The Crimea vote – and what it means for your portfolio

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.

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.

• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.

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  • David Webb

    What a surprising article! So Stepek says Russia imported its population into the Crimea to make an artificial Russian majority. Does he think the Crimea has **ever** had a Ukrainian majority in history? It was part of Russia since its conquest from Turkey in the 1700s. The Crimean Tatars have been in the minority in the Crimea since at least the late 19th century, and the Russian population there is not the product of a recent demographic shift. The Crimea has never been Ukrainian, ethnically, at any point in history. Why does Stepek write on a subject he knows zero about? Come to think about it, large parts of Eastern Ukraine were Russian before the unification with the Ukraine in 1654, and so it is no recent development there either that there is a majority Russian-speaking population there, although of course more people may have continued arriving at any point, and the Eastern Ukrainian and Southern Ukrainian areas have never been Ukrainian speaking at any point in history. Amazing how Stepek thinks he can assume all this is the result of mass population movements to change the realities on the ground.

  • ron cresswell

    John Stepek completely ignores ( or does not consider it merits consideration) the fact that Russia has borrowed from EU banks substantial amounts . Should they refuse to pay interest the banks would be obliged to make provisions which would probably cause many to be technically bankrupt.

  • Marjan Antunovic

    John Stepek should stick to his day job. How he can compare the situation in Crimea with Scotland and Norway is beyond me. For a start, he could have a look at some of the alternative media outlets (i.e. not mainstream and state sponsored) in order to get a better picture of what Crimea could be all about.

  • Willem Erasmus in Ellisras, Limpopo Province, South Africa

    Since when can USA and EU apply double standards ? Scotland may have a referendum, what about Kosovo ? Americans bomb and mamed in Libya, Afghanistan, Iraq, Pakistan + invade. The EU wants to lecture while applying double standards. Russia has permission, according to a 1997 treaty with Ukraine, to station u to 25 000 troops in the area. It’s not invading and it is not moving agressively. I think that neocon Americans (want to use Ukraine to build missile bases for “defence”. American neocons should mind their own business and not be the world’s double standard policeman.

  • Horace Knight

    The people of Crimea have spoken, 97% want to be reunited with Russia, so be it, good luck to them. In Kiev a few dozen (hundred) protesters brought down the elected president. The “west” should keep out of it, for once the people of Crimea have had the chance to decide their own fate. Thank goodness we have the greatest invention of the 20th centuary, atomic weapons, to keep the likes of Kerry from starting WW3.

  • Orb

    “you don’t just march into a country (or semi-autonomous region)… then annex it” – sounds like we could be talking about Palestine; odd how there have been absolutely zero repercussions for what’s gone on there – double standards deluxe!

    Indeed, Stepek’s comparison to Norway/Scotland is utterly bizarre.

    Every description of democracy hails the same theme (and NOT anything like the ‘democracy’ western governments are presently meting out on their own populations!!) The Crimeans have spoken just as the Gibraltans and Falklanders did – if there is any ounce of democratic value whatsoever left in western governments, then they’d do well to let the Crimeans be heard. Since when is the voice of the people ‘illegitimate’??

    However, tension should prove good for the UK: we’ll be able to sell off excess fracked gas once it comes online! Long live an independent (of Brussels) £!

  • One of many

    I love the comments here 🙂 Please, please, journalists, up your game. What ill-considered nonsense you churn out in pursuit of a dollar.

  • 4caster

    I also agree with the comments and not the article.
    Under the internationally ratified agreement of 1994, Russia can station 25,000 soldiers on the peninsula at bases throughout Crimea. The latest total is estimated to be around 16,000. Crimea was part of Russia till 1954 until Khrushchev bizarrely allocated it to Ukraine with no referendum. There is no evidence that the electorate was intimidated to vote 97% for Russia. You might just as well write that the 99% of Gibraltarians who opted to remain a UK colony rather than join Spain were intimidated. The analogy of Norway invading Scotland is ridiculous.
    The nearest analogy may be the Turkish invasion of northern Cyprus in 1974. Britain sent reinforcements to defend her sovereign bases, including Phantom jet fighters to Akrotiri, and both Cypriot factions were careful not to provoke British forces.

  • James Baker

    I’ve found what mainstream news hasn’t said on Ukraine as interesting as what has been said.

    For one its been mentioned that 30% of Germany’s gas comes from Russia. However the fact that massive amounts off Russian gas flows in to the EU through pipelines in Ukraine has not been mentioned.

    Have a look at this map of pipelines in the region (dated 2005)

    John correctly meintions in this article that
    “If things get bad, Russia could cut the EU off.”

    However does not mention that the Ukrainians could do the same.
    I reference this article by the international business times.

    This does not need to be enacted by the leadership of Ukraine but by radicles who may not be as concerned of the reaction of the EU as the country’s leadership would be.

    I belive these radicles are much more of a wild card than western media have given credit.

    If Ukraineian pipelines were incapacitated then there would be a large gas shortage across Europe. Germany, with 30% of its gas being Russian, would be hit hard. And with the German economy currently propping up the Euro the ripples could be far larger than Mr Stepek imagines.

  • CKP

    The western media’s coverage of the Ukraine crisis has been very biased. Whilst there is no doubt that Putin has violated Ukraine’s sovereignty and Ukraine’s nuclear disarmament agreement, it is hard to ignore that the Crimea was part of Russia until the 1950s and was an administrative anomaly that it ended up part of the Ukraine. There is no convincing evidence that the large majority of long term residents oppose being governed by Moscow and indeed likely feel that this would enhance their prosperity. Partitioning by referendum and negotiation is preferable to partitioning by civil war. There are two sides to this crisis, we are not being given the whole picture by our politicians and media.

  • GFL

    If the people of Crimea want to be governed by Russia then what right does the rest of the world have to block this?

    Heck, if the people of Scotland want to join Norway (your silly analogy) then they should be allowed to.

    This is the whole purpose of democracy! We have got so used to pseudo-democracy the very concept of people actually choosing who governs them sounds bizarre.

    If the elections were unfair, that is separate conversation. I’m sure Russia would be happy for a re-election, with the UN overseeing the process.

    • 4caster

      I expect Orkney and Shetland will vote against rule from Edinburgh. It is not much of a fantasy that they might vote to join Norway if they were given that option.

  • Ellen12

    The main thing I have taken from the US and EU opposition to the will of 97% of Crimea’s electorate is that democracy in the west has lost its way. It is good that so many in the comments section recognise this. It is very worrying our leaders work so hard to quieten the voice of the people.

  • MichaelL

    Unbelievable, Victoria Nuland and Co. spend 5bn getting their friends elected in something that was little more than a coup (agreement that was reneged upon, and almost guaranteed a Russian response) .. for their own interests of course.
    You only have to look and see the people elected and those given fiefdoms in Eastern Ukraine.

    Crimea, unsurprisingly wanted out of Ukraine (it was only part of Ukraine for 50 years) and Russia supported them.

    Now the UK, EU are acting like poodles signing up to sanctions. Ridiculous and the Russians have their Avtobazar system to knock (as they did a few days ago) the US drones out of the sky, so difficult to see what they can do about it. Other than press for sanctions that hurt other countries more than themselves.

  • Borderer

    “If people of Crimea want to be governed by Russia what right does the rest of the world have to block this?”. I imagine the German speaking population of the Sudetanland in Czechoslovakia said the same in 1938 when the Nazis rolled their tanks in. The (non) reaction of the western democracies then was called appeasement. Perhaps we might learn a lesson from history in case we are condemned to re-live it?