Maintain Vigilance On Ukraine

So far, the crisis in Ukraine has broadly followed the core scenario we outlined in early March, with Russian military activity contained to the Crimean peninsula, the threat of sanctions limited to travel bans and asset freezes, and the EU and IMF compiling a financing package for the cash-strapped Ukrainian government.

Even if events go no further, we believe the damage to investor perceptions of Russia has already been done. However, recent market moves imply that investors are starting to anticipate an escalation of the crisis. Russian equities have been hammered, but we see further downside ahead. The chart of the MICEX equity index in US dollars has key support coming in around 25, which would represent a 23% drop from current levels.

The technical picture for the rouble paints a similarly precarious picture, with the currency teetering on record lows against the greenback. If we see a confirmed move through the RUB37.00/US$ level, we believe the unit could head a lot lower. The damage is not limited to Russia, with Germany's DAX equity index breaking below the key 9,000 support level. Any perceived potential for Russian energy supplies to Germany and Europe being cut off (which is not our core scenario) could easily send the DAX back to 7,000-8,000 range.

There are several flashpoints to watch:

  1. Crimea will hold a referendum on its future status on Sunday, March 16. It's unclear if independence or absorption by Russia will transpire, but the vote will be an extremely sore point between Kiev and Moscow, and between the West and Russia.
  2. The situation in eastern Ukraine, where there are many ethnic Russians unhappy with the new interim government in Kiev, remains tense. Reports say that Russia is mobilising tens of thousands of troops on Ukraine's eastern border, for a possible incursion.
  3. Ukraine will hold a new presidential election on May 25. It's virtually certain that Russia, and to some degree the West, will try to influence the vote from behind the scenes.
  4. Any tense stand-offs between Russian and Ukrainian troops/militias/etc, that results in deaths could result in another flare-up of tensions.
  5. Beyond new elections, discussions over the nature of the future configuration of Ukraine (e.g. whether to adopt a federal model) could prove contentious.

Further analysis on a full range of aspects of the Russia-Ukraine crisis is available to subscribers at Business Monitor Online.

This Week's Trivia Question

Last week's question returned us to the world of film, and was as follows: which actor appeared in roles that involved, in separate films, a South American archaeological expedition in the 1930s, domestic life in revolutionary Iran in the 1980s, battling against a major superhero in the 2000s, a conspiracy involving the Vatican in the late 2000s, and another foray into Iran in 2010? (Hint: He's not a big name actor, but is evidently versatile.) The answer is Alfred Molina, who played Indiana Jones' treacherous companion in Raiders of the Lost Ark, Iranian husband Mahmoody in Not Without My Daughter, Dr Octopus in Spider-Man 2, a Bishop in The Da Vinci Code, and Shekih Amar in Prince of Persia.

This week trivia's question is numerical, and relates to a general election which took place recently. What aspect of the country-in-question's election does the number sequence 666, 649, 333, and 111 refer to?

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