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Ukraine Crisis Grips Financial Markets as US Sanctions, Referendum Hang in the Balance

H.S. Borji
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Ukraine Crisis Grips Financial Markets as US Sanctions, Referendum Hang in the Balance

Tension in the global financial markets reached a boiling point Friday after Russian President Vladimir Putin defended his country’s military intervention in the Crimea region of the Ukraine. In a telephone conversation with US President Barack Obama, Putin brushed off warnings from the world’s biggest superpower, saying Russia would not ignore calls for help from Crimea’s majority Russian population. The escalating conflict, which has been called the most serious east-west stand-off since the Cold War, has fueled risk aversion in the financial markets.

The conflict originated in November of last year when the government of Ukrainian President Viktor Yanukovych abandoned an agreement that would strengthen relations with the European Union. Instead, the government sought to establish closer ties with Russia. Fresh waves of protests soon followed, with as many as 300,000 Ukrainians taking the street in Kiev’s Independence Square on December 1. The protests, which would rage on into the new-year, resulted in several deaths, the occupation of Kiev’s city hall and the eventual resignation of the prime minister.

The opposition would eventually seize power after a political coup, forcing President Yanukovych to flee the country for Russia. Ukraine’s interim President, Oleksandr Turchinov would later issue a warrant for Yanukovych’s arrest. One day after the interim government issued that warrant, pro-Russian demonstrators took to the streets in the Crimean peninsula. In the days that followed, the Russian military would take control of key airports and military bases in Crimea.

The United States, having confronted Russia about its military involvement in Crimea, has threatened to enact financial and trade sanctions against the country. In the meantime, the global financial markets have roiled, as investors speculate about how the crisis may escalate.

Geopolitical tensions usually result in an uptake of safe haven assets such as gold or the Japanese yen, at the expense of riskier assets such as stocks. That’s exactly what happened earlier in the week. Spot gold (XAU/USD) surged to a high of $1,354.05 on Monday, before declining later in the week amid signs Putin would not press for military conflict.

Meanwhile, crude prices continued to rise amid concerns supplies to western Europe could be affected by the escalating conflict. Crude for April delivery continued to incr above the $100 a barrel mark. Brent crude, the global benchmark, was priced at $108.73 as of 18:00 GMT. West Texas Intermediate crude was marked at $102.54.

In currency news, the Japanese yen rose significantly in the early part of the week after the Russian military began pouring into Crimea. The USDJPY pair fell to a low of 101.18 Monday, a one-month low. As a global safe haven, the yen is used by investors to safeguard against a riskier trade environment. The US dollar, another safe haven, rose to an all-time record of 37 Russian roubles on Monday.

The global equities market also took a major hit on Monday. In Russia, the Moscow RTS stock index declined 12 percent. Elsewhere in Europe, the FTSE 100 index of top British shares declined 1.5 percent, while France’s CAC-40 declined nearly 3 percent. In the United States, the major Wall Street indices also took a hit. The Dow Jones Industrial Average fell 1.1 percent, while the S&P 500 lost nearly 1 percent.

With Putin putting off the potential of a military conflict, the equity markets rebounded strongly over the balance of the week. However, with a referendum for Crimea to join Russia hanging over the balance and the threat of economic sanctions from the United States, global equities could face turmoil over the next several weeks.

The Crimean parliament voted unanimously on Thursday to join Russia. On March 16, the Crimean people will vote on whether they too would like to join the Russian Federation.

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