The last few weeks have reminded me of geopolitical tensions reminiscent of the Cold War. There is a sense that there are two potential combatants – the West, and the core of the former Soviet Union – Russia. The tug of (cold) war is over the future of Ukraine and Crimea, but the weapons in this cold war will be more financial than military.

What we are seeing play out in international markets seems to underscore that view. The Ukraine crisis caused the Russian ruble and stock market to decline in late February – 5% for the ruble and 14% for Russian equities – as the situation deteriorated daily. However, after the referendum in Crimea that was overwhelmingly pro-Russian and Vladimir Putin annexed the area in about a week, the Ruble recovered and the stock market has regained more than half its declines. Indeed, Putin is enjoying an 80 percent approval rating with his own people.

This doesn’t seem to match the very dark economic clouds on the Russian horizon. The big number making the rounds in international finance is $70 billion, which is the amount of capital that is expected to flow out of Russian by the end of the first quarter. Russia saw $63 billion flow out of the country for the whole of 2013, and Russia’s own estimates are that the total could reach $100 billion. The World Bank estimates that if the Crimea situation escalates that the capital outflow could hit $150 billion and the Russian GDP could fall by 1.8%.

Ukraine and Crimea are certainly struggling in many ways as well. Much of the economic infrastructure is in upheaval and still dependent on Russian natural resources, which now will come at a heavy price. A key unknown here is how negotiations will play out in the months ahead between the IMF and Ukraine. The IMF needs to have some conditionality attached to Ukraine’s $15 billion loan request to assuage Western supporters, but will those conditions prove too severe for Ukraine?

As for the rest of the world, how long does Russia remain economically isolated? And at what point will economic realities of engaging with Russia overtake the current geopolitical tensions?

My View: I honestly do not expect major military action to come out of this, but I do believe that we are just at the beginning of what could be a more prolonged economic struggle.

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