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View the article online at http://citywire.co.uk/wealth-manager/article/a737582

Ukraine: the big event risk for markets

by Dylan Lobo on Mar 04, 2014 at 12:45

With Ukraine around 10 times the size of Georgia, its debt and financial markets clearly pose more risk, which is exacerbated by the fact it shares borders with four current EU members.

Europe is exposed to Ukraine through three channels; exports, energy and bank assets.

Deutsche analysts Michael Lewis and Michael Huseh say the crisis has introduced a new event risk for markets, highlighting the Ukraine is set to become the world’s third largest exporter of corn and sixth largest exporter of wheat in 2013-14.

'Commodities play an important role for the Ukrainian economy since exports account for around 50% of Ukrainian GDP, of which commodities account for around 60% of all exports,' the pair said. 'The country’s commodity exports include agriculture, chemicals, metals and timber products.'

However, Lewis and Huseh regard the Ukraine's strategic position for natural gas flows as the most crucial. 'Europe is dependent on Russia for 30% of its gas supply, of which about 50% of these imports, or 15% of EU gas supply, arrive via Ukraine,' the duo highlight.  

'The completion of the Nord Stream pipeline route under the Baltic Sea in 2012 reduced this dependence from 80% (to 50%), but a complete halt would still be very disruptive.'

Schroders' Botham fears oil sanctions could cause a stagflation shock in the global economy. He points out that Russia will not want pre-empt sanctions, while the Ukraine does not want to anger its European allies or invite further Russian aggression, and the European Union clearly does not want higher energy costs.

A sharp spike in oil and food prices could see China become embroiled in the diplomatic battle, Botham added.

'China will be watching closely given its dependence on energy and food imports, and we might see Chinese diplomatic pressure if the issue isn’t speedily resolved.'

For Jessop, the financial burden of supporting Ukraine is also an issue.

'The country needs around $25 billion soon to refinance debt and pay other bills for goods and services. Over the longer-term, the cost of supporting the transition could run into the hundreds of billions of dollars,' he said.  

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