Yesterday, Crimea voted to re-join Russia.
The presence of Russian soldiers, and a general sense of foregone conclusion might have had some influence on the sheer scale of the 95%-odd vote in favour. The Russians say the result is legitimate, and they’re ready to welcome this little chunk of Ukraine with open arms.
But America has already dismissed the result. Europe’s not for recognising it either.
So what happens next? And what does it mean for investors?
Here’s what’s happening in Crimea
As I’ve spelled out quite a few times over the past few weeks, investing on the basis of headlines is not a winning strategy. You need to make a plan, stick to it, and make sure your portfolio is sufficiently diversified to withstand the odd event like Crimea happening.
But while your investing shouldn’t be headline-driven, there’s nothing wrong with wanting to understand a situation better. Unless you’re the sort of person who can cheerfully ignore the news most of the time (a healthy approach, but surprisingly rare) then getting to grips with the main issues can give you a sense of what’s at stake and how much it matters.
In turn, that can make you less prone to panic, despite the 24-hour news cycle screaming new headlines in your face every time someone twitches.
There’s a lot of talk and counter-talk on who’s in the right and who’s in the wrong over the Crimea business. Almost everyone involved has an interest in defending one establishment or another, or using the situation as a stick to beat someone with.
Let’s boil it down to basics. You can see why Crimea and Ukraine matter to Russia. Ukraine is on the Russian border. As other pundits have said, you wouldn’t expect the US to stand by and do nothing if Mexico turned communist overnight.
And Ukraine has always been a bit of a basket-case politically and economically. None of the previous regimes have exactly covered themselves in glory, so the ‘goodies vs baddies’ narrative is a bit simplistic.
Also, Crimea is clearly more pro-Russian than the rest of Ukraine. There may be various historical reasons for that (that old trick of exporting a load of your population to an area and then claiming that it must be yours is a classic strategy). But it’s easy to believe that the majority of the population there might be quite happy to join Russia.
However, having said all that – regardless of how the Crimean people feel, you don’t just march into a country (or semi-autonomous region), declare a referendum, then annex it.
It’s as if Norway had occupied Edinburgh, and called the referendum on Scottish independence early. And then changed the question to: “Would you rather be part of Norway or the UK?”
Maybe lots of people living in Scotland would like to be part of the Scandinavian arc of prosperity, or whatever. But it’s just not how things are done.
And obviously, the big worry is that once the Norwegians had nabbed Scotland, they’d fancy a crack at Northumberland as well. (Not picking on Norwegians by the way, it’s just the nearest metaphor to hand).
So it’s tricky for the rest of the world to just sit there and let Russia get away with this without causing at least a bit of a rumpus about the whole thing.
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Russia has more to lose economically
The point is, no one wants to go to war over this. But they can’t just shrug it off either, in case Russia sees that as a green light to annex a bit more of Ukraine. America has already dismissed the referendum result.
So it looks like further sanctions will be imposed. The EU is discussing them right now. In short, there’s going to be a bout of economic warfare. So what are the consequences of that?
Firstly, this isn’t a ‘credit crunch’ scenario. As Capital Economics notes, Russia accounts for a tiny percentage of the global financial system. It also holds relatively few US Treasuries ($140bn out of nearly $6,000bn in foreign hands). So the Russian financial system does not “represent a major systemic risk to the global economy or Western banks”.
On the commodity side of things it’s a bigger deal. Russia is a key supplier of gas to both Ukraine and the EU. If things get bad, Russia could cut the EU off.
That sounds dramatic. But it’s a case of short-term pain for Europe, long-term pain for Russia. If you stop selling goods to your biggest customer, then you might make life hard for them temporarily. But they will find a more reliable supplier for the longer term. You, on the other hand, will have lost your biggest customer and will have trouble finding mugs to replace them.
The market reaction already prices in a lot of this. In terms of stock markets, the hardest hit has been Russia. That’s because arguably it has the most to lose in economic terms from all this.
However, given that Russia was already unbelievably cheap, it’s not necessarily something that should put you off investing. I wouldn’t put a huge amount of your portfolio in it, but I’d certainly consider drip-feeding a bit of money into the market just now.
Of course, all we’re talking about just now is ‘economic’ terms. The other feature of autocracies like Russia is that economics isn’t always the most important factor in their decision-making process. Maybe Russia is happy to suck up some economic pain in exchange for getting one over on the West. With other cities in eastern Ukraine agitating to join Russia, it might feel emboldened to just keep on going.
So we could end up with a much stickier situation than ‘rational’, economics-centred analysis would suggest. That’s why traditional ‘safe haven’ bets like gold and the Japanese yen have shot up. It’s one reason why we suggest you have a bit of your portfolio (5-10%) in gold, as a safeguard against situations like this.
In short, chances are that this will be resolved in a fairly low-key way. Russia will get Crimea. Ukraine will get aid from the EU. And if that’s the case, now will prove to have been a great buying opportunity for Russian stocks.
But if things escalate – well, that’s why you have a diversified portfolio. So that you’re not always betting on things going right all the time.
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