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The unrest in Ukraine is a major test for the new interim government, as it seeks to hold Ukraine together ahead of the elections scheduled for next month. The occupation of Eastern Ukraine by pro-Russian militants has shown how little authority Ukraine’s government has in the east.
Yulia Tymoshenko, a former prime minister and presidential candidate, urged the government (which she effectively controls) not to use force. There appear to be two main reasons for her hesitance toward any military action. One is her lack of confidence in Ukraine’s security services. If the operation fails, it would only enrage the public and give Russian forces a pretext to move deeper into Ukraine. Another reason is that the presidential elections are scheduled for May 25. Tymoshenko hopes to win the elections despite trailing behind Petro Poroshenko, a billionaire who supported the February Revolution.
The February Revolution in Ukraine was a series of violent events in the capital of Kiev, prompted by the country being mired in years of corruption, mismanagement, a lack of economic growth, currency devaluation, and an inability to secure funding from public markets. The revolution culminated in the ouster of President Viktor Yanukovych.
On the other side, Russia may not prefer to annex any more of Ukraine, as the bribes that would be needed to ensure consent from the majority of the population would cost a great deal. For Crimea, Russia had to pledge to bring salaries and pensions up to Russian levels. To do the same for Donetsk would cost Russia twice as much. Subsidizing the region’s coal mines, as the government in Kiev has done for years, would be another burden on the Russian economy.
The performance of emerging market ETFs like the iShares MSCI Emerging Markets Eastern Europe ETF (ESR) and the Market Vectors Russia ETF (RSX) that have exposure to Ukraine and Russian equities is a good indicator of the condition of these economies. We can also see repercussions from the turmoil in Ukraine in the performance of developed market ETFs like the iShares S&P 100 Index Fund (OEF), whose underlying index tracks the top 100 companies in the U.S., including Apple Inc. (AAPL) and Exxon Mobil Corporation (XOM).
Russian nationalists believe an occupation of southeastern Ukraine wouldn’t be in Russia’s interest. Popular belief is that America is now trying to provoke violent clashes between Russia and Ukraine to justify putting NATO military bases in Ukraine. Find out more about NATO in the next part of this series.
© 2013 Market Realist, Inc.