Russia’s decisive move to rein in Ukraine should come as no surprise considering President Vladimir Putin’s past assertion that collapse of the Soviet Union was the “greatest geopolitical catastrophe of the century.” His involvement in Ukraine indicates that he will do what he can to prevent any former Soviet state from increasing its links to the West, even at the margin.
Ultimately, we think that capital flows will have a far greater and more lasting effect on Putin’s actions than any boycott or sanction by the West. Russia needs external capital to diversify its economy away from the energy industry, which today accounts for over 70% of the nation’s exports, causing the economy to be highly sensitive to energy prices. If investors perceive that Russia will be militarily engaged—and will not respect the rule of law or property rights—capital inflows will ebb.
February provided global equity markets a welcome reprieve after the wallop that investors received in January. The MSCI Emerging Markets Index recovered nearly half of the losses it sustained the previous month as investors responded favorably to encouraging trade figures out of China and a smooth transition from Ben Bernanke to Janet Yellen as Chair of the US Federal Reserve. Notably, as tensions between Russia and Ukraine escalated at the end of the month, the Index continued to rise, though Russian equities broadly did decline.
Many emerging market currencies strengthened somewhat during the month, including those of Brazil, South Africa, Turkey, and Indonesia. Meanwhile, the Russian ruble was down over 2% in the month, and has depreciated by more than 8% year-to-date. Overall, our holdings in Russia, including a diamond supplier and oil company, have a modest tilt toward a weaker ruble.
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