Russian President Vladimir Putin’s decision to deploy military forces in Ukraine rattled world financial markets on Monday, as investors warily eyed the increased instability in the region.
Russian markets took the biggest hit with the Moscow Exchange tumbling nearly 11 percent over the course of the day, while the country’s official currency, the ruble, also plunged against the U.S. dollar.
The escalating volatility in Ukraine hit markets around the globe.
The Dow Jones industrial average was down around 200 points, or 1.2 percent, in early afternoon trading. European markets also opened the week lower— Germany’s DAX index is down close to 3.5 percent, while Britain’s FTSE has fallen about 1.5 percent.
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Market analysts said the Ukrainian situation would likely have limited impact on the U.S. economy and markets unless the conflict deepened into full-scale war or spread to other areas such as Lithuania or Estonia.
“Markets reacting as they are, especially given the big advance last year, is rational because the risks are high,” said David Kotok, chief investment officer at Cumberland Advisors. “This is the worst tension between the West and Russia since the end of the Cold War and it shows there is real weakness in the West’s ability to respond. But as long as this stays in Ukraine the U.S. is very insulated.”
Ukraine represents a very small slice of the global economy and its default, should it occur, would probably not cause more than a temporary ripple in bond and equity markets. The United States is also much less reliant on foreign oil than in the past. And the rise in oil prices impacting European economies should be limited given the current ample global supply, experts said.
“Of course you are going to have an immediate reaction but markets right now are much more driven by what the Federal Reserve is doing than by what is going on in eastern and central Europe,” said James Rickards, an expert on geopolitical market risk at merchant bank Tangent Capital. “Ukraine is a tiny economy. It’s not like distress in Spain or Italy that we saw in recent years,” Rickards said. “Where it gets tricky is spillover. Does the [European debt crisis] come back to haunt us now? We really have no way to know.”
Russia acted quickly on Monday to try and blunt the damage to its economy resulting form its move into the Ukraine with its central bank increasing its key lending rate to 7 percent from 5.5 percent.
“The decision is aimed at preventing the risks for inflation and financial stability arising from the recent increase in financial market volatility,” the Russian central bank’s board of directors said.
As world powers weigh how to respond to Russia seizing Crimea, a peninsula in Ukraine where Moscow has a naval base, Treasury Secretary Jack Lew over the weekend discussed potentially imposing economic sanctions on Russia.
Russia’s economy is hugely dependent on oil and natural gas, and some market watchers warn that economic sanctions could lead to an increase in certain commodity prices.
“If the West agrees on any economic sanctions, it has the potential to significantly drive up the price of oil (especially Brent) and natural gas as well as wheat and potash,” Robbert Van-Batenburg, director of market strategy at the brokerage firm Newedge, said in a research note.
Rickards and others noted that it made sense for the United States. to let Germany take the lead on pressuring Russia because the Germans have oil production technology the Russian’s need. And the two are now partners in the Nord Stream gas pipeline that runs through the Baltic to Germany.
Also, the United States and other leading economies are considering how to boost the struggling Ukrainian economy to help the country’s new government.
Lew said that the centerpiece of any aid package should come from the International Monetary Fund, which is sending officials to Ukraine this week on a “fact-finding” trip.
Some market analysts wondered whether the situation in Ukraine could lead Federal Reserve Chair Janet Yellen to pause the central bank’s current policy of cutting back, or “tapering,” asset purchases at each policy setting meeting. The Fed has been reducing the purchases, initially begun as an effort to stimulate the economy during the last recession, by $ 10 billion at each meeting.
The general consensus on Wall Street is that the unless the situation in Ukraine worsens, the Fed will continue to taper following its next meeting that concludes March 19th. “It will take more bad U.S. employment reports,” to get a pause in the taper, Rickards said.
Turmoil in Ukraine hits world markets
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