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March 18 2014

Russian President Vladimir Putin sure has stirred up a hornets’ nest. Why is annexing the Crimean peninsula and, possibly, Ukraine such a priority for the Russian leader? When asked, Putin has indicated Russia’s military influence is necessary to protect Russian-speaking populations in Ukraine. However, The Economist has a different take on Putin’s actions:

“Russia’s economic stagnation has exposed the limits of Mr. Putin’s political and economic model, which relied on rising oil revenues and allowed him to buy the support of the elite and the acquiescence of the population at large. Real disposable incomes, which rose by 12 percent in 2007, on the eve of the war with Georgia, are forecast to rise by 3 percent this year. The Kremlin faced a choice between political liberalization and mobilization of the country by the means of war and repression. Mr. Putin has chosen the latter. Confrontation with the West is one of the main goals of Mr. Putin’s operations. Any sanctions imposed will allow him to blame Russia’s economic downturn on the West, though that may not placate the ruling class, with its cash stashed abroad in property and bank accounts.”

No matter what Mr. Putin’s motivation really is, he faces clear opposition from the international community. Last week, a United Nations Security Council resolution was introduced which stated Sunday’s referendum in Crimea – a vote to determine whether Crimea would remain part of Ukraine or join Russia – had no validity and could not form the basis for any alteration of the status of Crimea. The resolution was supported by 13 of 15 member nations. China abstained from voting and Russia vetoed the resolution.

Perhaps more importantly, the economic consequences of Russia’s actions have been quite harsh. According to Barron’s, the ruble has fallen to a record low against the U.S. dollar. As a result, the Russian central bank has spent $28 billion to support the currency and has increased short-term interest rates by 1.5 percentage points, pushing yields on 10-year bonds to nearly 9.75 percent. In addition, capital is fleeing Russian markets. During the past three weeks, the MICEX equity index, in U.S. dollar terms, has lost about one-third of its value relative to its 2013 high.

Russia’s failure to back away from Crimea unsettled U.S. markets last week and gave the Federal Reserve pause when its holdings of U.S. Treasury securities for foreign and official accounts fell by more than $100 billion (for the week ended Wednesday). Since Russia had threatened to sell its U.S. Treasury bonds if sanctions were imposed, some believe the drop was Russian muscle-flexing. Others suggest Russia hasn’t divested itself of its U.S. holdings; it simply moved them outside of the United States so the assets wouldn’t be vulnerable to sanctions.

  • Data as of 3/14/141- WeekY-T-D1-Year3-Year5-Year10-Year
  • Standard & Poor’s 500 (Domestic Stocks)-0.02-0.00417.8%0.12419.6%5.2%
  • 10-year Treasury Note (Yield Only)2.6N/A2.03.43.03.8
  • Gold (per ounce) 3.715.3-12.7-0.98.513.3
  • DJ-UBS Commodity Index-0.97.3-2.4-6.14.7-0.9
  • DJ Equity All REIT TR Index0.0 7.9 3.711.129.38.6

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Bart A Zandbergen, CFP® is a Registered Investment Advisor with Optivest, Inc and a Registered Representative with Gramercy Securities, Inc. Investment advisory services are offered by Optivest, Inc. under SEC Registration and securities are offered through Gramercy Securities, Inc., member FINRA & SIPC, 3949 Old Post Road, Charlestown, RI, 02813, 800-333-7450.

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