

Implications

The implications of this conflict are potentially massive and very scary, with the worst possibility being the start of another World War, in which case there would be markets and global economic armageddon. In a best case scenario, this will all blow over and intermediation will prevail.

In the interim however, I think this conflict will continue to worsen gradually and will therefore affect market confidence more, that said the markets have proven very resilient over the last few years since the onset of the credit crunch and now continue to trade at record highs albeit that many equities are now overvalued and price-yield relationships in fixed income securities skewed.

Sadly, this conflict is the last thing we need when we are in an already fragile process of global economic recovery and I sincerely hope that world leaders can intermediate and contain this conflict otherwise it could destabilise that recovery, which nobody wants. The consequences of failure aren’t fathomable. Too big to fail. If one goes, we all do.

The fact that we now live in a global economy could be our saving grace and the driver that makes world leaders work together to resolve this conflict.

Investment tips

If you have money in the markets, as I do, i/ risk management, ii/ pound cost averaging, iii/ the ability to move money to cash quickly and most of all, iv/ quality financial advice, are the necessary tools of the day.