Academic journal article ABA Banking Journal

Impact of Black Sea Events

Academic journal article ABA Banking Journal

Impact of Black Sea Events

Article excerpt

Just days after the closing ceremony for the 2014 Winter Olympics in Russia, peaceful competition gave way to armed conflict in Crimea--the semiautonomous part of Ukraine--less than 300 miles from Sochi. The goodwill garnered by the Olympics was quickly amortized, and the world now finds itself in a very tense situation.

While the origins of the crisis are political, economic considerations are playing a major role in the ongoing diplomatic chess game.

Through the early weeks, markets seemed to be taking the situation in stride, but further escalation of conflict could test investor patience.

Ukraine is not a major player in the world economy. The country's gross domestic product ranked 53rd globally last year, and its GDP per capita did not make the top 100. By many accounts, it has struggled with poor policy, corruption, and political conflict since earning independence in 1991.

While far larger and healthier, Russia's economy has not been performing all that well, either. Soft commodity prices and the sluggish recovery in Europe have limited exports, which account for about one-third of Russian GDP. The Bank of Russia implemented a large emergency rate hike at the beginning of March, which will not be helpful to growth.

Economically, Russia has quite a bit to lose from its aggression. Russia was the world's third-largest recipient of foreign investment last year, with more than 60% of that coming from banks in the European Union. Those flows will likely be curtailed by apprehension, diplomatic pressure, and sanctions.

The big entry on the other side of the threat ledger is Russian energy, which both Ukraine and the European Union rely on heavily. …

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