AOTW 2014 0307 – Anson Analytics | Disciplined Investment Solutions

AOTW 2014 0307

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The Economics of Ukraine

International Update

As the Winter Olympics were in progress in Sochi, demonstrators in Ukraine were battling it out with the government over which economic union to join. When Ukraine’s President Yanukovych left the country in late February to avoid an arrest warrant, Russia halted a $15 billion bailout it had promised the Ukrainian president in December 2013.

Russia’s $15 billion bailout was an attempt to induce Yanukovych to walk away from a free-trade agreement with the European Union. Instead of joining the European Union, Russia’s Putin was vying for Ukraine to join its newly formed Eurasian Customs Union. It is believed that the Russian customs union will only work with the participation of Ukraine. It seems that President Putin will make every effort to have Ukraine included in the newly formed Russian union.

With Russian supported Yanukovych gone, Russia has halted its payments of a $15 billion bailout, leaving Ukraine in economic disarray. An international aid package is possibly taking shape as developed countries worldwide support Ukraine’s economic independence from Russia. Ukraine has also asked for support from the International Monetary Fund (IMF).

Even though the Ukrainian economy is smaller than the market capitalization of Facebook, the long-term economic affects on other former Soviet satellites can be substantial. Many of these smaller former Soviet states have evolved economically, while others are still struggling financially. Some have joined the European Union and assumed the euro, such as Slovakia, Slovenia, Estonia, and most recently Latvia.

Ukraine proclaimed its independence from the former Soviet Union in 1991 and has since had a difficult time establishing its economy. As the euro zone emerged and grew into an established economic entity, it became that much more feasible and beneficial for Ukraine to become a part of the euro. This past month, the euro zone extended an invitation to Ukraine asking it to join the euro. However, Ukraine’s president backed away from the offer that created fierce opposition from Ukraine’s citizens.

Rather than associating itself with the euro zone, Ukraine’s president had also considered an offer from Russia’s Putin to join a newly created “Russian Union” called the Eurasian Customs Union. Many believe that this union was conceived by Putin as an attempt to re-establish a union among the former Soviet states. Currently, the Eurasian Customs Union includes Russia, Kazakhstan, and Belarus.

Ukraine’s population of 45 million would make a strategic alliance for the proposed Russian union. Russia also funnels oil and natural gas to Europe via a pipeline that runs directly through Ukraine, with “western” European countries as some of the largest buyers of the Russian oil. Some speculate that Russia will attempt to strengthen a joint currency it established with China for the purpose of trading oil. This is of consequence to the United States, since the majority of the world’s oil supplies are traded in dollars, a currency that both the Russians and Chinese would prefer to avoid using.

Ukraine’s problems add to concerns surrounding emerging markets, which are dealing with political and economic problems in places like Turkey and India as well. Ukraine was already in dire economic straits before the latest turmoil erupted.

Sources: Eurostat, Bloomberg, Reuters, IMF

Sam Sweitzer, CFA │Principal│ANSON CAPITAL, INC.│
o: 678-216-0795│f: 877-750-9088│sam@ansoncap.com│www.Ansoncap.com│
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