The Crimea Referendum – The Outcome of the Yes vote

John colour

After early reports suggest that over 90% of Crimean voters backed the south western region of Ukraine to rejoin Russia, the world now awaits Russia’s next move as fears of a Russian invasion and possible financial sanctions continue to spook investors.

Why are Russia interested in Crimea?

Despite Crimea becoming part of Ukraine following the fall of the Soviet Union, Russia still sees Crimea Citizens as “their people” as around 59% of the population are ethnic Russians.

The Russian government maintains that its involvement in Crimea is purely to protect the ethnic Russians in the region against Ukrainian authorities.

Russia claim that just 24 hours after the protestors overthrew the former President Viktor Yanukovych, the Ukrainian Parliament adopted a bill to make Ukrainian the sole state language, seemingly pressing ahead with Ukrainian nationalism and infuriating prominent Russian speaking areas such as Crimea.

Another key factor in Russia’s interest may be the location. The Crimean Peninsula is seen by the Russian’s as a strategic link to the Mediterranean Sea, Black Sea, and the Balkans.

How will losing Crimea affect the Ukraine?

With or without Crimea, Ukraine will need billions in financial support over the next few months to get back on its feet.

The EU has offered Ukraine $15 billion over the next two years in the form of loans, grants, investments and trade concessions. The U.S. has promised $1 billion in loan guarantees, and the World Bank is talking about backing infrastructure and social security projects worth $3 billion.

A team from the International Monetary Fund has been on a fact-finding mission in Kiev since 4th March. The IMF will stay in Ukraine until 21st March with the aim of starting negotiations on a programme of support and economic reform.

How reliant is the EU and US on Russia?

The EU are Russia’s leading trade partner.  Almost half of Russian exports end up in EU countries, in turn Russia is the third largest trading partner of the EU. In 2013 trade between the two neighbours reached $330 billion.

The US and Russia are not as reliant on each other as they trade very little with each other. Russia is the 20th largest trading partner of the US, whilst the US is Russia’s 5th largest trading partner.

In 2013, trade between Russia and the US was $38.1 billion.

What sanctions could be imposed on Russia?

Economic data suggests that Russia’s economy is more vulnerable than many seem to believe.  Russia’s economic growth slowed to 1.3% last year, the worst performance since a 2009 recession.

As a result of this, as well as the deep economic links between Russia and Europe, the West are reluctant to impose sanctions that will significantly knock the Russian Economy. Instead the agreed sanctions are initially aimed at specific key political individuals rather than the economy as a whole.

At a summit last week European leaders agreed a three stage sanction process which they could impose against Russia.  The first stage would begin with suspension of trade talks, stage two includes asset freezes and travel bans for as-yet unidentified officials, the third level of sanctions and last resort, would involve wide-scale economic and trade sanctions.

What are the risks to the rest of Europe if stage three sanctions are imposed?

The EU will be hoping the sanctions don’t escalate to stage three, as Russia have already suggested any sanctions imposed on them would be mirrored by their government on the EU, which could result in Russia cutting supplies to Europe.

Russia’s energy supplies remain vitally important for the EU. A third of its natural gas is provided by Russia. Germany, the euro zone’s biggest economy, imports around 40% of its gas from Russia.

The issues and eventual resolutions surrounding Crimea have the potential to significantly impact the Eurozone and the global economy. Until resolved we expect volatility to continue in the markets, highlighting the importance for active portfolio management.