As one of my Russian brokers said to me when I checked on market sentiment (Russian market),  “…it’s been a long day of tape bombs from the Ukrainians, the Russians, the Europeans, the Americans, the IMF, the North Koreans, and former President of Ukraine Victor Yanukovych (I’m waiting for Sean Penn).

Image courtesy World Economy Forum: to say the situation is ever changing and will remain a scary mix of possibilities we will wait to see play out.  

There are positive things going on in terms of dialogue between Russia and the US, the IMF and Ukraine, and the Germans with a line straight into Putin.  

The base case here is that there will be no Russian intervention and that Russia is not looking at a Crimea grab.  

The base case is also that the RTS (Russian Index in USD terms) will test four year lows, especially as the currency is at all-time lows.  

Owning Russian assets in USD has been painful YTD (-13.5%) and anyone who has traded Russia in last 10-20 years will err on the side of not jumping in just yet.

Here are other thoughts on Russia/Ukraine/Crimea and their interrelationship:

No question that Ukraine events would have an impact in Crimea. Crimea in Southern Ukraine was actually part of the Russian Federation in the Soviet Union era. Crimean Russians are 59% of the population in a region where ethnic lines are really the sovereign maps that matter.  People who live in Crimea are of Russian descent and identify themselves as Russian. Russia keeps one of their largest naval fleets right there in the city of Sebastopol on the Black Sea.

My view is Russia is as surprised by recent developments in Crimea as everyone else.  In terms of Russia’s overall role in the Ukraine events, I believe they are reacting not agitating.  The Georgia comparisons are relevant only to the extent that Russia was strongly opposed to a NATO presence and played the ethnic tRussian interests in Georgia card to their benefit.  Saakashvili was courting NATO membership and led himself to be caught in the trap set by western interests as well as Russian ones.

Russia is reacting to the way the new government is being formed and will be reacting to who they believe is truly in power.  Russians are wary that the new government in Kiev may be a front for puppeteers behind the scenes who are extreme anti-Russia and right wing radicals.  It is not really clear who controls Ukraine politically right now and Russia fears that no one is really in charge.

Crimea will have a referendum vote (in 3 months?) on whether to seek more independence but not to suseed.  Russians are interested in preserving the status quo in Crimea.  The Russian government has always been interested in supporting Russian ethnic interests anywhere in the world. Russian authorities in Moscow do have an ability to shape the dialogue of the candidates in Crimea ahead of a vote.  Russia may recognize an independent Crimea but is not pushing for independence from Ukraine.

Russian goals in Ukraine do not include any interest in annexing or invading Ukraine.  No love lost between Yanukovych and Putin at this point despite Russia offering Yanukovych personal safety in Russia.  There is zero appetite in Moscow for grabbing a piece of Ukrainian territory, even Crimea.  Russian Ukrainian relations however are difficult to predict at this point and there is a significant amount of combustibility to the situation.

Some analysts are wondering whether Ukraine might be a situation that could lead to more unrest in Russia and maybe a model, i.e.: toppling of an autocratic leader where many are oppressed and the rule of law is driven by state interests.  Ukraine has confirmed Putin’s stance on striking early and striking hard was the right one.  I’m not saying I agree or am in favor of these actions, I merely point out that this is an approach Russia has always taken to dissidents and has yielded solid results.  

To this point, Putin's strategy has been anytime the state sees rebellion in the streets, it has to act quickly and decisively to punish and send a message.  

Stay tuned for more…

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