Editor’s Note: Wealth advisor Chris Nichols reminds us of the dangers of falling in love with the latest investment fads and fashions. In this case, it is one of the touted BRIC’s. Namely, Russia. On a personal note, while traveling in Eastern Europe, I thought I would visit the site of the 2014 Winter Olympics in Sochi, Russia. Unfortunately, this was about the time the shooting in the Crimea intensified. Needless to say, we cancelled our trip to Sochi. This was not the first time I have been stymied by the Russian Bear. In 1990, while engaged in a complex computer center consolidation in Braunshweig, Germany, Mikhael Gorbachev decided to visit the Brandenburg Gate on the one year anniversary of the fall of the Berlin Wall. Despite the allure of attending an event of great moment, I decided to high-tail in the opposite direction to the town of Hamelin to learn about the legend of the Pied Piper!
BEWARE THE RUSSIAN BEAR
Issac Newton’s third law says that for every action there is an equal and opposite reaction. Since things became tense between Ukraine and Russia, we’ve been getting a primer on the relative strength of diplomatic, economic, financial, and military actions and reactions.
Taking things over isn’t anything new for Russian President Vladimir Putin. A decade ago, he nationalized Yukos (a large publicly held Russian oil company) after jailing its founder for tax evasion and fraud. The financial repercussions of the takeover are still rippling through the global economy. In 2012, Russia lost a lawsuit filed by foreign shareholders of Yukos Oil and was ordered to pay damages.
Not long after the Yukos debacle, Putin lamented the demise of the Soviet Union was the greatest geopolitical catastrophe of the century. In 2014, he annexed Crimea – the first time a European nation has taken territory from another European nation since World War II although Georgia’s South Ossetia might as well be considered Russian after the shootout between the two nations in 2008 – justifying the action in many ways, including saying the Crimean peninsula should have been returned to Russia in 1991 when the Soviet Union dissolved. The West responded by imposing sanctions.
Today, Russia’s economy is in distress in part because of sanctions, according to Bloomberg BusinessWeek. Standard & Poor’s knocked the country’s debt rating down to one level above junk, and Russia’s central bank raised rates for the second time since March 2014 significantly increasing the cost of borrowing for businesses and individuals. Inflation is high in Russia – above seven percent – although, as one economist pointed out, raising rates had little to do with inflation and much to do with supporting the ruble and discouraging the flight of capital from Russia. During the first quarter of 2014, $50 billion was pulled out of Russia, and estimates suggest that amount could rise to $200 billion by year-end depending on what happens in Ukraine.
The Russian central bank wasn’t the only one taking action last week. Despite threats of further economic sanctions, Russia placed thousands of troops along the Ukrainian border for military exercises. Additional sanctions are likely to be imposed on Russia. We’ll soon have more insight into which actions speak the loudest.
Weekly Focus – Think About It
“One looks back with appreciation to the brilliant teachers, but with gratitude to those who touched our human feelings. The curriculum is so much necessary raw material, but warmth is the vital element for the growing plant and for the soul of the child. -Carl Jung, Swiss psychotherapist
Chris Nichols, Partner & Wealth Advisor
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