War Time Economics: Markets Predict Putin to Win

March 30, 2014

By: Ali Masud

While the west tries to use threats of economic sanctions to Russia’s interests in hopes of getting Putin to loosen its grip on Crimea, investors are waiting for clear evidence of a decisive victory before plunging in. Putin has created a situation where the only option the West is left with is to either accept the occupation of Crimea or declare war. Since a NATO attack on Russia is just as unlikely as Russia withdrawing from Crimea, it seems imperative that Putin will be redrawing Ukraine’s borders. The only question remaining is whether the Ukrainian government will peacefully accept the loss or retaliate with a military intervention; an act that could open the rest of Ukraine to be invaded by Russia as well.

Investors need to decide whether this is a buying opportunity or a last chance to dump risky assets before it’s too late. If history is any indication, probabilities lie with a peaceful solution, however, if we are to learn anything from history is that no one ever learns anything from history. The alternative, a civil war in Ukraine, would have a far greater impact on the global economies, especially energy prices. In 2002, S&P 500 fell almost 25% in the run up to the war. When the U.S attack on Iraq began, it bounced back and gained nearly 35%. Similarly, during the Cuban missile crisis, stock markets fell nearly 20% leading up to the President John F. Kennedy’s ultimatum to remove soviet weapons from Cuba or face nuclear war. Wall Street immediately started rising and gained nearly 30% in 6 months.

The 1962 rebound began only after it became clear that Russia was backing down and Kennedy had won. A logical explanation for this week’s stock market movements is that investors now see a similar outcome in Ukraine. Except this time, Russia is the winner.

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