Markets ignoring geopolitical risk of crisis in Ukraine
Markets appear to be ignoring the escalating tensions between Russia and the Ukraine, which could snap open another geopolitical "Pandora's box," warns the Danske Bank research team in FXStreet. Political risk and the possible increase of Western sanctions should be monitored as potential "black swan" events, it says, with much depending on Russia's actions after Ukraine's special forces alleged armed excursions in the Crimea; Putin has reportedly warned that Russia would implement extra measures to guarantee security. Yesterday it was announced that Russia has launched naval exercises in the Black Sea amid the escalating standoff with Ukraine, who have responded by putting its border troops on high alert.

Share:

Assessment and outlook

Yesterday on 10 August Russia's media and Russia's security service FSB first, and then President Vladimir Putin, announced that Ukraine's special forces had over the weekend committed a ‘stupid and criminal act' in Crimea, carrying out armed incursions. According to the announcements, an FSB operative was killed during the operation and two Ukrainians were also killed. According to the FSB, during massive shelling from the neighbouring state a Russian soldier was killed. Official statements also said that Ukrainian and Russian citizens were detained by the FSB.

President Putin declared that in the current conditions it does not make sense to meet in the Normandy format (a diplomatic group of France, Germany, Russia and Ukraine to resolve the situation in the East of Ukraine). Later Ukraine's defence ministry and President Petro Poroshenko rejected the accusations calling them ‘preposterous' and saying that ‘these fantasies are just a pretext for another portion of military threats against Ukraine'.

The crisis in the Ukraine has been out of the news for some time, thus yesterday's escalating tensions could open another ‘Pandora's box' in geopolitics, depending on how Russia acts. President Putin said yesterday that Russia would implement serious additional measures to guarantee the security situation.

Political risk should not be ignored

Surprisingly, the RUB stayed calm even after the opening this morning. It has been more of a global oil story as the crude price came under pressure after record Gulf production data, but rebounded after the International Energy Agency predicted that the oil market would continue to re-balance. We saw a temporary decrease in RUB government bonds OFZs and Russian stocks after yesterday's announcements by Russia and Ukraine, but stocks seem to be the most sensitive to the geopolitical news at the moment. Markets have already accepted ‘the new normal' in geopolitics, which started early 2014.

Thus, bigger moves (in RUB also) would seem to require concrete actions that would make Russia's economic position worse. Otherwise, the Russian currency remains indifferent while we are keeping our moderately bullish stance on the RUB and OFZs. However, the political risk and possible intensification of Western sanctions should be constantly kept in mind as possible ‘black swan' events could prevail over the fundamentals. We see the present as a good time to hedge RUB risks while rates continue calm.

Download The Full Flash Comment