Global markets swooned Monday as Russian soldiers secured control over Ukraine’s Crimean peninsula, while the threat of trade sanctions against Moscow from the West over the crisis sent oil prices soaring and the ruble plummeting.
Wall Street stocks lost more than 1 percent of their value. The Dow Jones industrial average fell as much as 250 points as investors tried to gauge the fallout from what could be the most serious East-West standoff since the Cold War.
The worst financial damage was in Russia, where the main stock index fell 12 percent. Russian and Western companies that have major stakes in the Russian economy took a pummeling, and the ruble fell to an all-time low against the dollar, forcing Russia’s central bank to sharply raise interest rates to defend the currency.
Analysts said Russia, which has had hopes of normalizing trade relations with the U.S. through a free trade agreement, has the most to lose with strained economic ties and possible sanctions if the standoff is prolonged.
Russian President Vladimir Putin should be concerned about “the bite of any NATO sanctions,” especially if they extend to Russia’s critical energy sector, its main source of economic growth and tax revenue, said Paul Christopher, chief international strategist at Wells Fargo.
“Sanctions on Russian banks and trade could be effective, as Russia’s economy is weak,” he said. But Mr. Putin will weigh those economic considerations against gains from reasserting Russian power in a critical border country that he views as essential for maintaining his nation’s security and status in the world, he said.
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Moreover, sanctions that curb Western imports of Russian oil and natural gas would drive up fuel prices and crimp supplies. The price of premium crude in New York jumped more than $2 to $104.68 a barrel in trading Monday, in a foreshadowing of what could happen if Western purchases from the world’s top oil producer are embargoed.
The pinch would be especially sharp in Europe, where nations import from Russia about a third of the gas they use to heat homes and power factories, and purchase about a third of Moscow’s oil exports. European gas prices surged by nearly 10 percent on the Crimean news Monday.
Sanctions also would have a harsh effects for U.S. and other Western companies doing business in Russia, including Exxon Mobil, PepsiCo, Boeing and Morgan Stanley. The stocks of many of these companies took a battering Monday. Mutual funds that specialize in Russian stocks also took big losses, including SPDR S&P, down 7.5 percent, and Market Vectors Russia ETF, off 6.9 percent.
Moreover, Russia could retaliate by imposing crippling sanctions on Ukraine, which is already in dire economic straits and in need of a bailout for its depleted treasury. Moscow withdrew its $15 billion rescue plan for Kiev when pro-Russian President Viktor Yanukovych was ousted by a popular uprising last month.
Mr. Christopher estimated that it would take a loan package totaling $30 billion for Ukraine to stave off insolvency and achieve economic stability this year. President Obama and the International Monetary Fund are mobilizing to round up the resources.
“Ukraine during the post-Cold War years arguably has chosen the worst of each world,” he said. “New freedoms encouraged Ukrainian households to take on debt, but Ukrainian industries and trade have remained tied to the Russian economy that is mostly less competitive than its counterparts in Western Europe.”
By taking on Russia, the West may be locked into providing the aid and economic sustenance Ukraine needs to survive, analysts said.
Koon Chow, an analyst at Barclays Research, said Russia has nothing to gain and much to lose economically from the standoff. Its economic growth prospects have been worsening, in part because oil prices have been stable at around $100 a barrel, making it difficult for the government to find resources to divert into other industries or pump up social spending. The $2 increase in oil prices Monday does not significantly change that outlook.
But economic considerations likely were not strong enough to deter Russia from moving to protect what it sees as vital national interests in Ukraine, he said. “The direct economic and financial connections between the two countries are not, in our assessment, large enough to be a problem for Russia’s economy,” which at $2 trillion a year is about 20 times the size of Ukraine’s economy.
Still, Mr. Putin will be wary about incurring any serious threat to Russia’s economy. For that reason, he likely will limit military ambitions to consolidating power over the Crimean peninsula, which hosts Russia’s only warm-water military seaport, said David Kelly, chief global strategist at J.P. Morgan Funds.
“Russia does not want to both expend limited resources in maintaining control over an outraged population in western Ukraine and risk the economic sanctions that Western parliaments might demand in retaliation,” he said.
The crisis in Ukraine brought a “bump in the road” to global markets Monday, but fears of a recession or financial crisis spreading out of the region are not justified, said Nigel Green, founder of DeVere Group.
“The situation will perhaps fuel some of the concerns regarding emerging markets,” which have big debt problems like Ukraine, he said, but “I expect the problems will, in the most part, be limited mainly to Russia and Ukraine.”