Russia poses new risk for Europe

Russia poses new risk for Europe

The annexation of Crimea by Russia led to a sharp sell-off in markets and especially in various Russia-exposed stocks. European companies whose businesses are leveraged to the Russian economy saw the pressure of rising geopolitical tension reflected in their share prices. More generally riskier European assets that had performed well in 2013 saw profit taking, given cross-border uncertainties between Russia and the West.

We believe the most likely scenario in the coming months is that Russia’s interventions stop at the annexation of Crimea. But there is a risk that Europe will go down the road of more serious economic sanctions. While sanctions might be a painful chastisement for an already weak Russian economy, such measures could also dampen Europe’s growth if Russia responds by restricting energy exports.

GDP growth in Russia and Ukraine has weakened

In addition, ethnic Russians in eastern Ukraine or in neighboring regions such as Moldova — located to the south and west of Ukraine — may seek similar protection or repatriation by a Russian leadership that appears to retain an interest in reassembling parts of the old Soviet bloc. While these economic and geopolitical downsides are not my central case for what unfolds, they represent risks that we cannot ignore.

Also, after the economic weakness related to the impact of an historically harsh winter in North America begins to ease, stronger data from the United States should help boost market performance in Europe and potentially offset weakness that stems from the Russia/Ukraine situation. European companies in peripheral markets that are domestically focused — e.g., Italian banks that are focused exclusively on Italian businesses — may also be insulated from Russia-related tensions, and thus could have additional room to appreciate in value.


More in: International