Markets calm but awaiting developments in Crimea

17th Mar 2014 13:58

The European Union (EU) and US have imposed travel bans and asset freezes against nearly two dozen officials from the Russian Federation and Ukraine.That is in response to Sunday's referendum in the breakaway region of Crimea, which saw 97% of voters purportedly cast their ballots in favour of re-joining Russia. Initial market reaction has been calm, with analysts at RBS pointing out how only 3% of European exports have Russia as their final destination. Russia does supply a third of Europe's oil and gas - 55% of the gas exported to the EU flows through Ukrainian territory - but judging by the calm in markets expectations seem to be that disruptions will be avoided. Much of the focus in markets now is on the eventual scale that sanctions will reach. In particular, traders are watching for any signs that Russia might wish to encroach on parts eastern Ukraine, which, at the least, could lead to an escalation of tensions and sanctions.In a note issued to clients on Monday morning Bank of America-Merrill Lynch outlined two possible scenarios for the future:De-escalation most likely scenario, broker saysUnder their 'base case', or most likely scenario, Russia would not rush to annex Crimea but, rather, use it as a bargaining tool with serious economic sanctions unlikely as long as Crimea remains out of Russia.Under a worst case scenario, Russia would announce the annexation and announce counter-sanctions on US and EU businesses.Russian President Vladimir Putin is set to make a speech on Tuesday. The BBC further reports that Lithuania's Foreign Minister, Linas Linkevic, has tweeted that further measures were expected to be taken in the next few days.Draft UN Security Council resolution blockedInterfax cites former Soviet President Mikhail Gorbachev as having said that any sanctions must be upheld by the United Nations (UN) or would otherwise be 'illegal' and that Sunday's vote "amends a Soviet-era mistake." A draft resolution to call the referendum illegal was brought before the UN Security Council, but was vetoed by Russia, with China abstaining.London listed stocks such as BG Group could benefit, whereas SSE could take a hit "should Russian gas supplies through the Ukraine shut down for a prolonged period of time", Bank of America adds. Lastly, the broker points out that the possibility exists for the EU to block the completion of its new pipelines to southern and northern Europe. While unlikely, such sanctions would cause substantial damage to Europe and hurt Russia's future exports and economy.AB