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Market update: The situation in the Ukraine worsens

The situation in the Ukraine worsens
The situation in the Ukraine worsens
Photo by Sean Gallup/Getty Images

The crisis in the Ukraine is escalating, and it will likely take some time to get resolved. The impact on the markets, while currently small (we are in a holding pattern of consolidation), could change dramatically if the crisis leads to calls for military intervention. To understand what has led us to this point, a brief review of events is required.

The crisis in the Ukraine started late November when then President Viktor Yanukovich suspended trade and association talks with the EU, and instead accepted $15 billion in bailout aid and renewed economic ties with Moscow (supposedly under duress). This led to three months of street protests (over 800,000 people were in the streets in Kiev on December 8) and the eventual overthrow of Yanukovich as the Parliament voted to remove him as President on February 22. Two days later, Yanukovich (who has already fled the country) is indicted for "mass murder" of nearly 80 demonstrators.

In late February and early March, armed men (without Russian insignia) seize control of the Crimea parliament, and two Crimea airports. Putin receives parliamentary approval on March 1 to invade Ukraine, while the Ukraine government in Kiev puts troops on high alert and appeals for help from NATO.

During this period, the U.S. warns Russia of political and economic isolation if this "incredible act of aggression" does not cease. Secretary of State John Kerry threatens Moscow with "very serious repercussions".

When the markets opened on March 3, the Russian stock market plummeted along with the ruble. The U.S. markets also dropped, but not severely. The next day President Putin orders his troops near the frontier to return to their barracks, and says military force would only be a "last resort" in the Ukraine. The U.S. markets rebounded over 1 percent on the news.

On March 5, Russia refuses to withdraw troops from Crimea claiming they are "self-defense" forces not under its control. The next day, the pro-Russian Crimea parliament votes to join Russia and sets March 16 for a referendum. President Obama publicly denounces the referendum stating it violates international law and orders sanctions on those responsible.

Over the weekend, talks between Putin and Obama lead nowhere. In the interim, Russian troops prevented an unarmed international observation team from entering Crimea by firing shots into the air, and they are becoming more hostile to Ukrainian troops trapped in their bases.

The question moving forward is how can the U.S. and its allies resolve this issue peacefully? While sanctions and isolation have worked for Iran, Russia has too many political and business relationships with Western governments and corporations; especially of concern is Europe's reliance on Russian gas.

While the U.S. markets currently are not being impacted, this could quickly change. This is a military crisis that impacts the borders of Europe (and NATO). And for Russia, the Ukraine is a country on its border with historical and cultural ties.

If what occurred in Georgia is any indication, Putin likely expects to take control of Crimea and surrounding Russian speaking regions, effectively dividing the Ukraine in half. Short of military action, the Western nations have little recourse; any sanctions imposed will likely be short-lived.

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