By Tyler Hawkins Sunshine, PhD
World War III is certainly not looming and any fallout from recent events in the Ukraine will only have a short-lived effect on capital markets in Russia, let alone the rest of the world.
Russian equity indices and credit default swaps are trading at the lower end of the same range ever since late 2009. The investor mood is sceptical regarding equity investments in Russia. Unpredictability of taxation and tariff policy has made many oil and gas as well as power companies virtually un-investable. The banking sector’s largest players are loaded with loans and other assets of questionable quality.
Despite these issues, yield on corporate debt is quite attractive and could be sensitive to short-term news flow that will not affect the issuers’ ability to service the debt simply because concerns are exaggerated.
The speed at which the Crimea was annexed violated what Western nations would consider “a pause of decency” for such an operation. Despite the lack of violence and overwhelming local support (which proved that doubling pensions and salaries for government employees is a sure crowd-pleaser), the action was globally condemned.
To understand what the polemic is all about, consider an alternative annexation of Crimea the “Western way”: a coalition of the “willing”, (after a heart-rending presentation at the United Nations) sends a peacekeeping force to Crimea to protect Russians against violence. Digging up a coalition is not that hard – it could be comprised of Russia, Belarus, Abkhazia, South Ossetia, Armenia, Nicaragua and Venezuela. All of these nations “missed out” on many of such coalitions over the past decade and probably would be eager to protect a population in danger. After a year of “peacekeeping operations”, there would be a referendum on independence for Crimea that would pass by a large margin. Two more years of “transition period,” and Crimea would join the Russia Federation. International reaction would be considerably more muted.
The Crimea is not an important piece of land geopolitically and comparing it with Sudetenland is historically inappropriate. Crimea was actually part of Russia longer than it has been part of the Ukraine, which makes it unlike all other examples of “orphaned” Russia speakers that could potentially need protection. If Hitler’s annexation of Sudetenland gave Nazi Germany a launching pad into Czechoslovakia, Crimea gives Russia a launching pad into nothing. Russia’s large border with the Ukraine is not “defended” on either side and the lease agreement for the Black Sea Fleet at Sevastopol was just a way of gaining some other benefit for gas that Ukrainians didn’t have money to pay for anyway.
The nominal sanctions on a numerically small group of people and economically insignificant group of companies imposed thus far by Europe and the United States is symbolic.
The fear that draconian Iran-style sanctions could be imposed, and Russia financially isolated is far from realistic. Such draconian measures are strictly reserved for states that allegedly pose an “existential threat”. Such sanctions would certainly be counterproductive to US and European policy goals in North Korea and Iran which are more important than the Crimea. Additionally, these draconian sanctions against Iran developed over more than 20 years! These sanctions are the biggest risk to credit instruments.
In the short-term, a variety of circumstances could cause an escalation of the situation. Additional sanctions such as limits on transactions with Russian counterparties and retaliatory decrease in gas supplied to Europe could be announced, partially imposed, and in a year, forgotten.
Since 2008, the Russian – Western relationship has been slowly degrading – the war in Georgia, Magnitsky Affair, the failed “reset”, Snowden and now Crimea. This negative background is certainly not encouraging foreign investment in Russia, but it will not result in any serious economic sanctions. Even in such a scenario whereby the Eastern Ukraine was “separated” by political or other means, the West could retaliate by admitting the Western Ukraine to NATO and the EU – well short of an economic state of war.
In any case, Russia’s active participation in the global economic system is not likely to be in question in the near future and its ability to service almost all sovereign and corporate debts is extremely likely.
T “Hawk” Sunshine is Head of Fixed Income at IFC Metropol in Moscow and holds a Ph.D. in Economics from MGIMO, the Russian University of the Ministry of Foreign Affairs. Mr. Sunshine is a former Captain in the United States Army and speaking Serbo-Croatian, he served in Kosovo. He was formerly Head of International Equity Sales at Sovlink LLC from 2003. Hawk came to Russia in 1995 and worked for the Rosinter Group as Financial Director before moving to equity sales at Deutsche Bank where he was a specialist in less-liquid Russian equities. Hawk is an American national, holds a Bachelor of Arts degree from Rice University (USA) an MBA from Thunderbird, the American Graduate School of International Management (USA).
This article reflects the author’s personal opinion only