While the Ukrainian economy is too small and its problems too specific to have a direct impact on the global economy, capital markets have reacted unfavourably to news of Russia’s involvement, raising concerns that the skirmish could trigger a wider conflict between Russia and the west, AMP Capital head of investment strategy and chief economist Shane Oliver said.
“The Russian action in Crimea over the weekend adds to this risk,” Mr Oliver said.
“Note though that Crimea has a predominantly Russian population, it was part of Russia prior to 1954 and the Russian Black Sea naval fleet is based there, so this all confuses the situation a bit,” he said.
“At the moment, markets are focused on the risk to gas supplies.”
The eurozone obtains 25 per cent of its gas from Russia – mostly via Ukraine.
“This could be threatened by a broader civil war in the Ukraine and/or if Russia decides to punish Europe for supporting Ukraine,” Mr Oliver said.
“Ukraine is also a big grain producer – hence wheat futures are up 3.4 per cent.”
Much now depends on how Europe and the US respond in terms of how much support they provide Ukraine, Mr Oliver said, adding that the EU and US will tread carefully knowing how much the Ukraine means to Russia.
“It would be a bit like Russia meddling in Canada,” he said.
“The EU is also likely to be wary of doing anything that might threaten its gas supplies and hence its economic recovery.
“So I suspect that while there may be a lot of noise on this front it may die down in time.”
Mr Oliver believes the best outcome for reducing market uncertainty would be IMF support for Ukraine to enable it to service its debt supported by Russia, the US and the EU with Ukraine staying out of the EU.
“My suspicion is that Ukraine is just another distraction for markets that will fade in the months ahead,” he said
“It may take a while to settle down and the uncertainty could get worse before it gets better.”
The ASX200 was down as much as 1.2 per cent early in the trading day but recovered to only lose 20.5 points by the market's close. The Australian dollar dropped to US89.14 cents.
