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Market impact: Ukraine referendum and civil war

Violence in Ukraine escalates
Violence in Ukraine escalates
Photo by Brendan Hoffman/Getty Images

In The News

Although Russian President Vladimir Putin intimated at postponing referendums scheduled this weekend, eastern Ukrainian rebels moved forward with their hastily organized referendum that has led to new fighting and increased fear of civil war. The purpose of the referendum is to ask voters if "they want to create a quasi-independent statelet from the Luhansk and Donetsk regions of Ukraine".

In the southern port city of Mariupol, where the most recent violence between the army, police and pro-Russian forces has occurred, large lines of voters could be seen. A quick polling of voters by a BBC reporter indicated strong support for independence.

This contrasts to a poll recently conducted by the Pew Research Center in which 70 percent of the people living in eastern Ukraine do not want to secede. It is unlikely that these people will be found on voting lines, an indication that the results of the referendum simply reflects the anti-Kiev sentiments of a small portion of the populace. The national presidential election, scheduled for May 25, is expected to have a far larger voter turnout.

Market Impact

Western leaders have denounced the referendum. On Saturday, German Chancellor Angela Merkel and French President Francois Hollande said that if the scheduled May 25 presidential election was disrupted by Russia, they would back further stiff sanctions.

"If there is no internationally recognized presidential election, that would unavoidably lead to a further destabilization. Germany and France are in agreement that if that is the case, then corresponding consequences would be drawn as outlined by the European Council on March 6, 2014."

It is uncertain what the impact on the U.S. market will be on Monday, but additional sanctions will have a negative effect. Not just multi-national service and manufacturing companies will be impacted, but also major banks.

"Société Générale and UBS warn of a potential impact on earnings because of what is going on in Russia and the variety of sanctions that have been imposed both by the US and the EU".

"One of the issues which has not been resolved going all the way back to the financial crisis in 2008 is that Russian private companies still owe quite a lot of money on unsecured basis through their other offshore entities to western banks."

The crisis in the Ukraine could be the trigger for the long anticipated market correction. While current sanctions have been largely symbolic, stiffer sanctions aimed at Russian banks and industry will jolt investors, since the EU is Russia's primary trading partner.

In the weeks leading up to the May 25 election, the markets will very likely see increased volatility as the turmoil in the Ukraine escalates.

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