Do the markets care about the invasion of Crimea or do they care about war in Ukraine?

Last week we asked about the market reaction to the Russian silent invasion of Crimea. The data were not yet in. Now the data are in.

Above is the RTS index for the past two weeks. The collapse on Monday, March 3rd, is hard to miss. There is a recovery over the next two days, but it is only partial. The markets did not like the Russian invasion.

That would seem to be clear-cut. The problem is that a slightly longer view muddles the issue. The vertical bars show intra-day variation, with the horizontal lines being the open and close.

On this view, the markets were terrified of an all-out war and with good reason. It would cut off most Russian gas exports through Ukraine, directly slamming the economy, and court severe Iran-style sanctions from the west ... if not outright combat. Once that fear passed, the previous downward trend reasserted itself.

If you doubt the severity of the panic, consider that the Russian central bank had to raise interest rates on Monday. That is not something that a central bank would do lightly.

In short, unlike the Russo-Georgian War of 2008, the markets did care about the appearance of Russian troops in Crimea. But it is not clear whether they are punishing Russia for the violation of international norms or whether they were panicky about the impact of an all-out interstate war right along the biggest gas export routes.

These are very different things with very different implications for international relations in the 21st century. Any ideas for how to sort it out?

Comments

[shah8]

Could the falling market be an impact from war preparations? Either from the state liquidating assets, say to pay soldiers, or businesses thinking that cash on hand is king in turbulent times?

[Bernard Guerrero]

I'd think that if the fear were of interstate warfare and the concomitant disruptions, you'd see impacts far beyond just the RTS and Russian bonds (where we have failed auctions.) e.g. Ukrainian bonds, Polish bonds, big safety bid for USD, money flows into German banks, nat gas futures and LNG freight rates (sure, we're not really set up to ship to Europe in a big way, but I'd expect a panic-bid for what capacity is available), etc. I'm not sensing a more general panic yet, are you?

[Noel Maurer]

I think I might have been unclear. I agree with you, there is as I write this no sign of a general panic.

There was, though, something close to panic on Monday, which then subsided. The Russian snap exercise in the Western Military District ended on March 4th. (See http://www.nytimes.com/2014/03/05/world/europe/ukraine.html.)

One interpretation of events is that the markets had a complete freak-out over the weekend, but once President Putin ended the exercise, the panic subsided.

So here's the question. The dollar market is too deep for a one-day panic to show up in big movements. The flow-of-funds data (AFAIK, am I wrong?) won't show up on a daily basis.

But the other markets you cited should move if the panic was about generalized war rather than some sort of spontaneous economic sanction. What happened to those prices on Monday?

[Bernard Guerrero]

Huh. http://www.neo.ne.gov/statshtml/124.htm

[Bernard Guerrero]

Not that that's probative. There are equivalent spikes in Feb, and this is a spot price.

[Bernard Guerrero]

I'm not seeing much of anything on the CME physical delivery HH contracts. http://www.cmegroup.com/trading/energy/natural-gas/natural-gas_quotes_openOutcry.html

[A.R.]

Why should Europe care what happens between Ukraine and Russia?there is no connection b.w both.