Oliver comments of the economic impact of the Ukraine, Russian situation.

Worries about Ukraine have adversely affected share markets yesterday (US S&P futures -0.8%, ASX 200 -0.5%,).

The Ukrainian economy is too small and its problems too specific to have a direct impact on the global economy or an impact via contagion.

The main risk has always been that it triggers wider Russian/West conflict – resulting eg in a disruption to gas supplies to Europe or a broader military conflict.

The Russian action in Crimea over the weekend adds to this risk. Note though that Crimea has a predominant Russian population, it was part of Russia prior to 1954 and the Russian Black Sea naval fleet is based there. So this all confuses the situation a bit, eg Russia may have done all it plans to do.

At the moment though markets are focussed on the risk to gas supplies, eg the Eurozone obtains 25% of its gas from Russia – mostly via Ukraine. This could be threatened by a broader civil war in the Ukraine and/or if Russia decides to punish Europe for supporting Ukraine. Ukraine is also a big grain producer – hence wheat futures are up 3.4%.

Much now depends on how Europe and the US respond in terms of how much support they provide Ukraine, and hence by how much they antagonise Russia. My view is that the EU and US will tread carefully knowing how much the Ukraine means to Russia. It would be a bit like Russia meddling in Canada. The EU is also likely to be wary of doing anything that might threaten its gas supplies and hence its economic recovery. So I suspect that while there may be a lot of noise on this front it may die down in time.

The prospect and implications of a broader (Yugoslavian style) civil conflict between western and eastern (more pro-Russia) Ukraine and its impact on the flow of gas is harder to read.

The best outcome – in terms of reducing market uncertainty – would be some sort of IMF support for Ukraine to enable it to service its debt supported by Russia, the US and the EU with Ukraine staying out of the EU.

My suspicion is that Ukraine is just another distraction for markets that will fade in the months ahead. But it may take a while to settle down and the uncertainty could get worse before it gets better.

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