EQUITY markets are suffering their second Ukraine-related sell-off within three trading days, as the Western powers react to the de facto Russian occupation of the Crimean peninsula. European stockmarkets have fallen by 2% or so and there has been a rise in the traditional safe-haven assets such as Treasury bonds and gold.
While the parallels with the 1930s are uncanny—a great power using the threat to minority populations as an excuse for military intervention in smaller neighbouring countries—it seems highly unlikely that any military action on the part of the West will occur. Despite, or perhaps because of that, the scope for economic penalties on Russia is a serious possibility. That is why the Russian stock market is down more than 11% at the time of writing, while the fall in the rouble has pushed the Russian central bank into increasing rates by 150 basis points, from 5.5% to 7%.
Russia has foreign-exchange reserves of $453 billion so this is not the equivalent of Suez in 1956, when an American threat to cause a run on the pound caused the British government to abandon an ill-judged foreign intervention. The Russians also have the potential to retaliate by hitting the value of Western investments, such as BP's holding in Rosneft, which has dropped in value by $1 billion overnight. Nevertheless, a 150 bp rate rise will have a significant economic impact and the Russian financial elite has a lot of money overseas which it will not want to see threatened.
As mentioned in a previous post, the past 20 years have taught investors that these geopolitical storms tend to blow over quickly, and one suspects that is the consensus view this time round. There are two (inevitably speculative) reasons for wondering whether this time might be different, to use that dangerous phrase. The first is that, while Western nations may accept that there is little they can do to evict Russia from Crimea, their attitude towards the Putin regime will have changed; it will be much harder to take the line that with a little bit of encouragement, he can be persuaded to co-operate with the West. Relations may be hostile for some time, as of course they were before 1989. Steen Jakobsen, chief economist of Saxo Bank, refers to this as a "reverse Berlin wall" moment.
Secondly, there are many other nations with Russian minorities in the former Soviet Union. This is the second Russian military intervention in recent years (Georgia in 2008 being the first) and there will inevitably be nervousness in other countries (the Baltics, for example) about the scope for the Putin doctrine to be extended.
Finally, the events are a timely reminder that Norman Angell is still a lost prophet. Back in 1910, the journalist and MP argued in "The Great Illusion" that, thanks to financial and trade links, war between the great powers would be futile. Four years later Europe went to war anyway in a collective act of madness. As Tina Fordham of Citigroup notes,
markets have a tendency to overestimate the weight of economic self-interest; this case is just the most recent where the perceived transgressing of a geopolitical "red line" trumps other considerations, even risking costs to the economy and trade.