A thriving Ukraine is crucial to global market stability

As Russia’s Ukraine misadventure has reached a boiling point in Crimea, investors and market participants are worried how the crisis could roil a fledgling global economic recovery.

Why should Russia, Europe, financial markets and the whole world all be concerned about the instability in the former Soviet republic?

Let’s have a closer look.

Russia supplies about 25% of Europe’s gas needs, half of which is pumped via pipelines running through Ukraine. Moscow has cut off that flow in past disputes with Kiev and a disruption could push up European energy prices.

Russia’s Black Sea Fleet has been based in Crimea since the peninsula was founded in 1783. The strategic position helped Russia defeat Georgia in the South Ossetia war in 2008. Crimea still remains crucial to Russian security interests in the region.

Ukraine is one of the world’s top exporters of corn and wheat, and prices could rise even on concern those exports could be hit. Ukraine’s instability also comes at a crisis-time for emerging markets, which are seeing slowdown as the Federal Reserve tapers its stimulus programme.

Russia, sure, has ample reasons to worry about a “Westernised” Ukraine. President Vladimir Putin, who regards the break-up of the Soviet Union as the greatest catastrophe of modern times, has sought relentlessly to revive Russia’s lost glory. He does know that Russia without Ukraine “ceases to be an empire”.

Russia may be willing to go to war over the Ukraine crisis, but the US and Europe are not. What can, then, sanctions do to deter Putin from a misadventure?

Russia, which is dependent on oil and gas exports for about half of its government revenues, is by now well-integrated into international finance systems. While markets across the world saw a bloodbath on Monday, the Russian benchmark plunged above 10%, losing $60bn in value, more than Russia spent on last month’s Sochi Olympics. Natural gas monopoly Gazprom, which accounts for roughly a quarter of Russian tax revenue, lost $15bn in market value in one day. The rouble dropped against the dollar to the lowest on record, and Russia’s central bank spent $10bn on the forex markets to prop it up.

Most global markets, however, regained the lost ground yesterday after Putin said he would use force in Ukraine as a last resort in an attempt to ease East-West tension over fears of a war.

Kiev’s government is in debt and needs immediate assistance. The country owes $13bn in debt this year and $16bn comes due before the end of 2015.

Ukraine needs a “modern-day equivalent of the Marshall Plan, by which the US helped to reconstruct Europe after World War II. Germany ought to play the same role today as the US did then”, says George Soros, chairman of Soros Fund Management. A replay of the Cold War would cause immense damage to both Russia and Europe, and most of all to Ukraine, which is situated between them, says Soros.     The crisis has already worsened Russia’s image as an unreliable energy supplier.

If Putin really wants to repair the damage and lay the foundations of a stronger Russia, he must make sure that the Kremlin is a partner, not an adversary, in rebuilding Ukraine. Longer term, he must strive to drive home the point that Russia can be a trusted ally, not an invading Tsar, to consult on crucial global matters.