Why the market’s ho-hum conclusion on Putin and Ukraine may be short-sighted

Up again?
Up again?
Image: Reuters/Ralph Orlowski
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Tens of thousands of Russian forces remain in position to invade eastern Ukraine should they be so ordered, worrying a lot of global political and military leaders. But US and European traders have concluded that Russian president Vladimir Putin won’t pull the trigger, and that sanctions on Russia will remain as they are—essentially not doing very much at all.

All the major US and European indices are up this week. Moscow’s Micex index, which plunged after Putin’s invasion of Crimea in February, has been on a robust ascent for the last three weeks. The market’s ho-hum posture mirrors Moscow’s: there is some blood on the floor after Crimea, but let’s move on.

That attitude was reinforced in a 40-minute conference call yesterday with a handful of US and European investment analysts. “There is zero percent chance of a Russian invasion,” one analyst said. The operative phrase was “it’s business as usual.” However, after the call, an analyst told me that Putin continued to worry him personally; he seemed sheepish about saying so in front of his peers.

One can understand why these money men would take this position. Putin already has the Crimea. Having demonstrated he means business, the Russian forces on Ukraine’s border are merely a means to negotiate his preferences for the country and the neighborhood going forward. And as long as troops don’t actually cross the border, US president Barack Obama is unlikely to broaden the sanctions to include a blockade of Russian industries and a wider asset freeze.

Are Putin and these Western investors right?

Certainly, history supports a calm—even an exuberant—investment climate. But in key ways, the economic firmament underlying investment decisions in Russia has shifted, causing some businesses to pivot—Finnish retailer Stockmann, for instance, one of Russia’s biggest foreign investors, announced this week that it has frozen its Russian expansion because of Crimea.

It is a shift that is likely to be more or less fixed for the next five or six years. One of the main reasons is US domestic politics—in order not to appear “soft” on Russia, Obama will keep the pressure on for the rest of his term. And public opinion is likely to force the same approach on whomever wins the 2016 US presidential election.

Putin, too, shows no signs of trying to lower the temperature. In Ukraine, he has enacted natural gas price increases of more than 60% since the Crimean referendum, and in Syria, he is escalating his delivery of deadly weapons to prop up president Bashar al-Assad.

So, no, there is not a zero percent chance of Putin invading eastern Ukraine. And it is not business as usual.