What does the conflict in Ukraine mean for the Aussie economy? A SmartCompany Q&A

The conflict in Ukraine has escalated with Russia sending in 6000 troops and naval forces to the Crimean peninsula on Sunday, triggering a standoff between Russia and the West.

The action by Russia sent waves of caution through investors globally, with stock markets worldwide falling on the news.

Last month Ukraine President Viktor Yanukovych was overthrown by the Parliament, following bloody anti-government protests in the nation’s capital of Kiev.

The protests were triggered when Yanukovych rejected an accord with the European Union in November 2013 and instead formed stronger ties with Russia, angering locals who had long pushed for greater integration with Europe.

The protests started peacefully, but escalated when the authorities became involved, with student protestors beaten and opposition activists supposedly abducted.

On February 20, 77 people were killed and nearly 600 wounded in a 48-hour period.

As diplomatic tensions in the region rise, SmartCompany takes a look at how the instability could influence the Australian and global economies.

So Russia has sent 6000 troops to the Crimean peninsula in Ukraine and the West disapproves. Is this having an impact on global markets?

In short, yes. The impact globally is varied, but there’s no doubt investors are wary and this is being translated into falls on sharemarkets around the world.

JPMorgan chief economist Stephen Walters told SmartCompany the financial markets “are watching”.

“In Europe markets fells 2-3% yesterday. Germany was down almost 3.5%, the UK fell 1.5% and France lost 2.5%. Generally there were greater losses depending on the closeness to the regions,” he says.

“In the US the Dow Jones lost 1%, so it’s watching. The US involvement here is distant, but clearly it has been involved in diplomatic conversations.”

In Russia the stock market was down 11.5%, as the rouble has fallen to near record lows against the US dollar and the euro. Russia has also raised interest rates by 1.5 percentage points.

So the conflict is making investors more wary globally, but has this impacted Australia?

Ukraine’s direct impact on Australia is relatively small, as we don’t trade with the region in a significant way. However, our sharemarket regularly takes its lead from global markets.

Yesterday the S&P/ASX200 benchmark closed 20.50 points lower, down 0.38%. The loss was minimal compared to other markets, but Walters says today might be a different story.

“We could see a greater impact today following the losses on global markets yesterday,” he says.

Walters says the impact of the conflict in the coming weeks is unknown.

“If the situation is diffused and diplomacy wins, everything could return to normal, but if it escalates, so could the economic impact,” he says.

Evidently stock markets have fallen here and around the world, but what’s happening with commodities?

Oil and natural gas prices have been pushed higher, as Ukraine is home to one of Europe’s major gas pipelines, with the gas controlled by Russia.

Brent crude (a major benchmark price for the purchase of oil worldwide) rose by 2.1% yesterday to $111.38 a barrel on the ICE Futures Europe exchange.

The West Texas Intermediate also jumped yesterday to a 23-week high on the back of the crisis.

“There have been quite significant developments already,” Walters says.

“If oil prices keep going up, this will result in energy and petrol price increases.”

Walters says the crisis is having an impact on oil prices because Ukraine is a “strategic region”.

“We also saw this take place in Bahrain last year. However, if there’s an issue somewhere else, you don’t necessarily see this kind of impact. For this region, the response of oil prices is typical.”

Oil and gas prices are on the rise, but what about gold?

As investors are more cautious of risky investments, many turned to gold yesterday, sending prices higher.

“Gold is a safe haven flow,” Walters says. “You buy gold when there are global tensions, or natural disasters like what happened with Fukushima in Japan.”

Obviously there are some pretty significant economic impacts of the crisis, but what does the Australian government think about all this?

Ukrainian Prime Minister Arseniy Yatsenyuk said yesterday Russia and Ukraine are on the brink of war and the Western governments have criticised Russia for invading Crimea.

Prime Minister Tony Abbott told Parliament yesterday a trip to Moscow by Trade Minister Andrew Robb had been cancelled in light of the action, as was a visit to Australia by Russia’s National Security Advisor Nikolai Patrushev.

“It should withdraw its forces from the Ukraine and the people of the Ukraine ought to be able to determine their future for themselves,” Abbott told Parliament.

“The situation in the Ukraine is fluid and it’s threatening; all Australians are rightly concerned about that.”


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