Cees Bruggemans Consulting Economist Bruggemans & Associates
Cees Bruggemans Consulting Economist Bruggemans & Associates



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Ukraine a EM tripwire?

2014-04-05

Is Ukraine an Emerging Market (EM) tripwire and what would this imply for SA?

Global markets suffered initial hesitancy bordering on short-lived panic in early 2014 as Crimea erupted in the aftermath of Ukraine regime change.

It offered the usual pandemonium as asset prices came to discount a premium for the suddenly massive unknown. Markets suffered a shortage of quality information and insight, and resulting conviction, yet still came to a rather quick and firm verdict.

Storm in a teacup. To be disregarded as a serious global risk, except in a narrow regional context, even if wider tail risk residue (small probability, big impact event) lingered as background noise (something akin to big space background radiation, supposedly the lingering echo footprint of the Big Bang).
So how realistic is this? Will it stay this way? If not, what will it look like? With what playout, bearing in mind that surprise outcomes are possible?

We presumably may presume that Russia has no designs on Europe, or even the Greater West (America). At least, there is no hint of this, despite nostalgia about superpower greatness.

On the other hand, Europe in a narrow regional context and the Greater West in a global one certainly have designs on Russia, in a missionary kind of way.

Ideally, the whole region will be converted to western ways of  thinking, but seeing that such conversion won't happen voluntary it is being attempted in baby steps, in little bites persuading border regions to turn westward and embrace the western way of life.

Russia, at the implosion of the USSR quite powerlessness, agreed to large chunks of its western and southern border lands floating off into neutral space, thereafter progressively turned by European gravity pull.

True Russians mourned this state of affairs, until the tide started turning, and a new Russian jauntiness could be observed, taking back in bites that what had floated off before with such ease in the early 1990s.

Thus Georgia in 2008 found itself embroiled in conflict and thereafter reconfigured. In 2014 it was the turn of Ukraine, with Crimea the first bit to be taken back.

Mainland Ukraine historically consists of two rough halves, a western half carved out of the preceding Astro-Hungarian empire with a strong Polish origin, and the eastern half containing large Russian densities.

The Baltic countries have also large Russian concentrations, and thereby feed Russian appetite for border realignments.

From a global market point of view it doesn't really matter who owns these regions. If within the European sphere, they will turn out richer over time, but with no bearing on the geopolitical balance or its economic basis.

If the Russians Balkanize these regions, taking back areas with high Russian populations, the demographic balance would improve, even though destabilized non-Russian border land leftovers (a truncated Ukraine, Belarus, Baltics) might turn out less western or rich, and the poorer for its Russian orientation.

This is assuming that a Russia following its own ways will remain less well organised and managed and its population poorer in an oligarch dominated reality, and its immediate dependent neighbours tarred by the same brush.

This is something that deeply affects the people of the region, deeply challenges the western missionary zeal and the Russian sense of self after a millennium of being shaped by external and internal aggression.
But as long as nobody gets really destructive, either economically (gas) or geopolitically (WW3), it frankly is a localised distribution problem rather than being yet another installment of the nationalistic and ideological conflicts of the last two centuries.

And as such something to be ignored.

Whoever  is cleverer in manipulating will gain the greater sway, though economics in the long run will decide who will be richer. The former favours the Russians with assets (people) on the ground and not shy to swagger. The latter favours the Germans and whoever succeeds to get into their slipstream (not quite a 1945 prediction, but then we can't know everything).

The danger for SA is thus presumably not in these localised tiffs. If anything, we benefit from them, as Russia suffers pressure, other EMs look relatively more appealing as reflected in their capital access, precious metals may carry a residual risk premium.

Only if conflict were to intensify greatly does one begin to wonder.

Europe finding its Russian gas cut off would be a great deal more inconvenienced by a loss of 25% daily gas supply as compared to Russia finding itself without trade surpluses for awhile.

Such economic questions pale into insignificance next to the military ones. There seems to be no appetite for a trial of arms, given who are involved and what it would mean. Given the lack of geopolitical consequences, long may this be so.

This is assuming that today's Russia is different from the Bolshevik ideological zeal or the imperial expansion urge of earlier ages. This might be true. Even so, do not perhaps underestimate the Western missionary zeal. They can really nag when they want to and keep it up indefinitely, if need be.
In which case it would be a real surprise if it turned out different, badly.

Markets seem to have weighed the evidence on all sides and reached their verdict. All the noise carries terribly significant symbolism for all concerned, with real distributional consequences locally, but it makes not a row of beans difference beyond that narrow confine.

So by all means keep watching for the quality tragedy it offers, in the true Russian (and fine German) tradition, but no US cavalry will soon ride to the rescue, and any distressed damsels will have to make do with local fare.

Depressing, but also offering a great sense of relief that we are after all not replaying the 20th century (just as yet).

So back to Fed and China watching, with a cameo role for Draghi resisting all temptations (for now).
Frankly, a clear run for EMs, if Fed and China keep running on straight railway tracks.

It could make the EM cyclical revival outside of Russia stronger than imagined, if markets keep turning more supportive again.
 
Reference
Matthew Kaminski "Lessons from the Putin Wars" Wall Street Journal 3 March 2014
 
Cees Bruggemans
Consulting Economist
Bruggemans & Associates
Website   www.bruggemans.co.za
Email    economics@bruggemans.co.za
Twitter   @ceesbruggemans
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Ukraine a EM tripwire?

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