The Russian Federation has annexed part of a neighboring country. Anyone interested in investing in Russia will do well to keep up with the news. In this first article of a three part series, we look at the historic backdrop to events in Ukraine and the annexation of Crimea by the Russian Federation. In our second article we will look at the Crimea fallout in the short term as it will effect investing in Russia, the value of the Ruble and political and economic relations with the European Union and the USA. In the third article we will try fundamental analysis of how to proceed at investing in Russia in a potentially more hostile world. All of this started with political unrest in Ukraine.
Ukraine, Crimea and Russia
Ukraine is an independent nation, the largest by land mass of nations located totally within Europe. The nation is bordered by the Russian Federation to the east and northeast, Belarus to the northwest, Poland, Slovakia and Hungary to the west, Romania and Moldova to the southwest, and the Black Sea and Sea of Azov to the south and southeast. Ukraine is a former member of the Union of Soviet Socialist Republics. Its Eastern regions contain many ethnic Russians and Russian speakers. Crimea was a semi-autonomous region of Ukraine jutting out into the Black Sea. This region has strong historic ties to Russia itself and a majority of its population speaks Russian and identifies with Russia. Crimea is also the home of the Russian Federation’s only warm water naval base. A major economic factor in this equation is that virtually all of the oil and natural gas pipelines that send Russian supplies to Europe pass through Ukraine. Anyone investing in oil and natural gas will be interested in how all of this turns out.
Unrest in Ukraine Leads to Loss of Crimea
Months of recent political unrest have led to the overthrow of an apparently corrupt president of Ukraine. The man fled to Russia. A new government in Ukraine wishes closer ties with the West although it has made no move to reduce ties with the Russian Federation. However, the Russian Federation led by Vladimir Putin seems to have provoked a bloodless coup d’état in Crimea. The new government put the matter of where to belong to a vote and Crimea ended up picking the Russian Federation. Russia has obliged and with Russian troops massed on the Eastern border of Ukraine Mr. Putin says that he is taking Crimea because of its large Russian ethnic population and because it wants to be part of Russia. He says that he has no other interest in parts of Ukraine although Russian troops are still present on Ukraine’s Eastern borders.
What Are The Stakes in Ukraine, Investing in Russia and the Crimea Fallout?
Take a look at the map. Huge amounts of natural gas and petroleum pass via pipelines from oil fields in the Russian Federation to the European Union. The stakes are enormous if the situation in the region does not settle down.
An important part of this is that the current Russian leader, Vladimir Putin, believes that the breakup of the USSR was the worst disaster ever for Russia. The USSR was a huge trading block, military power, economic power and trading zone. The Russian Federation is large but substantially smaller than the USSR. The USSR suffered unimaginable losses 1 in World War II in fighting the German army. A big part of why the Russians wanted to control Eastern Europe was that they never wanted to fight again on the soil of the Motherland. The Ukraine was one of Soviet Republics with substantial agricultural and industrial resources. The Crimea is historically Russian and a naval asset. It is unlikely that Russia will ever want to give the Crimea back to Ukraine.
With these thoughts and figures as a background we can see that this is a deep seated issue that links into international commerce and power politics. Anyone interested in investing in Russia needs to pay attention. This especially applies to those with sufficient assets and expertise for foreign direct investment in the Russian Federation.
1 Estimates of total dead in the USSR due to the Second World War range from 26.5 million to 40 million, with military deaths anywhere from 8 to 14 million.