Tags: Russia | Ukraine | dollar | gold

Be Prepared in Case Events in Ukraine Don't Turn Out So Well

Tuesday, 25 February 2014 12:11 PM Current | Bio | Archive

After White House National Security Adviser Susan Rice said during NBC's "Meet the Press" Sunday that it would be a "grave mistake" for Russia to intervene militarily in Ukraine and an unnamed Russian foreign ministry source told Interfax news agency "we consider that the current presidential adviser will give this kind of advice about the error of using force to the U.S. leadership in the event of a decision about a new intervention," I don't think it's an overstatement to say we "could" (Please take care, I'm not saying we "will") be at risk of a developing standoff between the United States and Russia because of evolving events in Ukraine.

The Russian position obviously hardened later on when Russian Prime Minister Dmitry Medvedev stated that "dictatorial and sometimes terrorist methods" were being used to put pressure on dissenters in some regions and that the concerns of lawmakers in Crimea along with the eastern and southern Ukraine must be taken into account.

Crimea is a peninsula of Ukraine located on the northern coast of the Black Sea with the Autonomous Republic of Crimea occupying most of the peninsula, according to Wikipedia, and with the port of Sevastopol, home of Russia's Black Sea fleet, which is administratively separate from the autonomous republic. Crimea is an autonomous parliamentary republic within Ukraine and is governed by the Constitution of Crimea in accordance with the laws of Ukraine. More than half of Crimea's 2 million inhabitants are ethnically Russian.

Medvedev has said, according to Interfax, that instability in the Ukraine is "a real threat to our interests and to our citizens' lives and health. . . . Strictly speaking, today there is no one to talk to there. . . . The legitimacy of a whole host of government bodies is raising huge doubts."

Interestingly, one could easily get the impression markets don't seem to worry that much about what's going on in Ukraine and what it could mean geopolitically and even economically.

The threat of a Russian military intervention somewhere in Ukraine remains palpable as U.S. European Command Commander and NATO's Supreme Allied Commander Europe Philip Breedlove and the chief of the general staff of Russia's armed forces General Valery Gerasimov have been in direct contact and both have expressed their concerns over the situation in the Ukraine.

Investors should take notice that Russian interventions have in recent history caused bad reactions in foreign exchange markets. Of course, we aren't there yet, but it might be a good idea to refresh our memories.

Remember the Russia-Georgia war of 2008 when on Aug. 5 a Russian spokesman announced Russia would defend Russian citizens in South Ossetia if they were attacked and then on Aug. 7 Georgia launched a large-scale military offensive in an attempt to reclaim that territory? One day later, on Aug. 8, Russia reacted by deploying troops and calling in airstrikes. On Aug. 12, both camps agreed to a preliminary ceasefire after heavy fighting for several days.

Interestingly for investors, on Aug. 8 the euro started a sharp downward move that would bring it down from its highest point of $1.5631 per euro in August to its lowest point of $1.239 in October, which represented roughly a 20 percent decline in only three months. The Russian ruble also moved down during that same period, from $0.0426 per ruble to $0.037, or roughly 12 percent, while the Japanese yen ended a five-month weakening trend.

It is certainly noteworthy, notwithstanding the 2008 Russian crisis was soon overshadowed by events in U.S. markets, to remember it was precisely around that point in time in 2008 that many of the biggest moves of the financial crisis first began to emerge and where we saw gold at its lowest price of 2008 in October of that year, at $681.85 per ounce. Thereafter, the gold price reversed course to rise practically uninterrupted to $1912.40 in August of 2011, which was a rise of roughly 180 percent.

Going further back in time to the Russian invasion of Afghanistan on Dec. 24, 1979, we see a surprisingly similar pattern developed, with the dollar starting a five-year rally against the European currencies (the euro didn't exist at that time), while gold peaked out only a couple of weeks later, on Jan. 21, 1980, when the price in London was fixed in the afternoon at $850 per ounce and thereafter it started a 21-year downtrend.

Finally, it is also noteworthy to keep in mind that the two great price peaks in oil in the last 45 years (especially when we look at oil prices in inflation-adjusted terms) occurred in December 1979 and the summer of 2008.

As an investor, I would certainly follow closely how the Ukrainian crisis evolves further from here on and be prepared in case things wouldn't turn out as well as many suppose they will today.

Let's hope we don't have to say afterwards: "What a difference a week made in the Ukraine and, who knows . . . in many places and portfolios in the world."

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As an investor, I would certainly follow closely how the Ukrainian crisis evolves further from here on and be prepared in case things wouldn't turn out as well as many suppose they will today.
Tuesday, 25 February 2014 12:11 PM
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