Thursday, March 20, 2014

Putin's Problems Begin (Or Let's Hope So)

Vladimir Putin: Horsing around with Ukraine might not pay off.

So it begins. Standard & Poors downgrades Russia's economic outlook to negative. This, so it seems, is only the beginning and, as a matter of fact, has been underway for a while.

Now, according to the Moscow Times, it's set to a new, permanent battered status:
Before Ukraine and Crimea entered the center stage of geopolitics — in what Ian Bremmer of political risk consultancy Eurasia Group recently called "the most seismic geopolitical events since 9/11" — there was still hope that Russian stock valuations might increase. Analysts hoped that the fact that central Moscow feels and looks like a European capital — with better-dressed people and more money — could eventually erase images in investors' minds of old men in furry hats saluting missiles on Red Square. If Putin returned to his early 2000s reformist form, investor concerns about him would be assuaged. And eventually, investors would appreciate that corruption and the business environment in Russia are, at worst, comparable to other emerging markets.
But the hopes of a re-rating of Russian stocks are officially dead. Russia's Ukrainian adventure has shown that it is not only the rest of the world that still views Russia through a Cold War prism: That is how the Kremlin sees itself. Putin has backed up his theatrically menacing exterior with actual force. He acted like the bad guy because, well, he is a bad guy.
Global investors never really bought the illusion that Russia is just a snowier, bad-food version of China or India, or Brazil — and thus deserving of the higher valuations usually assigned to those markets. Now, investors' doubts have been confirmed.
Today, Russia suffers from low levels of investment and enormous — and rapidly increasing — capital flight. The current crisis will exacerbate the ongoing economic slowdown. Wealth creation — for investors and for millions of Russians — is permanently stunted. And there will not be any fundamental improvement in the perception of Russia for a long time.
Permanently stunted. Ouch. Good move, Putin. How are your oligarchs feeling now, huh?

the bond markets aren't doing so well, and neither is the ruble:
Russia paid a heavy financial price on Monday for its military action in Ukraine, with stocks, bonds and the rouble plunging.
Moscow's forces remained in control of Ukraine's Crimea region on Tuesday but markets partially recovered on hopes of easing tensions after Moscow ordered troops on exercise in western Russia back to base.
But the turmoil has forced bankers to try to assess damage to corporate deals and share sales and to calm clients.
This was before the annexation of Crimea, but the handwriting is on the wall. Remember, this is all before sanctions even started, and it may grow worse as newer, heavier sanctions begin to bite. Of course, the EU may pull its punches for fear of an energy shortage -- Russia supplies much of the EU's energy needs -- but fear of a bolder Russia may force the EU to stand firm with the U.S.

This should get interesting, but Putin may be chastised by his cronies more and more as time goes by. The thing is, though, Putin might not care.

Breaking: The U.S. begins to ratchet up pressure on the oligarchs. Stay tuned.

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