Ukraine crisis: Why it matters to the world economy

http://money.cnn.com/2014/03/02/news/eco...?iid=lead2

Ukraine crisis: Why it matters to the world economy
By Mark Thompson and Gregory Wallace @CNNMoney March 3, 2014: 8:14 AM ET

ukraine kiev anti-russia demonstration
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NEW YORK (CNNMoney)
While the world watches the escalating crisis in Ukraine, investors and world leaders are considering how the instability could roil the global economy.
The political turmoil is rooted in the country's strategic economic position. It is an important conduit between Russia and major European markets, as well as a significant exporter of grain.

But in the post-Soviet era, it's a weakened economy. Now, the government is in need of an economic rescue -- and torn between whether Russia or the Western economies (including the European Union) is the savior it needs.
Here are five reasons the world's largest economies are watching what happens in Ukraine.
1. Ukraine is an important tie between Russia and the rest of Europe: Ukraine doesn't hold the economic power it once did, but it does retain its geography. Russia supplies about 25% of Europe's gas needs, and half of that is pumped via pipelines running through Ukraine. Moscow has cut off that flow in past disputes with Kiev and a disruption could push up energy prices for businesses and households.
The critical Crimean peninsula juts into the Black Sea, and the Russians base their Black Sea navy there.
Related: G20 pledges to add $2 trillion to economy
2. Sanctions on Russia: One prospect on the table would be the unusual circumstance of a top-10 global economy placing sanctions on another. But Secretary of State John Kerry said Sunday the U.S. is "absolutely" willing to consider sanctions against Russia. President Obama, he added, "is currently considering all options."
That possibility must be on the mind of Russia's government, which is certainly "looking very seriously at the economic component of" its military and diplomatic moves, said John Beyrle, a former U.S. ambassador to Russia.
"The reality is that Russia is dependent on the international economy in a way that wasn't true 10 years ago," Beyrle said Sunday on CNN's "State of the Union." "Fully one -half of Russia's foreign trade now ... is with European Union countries. Russia depends on European imports to keep its stores filled, to keep the standard of living that Russians have gotten accustomed to."
Even if sanctions aren't leveled, the political relationship between Russia and the West will likely chill. Although President Obama spent an hour and a half on the phone with Russian President Vladimir Putin on Saturday, the U.S. is expected to skip an upcoming G8 preparatory meeting in Sochi, Russia. On Sunday, U.S. officials also canceled upcoming energy and trade talks with their Russian counterparts.
3. European and world trade could be impacted: The impact could be felt beyond Europe if the world's supply of grain is impacted. Ukraine is one of the world's top exporters of corn and wheat, and prices could rise even on concern those exports could halt.
And the current political uprising was fueled by the government's handling of a trade agreement that would have brought Ukraine closer to the European Union. The government cut off negotiations in November amid pressure from Russia, which offered discounts on natural gas if Ukraine signed a pact with Moscow's Customs Union.
Inside Ukraine ex-President's lavish estate
Inside Ukraine ex-President's lavish estate
4. Ukraine's government is in debt and needs assistance: The situation arguably would not be so volatile if Ukranian government coffers were more stable or the economy stronger. The country owes $13 billion in debt this year and $16 billion comes due before the end of 2015. Without help, the country appears to be headed for default.
"In order to avoid a complete collapse in the coming weeks, Ukraine needs money now," Lubomir Mitov, emerging Europe chief economist at the Institute of International Finance, said. "Ukraine cannot survive without reforms in the next few months."
It's not clear who would supply the needed economic assistance, especially after the ouster of key Russian-aligned officials prompted Moscow to freeze a $15 billion bailout and there is no comparable alternative in sight.
The most likely source of support would be the International Monetary Fund. Managing Director Christine Lagarde said the IMF is consulting with other bodies that could help raise the $35 billion Ukraine says it needs.
The IMF said Tuesday that it would begin a fact-finding mission in Kiev starting Tuesday and concluding on March 14 to "discuss the policy reforms" that world body would require as part of any loan.
Treasury Secretary Jack Lew said Sunday the U.S. is "prepared to work (with) partners to provide as much support as Ukraine needs" for economic growth and stability.
5. Ukraine isn't the only fragile emerging market: Ukraine's instability comes at a difficult time for emerging markets worldwide, which are seeing growth slow as the Federal Reserve eases its economic stimulus. The situation in Ukraine could lead investors to reassess the risks of other emerging markets slowing economic growth. Troubles in Ukraine will also hurt Russian banks, which have leant heavily to Ukraine. The Russian ruble is down about 10% since the start of 2014.
--CNNMoney's Alanna Petroff contributed to this report To top of page

the west long term strategy to subtly trying to "contain russia" slowly undermining their influence by trying to win over ex-soviet countries and get them to join nato.

When Georgia agreed to host US long range radar system part of nato plan for european missile shield they got invaded.

Ukraine was also a candidate to join nato and crimea strategic location black sea is home to russian navy fleet will become threatened.

I think the russians only want to secure their interests won't go beyond crimea, ukraine on it's own isn't a threat to russia, they have only tiny army, is broke and heavily dependent on the russians for energy if they raise the prices ukraine will die.

the russians are biggest single country oil exporter in the world nearly on par with arab oil cartel I don't forsee people will stop doing business with the russians anytime soon.

lets hope this blows over quickly.

It would appear to me that the "west" has been covertly supporting the Ukraine's pro-west sympathizers all along. Why would the west then proclaim surprise and outrage at Russian's intervention? Surely 2 parties can play the same game too? It's just that the Russians are merely a little less "subtle".

My hope for the Ukrainian people is that we do not see a repeat of Yugoslavia and they can side-step being pawns in a game played by politicians.

Politics or Convert aside, if we look at past experiences on East and West Germany, North and South Korea, Vietnam, "middle
countries" aligned to West have much much better life for the people.

I hope common sense prevail for all Ukrainians (Including ethic Russians) instead of RACE, RELIGION or ALLEGIANCE. They miss this time to join Europe, Gods know when they will ever escape the bear clutches.

I think the energy front will pose the largest problem for Ukraine. There is no reason for Mr Putin to continue subsidizing Ukraine's natural gas consumption if Ukraine were to turn to the EU. This will lead to price hikes of up to 40% for gas from Gazprom, which I doubt Ukraine will be able to afford.

(04-03-2014, 08:08 AM)HitandRun Wrote: It would appear to me that the "west" has been covertly supporting the Ukraine's pro-west sympathizers all along. Why would the west then proclaim surprise and outrage at Russian's intervention? Surely 2 parties can play the same game too? It's just that the Russians are merely a little less "subtle".

My hope for the Ukrainian people is that we do not see a repeat of Yugoslavia and they can side-step being pawns in a game played by politicians.

Ya lol! Do you think the Vietnam War and the Korean War were wars between Vietnam & US and N. Korea & US. ?

A subtle article about Ukraine crisis on Lianhe Zaobao by 于时语 today, one will get a better understanding of how geopolitics background plays between US, W. Europe and Russia for their own agenda as always.

(04-03-2014, 12:27 PM)Clement Wrote: I think the energy front will pose the largest problem for Ukraine. There is no reason for Mr Putin to continue subsidizing Ukraine's natural gas consumption if Ukraine were to turn to the EU. This will lead to price hikes of up to 40% for gas from Gazprom, which I doubt Ukraine will be able to afford.

In the first place, why Ukraine needs to be subsidized ? Is this the path to continue deeper into the hole. The answer is obvious.

The Ukrainian government had always subsidized the gas delivered to their homes and industries, relying on Russia to provide below market rates on it's imports. The IMF has estimated that overall energy subsidies to households accounted for roughly 7.5% of it's GDP in 2012. The IMF will probably require that the government cease it's subsidies of energy in exchange for aid, but Ukraine is now a divided country and gas price hikes might crack the legitimacy of the new government.

I see it as status quo.
A bit blant but here's my thoughts.

1. Europe too poor to fight.
2. Obama isn't the big brother state it used to be.
a. It has no extra funds to go to war.
b. Americans are tired of war.
c. Obama looked like a 'small boy' in the Syria incident after
wife says no to war and Putin 'saved' Obama's face.
3. Putin is gutsy, and he doesn't give a damn.
4. China won't intimidate their good neighbour and relations.
5. Sanctions? What sanctions?
6. Its Russia's own 'family' business.