ukraine

Economic priorities will trump politics as the crisis in the Ukraine unfolds, say BMO experts.

“The stakes…are substantially higher for Russia than they are for anybody else,” said Jack Ablin, CIO at BMO Private Bank in Chicago during a conference call. “[This] suggests military escalation is unlikely, even against the backdrop of the parallels between now and the appeasement of Hitler before World War II.” He adds Crimea’s parliamentary vote to join Russia was “pretty much a sham.”

Read: Could tough sanctions on Russia backfire?

The EU will likely extend a $15-billion loan package to the Ukraine, but probably won’t punish Russia.

“While they’re certainly at odds over this territory, they’re trading partners,” says Ablin. Russia is the EU’s third-largest trading partner; the EU is Russia’s largest.

The EU sends Russia machinery, autos, chemicals, pharmaceuticals and agricultural products. From Russia, the EU gets mainly raw materials with an emphasis on oil and gas. And 75% of Russia’s foreign direct investment comes from the EU, notes Ablin.

“The U.S. is also an interested party, but in the scheme of things a mildly interested party,” he suggests. “I think what we’re learning from this…is that politics and political structures take a backseat to economic issues, especially as all of the parties involved are part of the global supply chain.”

Albin says there needs to be a diplomatic solution, which may involve “pinpoint sanctions” on Russia. If trade between the EU and Russia collapses, it could create stagflation in Europe and prompt the U.S. to accelerate plans to export its abundant natural gas supplies. But that, he adds, would take years, not months.

Read: How to cope with inflation, deflation and stagflation

The key risk to commodities markets is a disruption of Russian natural gas flows through the Ukraine, says Randy Ollenberger, a Calgary based oil and gas analyst at BMO Capital Markets.

Russia’s the second-largest gas producer in the world, pumping out more than 57 billion cubic feet per day. Most of the gas the EU gets from Russia—40% of the bloc’s total demand—comes through the Ukraine. If a civil war erupts, those flows could slow, Ollenberger explains.

“The gas flowing through the Ukraine from Russia to Europe is worth [about] $100 million a day, so Russia won’t be keen to see any disruption in supplies, and Europe certainly isn’t keen to see disruption in gas supply coming out of Russia.”

At the moment, Europe has unusually high natural gas inventories, says Ollenberger. The winter heating season is ending, and unlike North America, the weather across the pond wasn’t so bad the last few months. The market’s betting there won’t be a disruption in supply; and if there is, it’ll be temporary and manageable thanks to Europe’s inventories, he explains. “Natural gas prices have actually been trending down in Europe and globally.”

And don’t expect a jolt on our side of the pond, either. “The North American natural gas market remains largely delinked from the global gas market, so we’re not really seeing any impact of the Ukraine crisis on North American gas prices.”

Read: Look abroad for strong energy plays

Originally published on Advisor.ca

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