The Ukraine economic and political imbroglio and its impact on the Global Economy By Dr. Bobby Srinivasan and Mr. Chandan Palaksha

March 11, 2014 | Posted by bobbysrinivasan << back to blog

There are events in the global economic and political history, which look initially small and innocuous suddenly grow up to become an issue of an international nature. The current situation in Ukraine, a former USSR country, starting as a small strife among the ethnic group, is threatening to become an international issue which will affect the global trade and leading to what appears as the beginning of new cold war between US, Eurozone and Russia. Let us now turn our attention to some basic data about Ukraine.

Land Area: 603700sq km of which 55% is cultivated (Indian Land area 1.25million Sq. km)
Population: 458 million (end-2009)
The major cities are: Kiev, Kharkiv, Donetsk, Odessa and Dnipropetrovsk
Language Spoken: Official Language: Ukrainian

Other Languages: Russian in Ukraine

To quell the internal strife Russia “the big brother” moved its troops to Crimea, an area in Ukraine dominated by people who speak the Russian language claiming that they are defending the rights of ethnic Russians .This is direct intervention by a country (Russia) intervening in the local affairs of another country (Ukraine) .

There has been an exchange of harsh words between Russia and USA. To quote, Putin on the intervention by the west “They sit across the Pond. Sometimes it seems they feel like they are in a lab and running experiments on the rats without understanding the consequences……

Obama on Russia’s actions

I know Mr. Putin seems to have a different set of interpretations of International laws but I don’t think that is fooling any one.

The US has taken the issue very seriously and threatened to isolate Russia politically, economically and diplomatically unless it withdrew the forces that have seized control of Crimea. The US strongly believes that the military action of Russia has violated international Law.

The Russian invasion had a dramatic impact on its local financial markets. Their currency rouble already one of worse performing currencies fell nearly 3 percent to a record low of 36.90 to a dollar .So for the currency has depreciated11 percent this year against the dollar and inflation rate is steadily moving up .Russia had devalued its currency twice before in 1997-98 and 2008-09.

The Russian equity index MICEX has already dropped from 1500 to 1300 .The price of selected commodities namely the wheat prices jumped up 4.7 percent while the Brent crude oil rose 2.1percent and natural gas futures jumped 10percent .Market analysts believe that Russia’s invasion could exacerbate capital flight thus creating a liquidity crisis.

Russian economic growth has faltered and the economists expect the current financial year’s GDP to be around 1 percent. The question to ask is whether Russia is creating this tension to push up the global oil prices which is good for them. In fact crude prices have moved up significantly in the meanwhile.

The situation in Ukraine is alarming. The country is on the verge of bankruptcy. Their foreign reserves are hardly enough to sustain two months of import. They carry a foreign exchange liability of 73 billion dollars while the reserves stand at around 15billinon$ Ukraine wants 35 billion dollars loan to be spread over next two years including an urgent loan in the next 2 weeks .But the international community wants to wait till May 2014 when the new president will be elected to office .

Its former president Viktor Yanukovych who was literally kicked out of office ran away with an estimated loot of 12billion dollars. He is hiding somewhere. The document released by Ukraine government shows that he has planned a crackdown in Kiev with 2500 troops ordered in to the capital for an antiterrorist operation .The leaked documents show how close the city came to a blood bath.

Where do we go from here? Russia is the third largest trading partner with EU with the turnover in goods and services nearing 340 billion Euro .If the EU decides on a trade embargo it may have a devastating impact on the Russian economy .For example oil and gas account for 70 percent of Russia’s exports and 50 percent of its government revenues.

Let us hope that the stalemate does not lead to a cold war. if it happens then we should be prepared for a major global economic slowdown with all kinds of trade embargos. However the EU must send a strong message telling the Russians that business is not as usual.

Time will tell as to how this situation will unfold. But one thing is certain. Russia has always used this kind of tension to push up the global energy prices.

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