Russian, European stocks post cautious rally after Crimea vote

Share

The Russian and Western European stock markets rose modestly Monday morning even though the Crimean parliament moved quickly to declare Crimea an independent state and the United States and the European Union were preparing retaliatory sanctions against Russia that could come into effect today.

But the market rise comes after weeks of steep selloffs as Russian troops moved into Crimea, Ukraine's southernmost region, and threatened incursions elsewhere in Ukraine. Ominously, Russia's foreign ministry on Saturday said that the Kremlin is considering "requests for protecting civilians" in southeast Ukraine, where the Russian language is widely spoken.

In early Monday trading, Russia's benchmark Micex index opened up 2 per cent, then fell back for a 1-per-cent gain. The index had fallen almost 20 per cent in the last three weeks. The Russian ruble, however, lost a bit more ground, remaining at near record lows against the dollar.

European markets, including the FTSE-100 index and the Eurofirst 300, where up about half a per cent. Commodities were down and copper extended its losing streak, shedding about 1 per cent.

Nicholas Spiro, managing director of Spiro Sovereign Strategy, a London debt investment consultancy, called Monday's rising markets a "dead cat bounce" and predicted more turmoil for Russian assets as the Russian president Vladimir Putin refuses repeated invitations from the United States and the EU to "de-escalate" his Ukrainian incursion.

The Crimean parliament's vote to declare the region an independent state came the day after Crimeans voted overwhelmingly to rejoin Russia. Crimea was part of Russia until 1954, when it was transferred to Ukraine by Soviet leader Nikita Khrushchev.

The referendum triggered fears by the new Ukraine government that Russia's next move would be a move into eastern Ukraine, whose cities are largely Russian speaking. Various reports said that demonstrations broke out in those cities on Sunday as protesters demanded the right to hold Crimea-style referendums of their own.

In London on Monday, British foreign minster William Hague told the BBC that Mr. Putin's refusal to back down in Crimea and his support for the Crimean referendum, which the United States and the EU consider illegal, will result in "far reaching economic consequences" for Russia. He added that the Western countries are demonstrating "a real resolve" to punish Russia.

But Mr. Putin appears to be gambling that deep divisions among the EU countries will blunt any sanctions. The wild cards are Germany and Italy, both have which have strong economic ties to Russia and depend on it for much of their natural gas needs. German chancellor Angela Merkel has backed strong sanctions, but it remains to be seen how far she will go.

In a note published Sunday, Mr. Spiro said: "The big question is now tough Ms. Merkel is willing to get with Russia on the sanctions front…Ms. Merkel is likely to tread carefully, with her decisions heavily influence by what happens in eastern Ukraine."

Britain's determination to back harsh sanctions also has to be tested because Russian investors are big players in the British real estate and financing markets.

EU foreign minister arrived in Brussels Monday morning for meeting to decide on a range of sanctions including asset freezes and visa bans on people and "entities" involved in Russia's invasion of Crimea. It was not known yet whether those sanctions would be directed against Mr. Putin's inner circle.

"We'll be looking today at what we do about this co-called referendum," EU foreign policy minster Catherine Ashton told the media ahead of the talks. "This is, under international law and under the Ukrainian constitution, illegal. We need to now consider what our response should be."

In Washington, the White House in a statement said "Russia's actions are dangerous and destabilizing. Military intervention and violation of international law will bring increasing costs for Russia."

President Barak Obama has signed an executive order authorizing American financial sanctions against Russia that could include asset freezes and blocking U.S. companies from doing business with Russian individuals or companies deemed a threat to Ukraine's security.

Any sanctions imposed this week may not be enough to convince Mr. Putin to back off in the Ukraine. Some EU countries are well aware that tough sanctions could be mutually damaging. "I would do anything possible to avoid sanctions, because I believe everyone will suffer if we get into sanctions," Dutch foreign minister Frans Timmermans said before the EU meeting in Brussels.

Follow me on Twitter: @ereguly