‘Eur Asia’ jeopardised with Russia and Europe at odds

Events in Ukraine cast a shadow over the idea of a continent between the West and Asia.

The recent uprising in Ukraine condemns Russia’s president, Vladimir Putin, to rethink his dream of building “Eur-Asia”.

The original concept of building a new continent between the West and Asia, which emerged for the first time in 1920, became a doctrine in 1998. The Russian government has taken it up as a means to create and maintain a buffer zone against the West. This will also help Mr Putin to contain the growing influence of China in Central Asia (which holds vast reserves of raw materials).

Ukraine is a cornerstone of this geostrategic vision, namely because of its size – it is the second-largest country in Europe – and its location bordering Poland, Slovakia and Russia. It also gives Moscow direct access to warm waters through the Black Sea.

The fixed smile of Sochi has given way to a deep tension for Mr Putin. Granted, no one knows how the Ukrainian crisis will evolve. But the spectre of a progressively stiffening Russian position, fuelling retaliation by way of trade sanctions, is looming.

From an economic and financial standpoint, the breaking of trade would mean risks for Russia of losing three-quarters of its exports in hard currency – mainly gas – while Europe would lose a third of its energy supply. Moscow would neither benefit from crucial foreign direct investments from the West nor get access to its technology. The interest rate of the rouble would be pushed up, adding to the fragility of the financial and banking sector.

The country, which is already suffering from sluggish growth and a dramatic demographic development, would have very few solutions to fill these gaps.

In the European Union, Germany would have to manage its energy dependence and halt its policy of delocalisation, a key element of the country’s miraculous booming productivity. The Baltic countries and the former satellites of the USSR would also experience lower capital flows and investments.

Russia and Europe are going through the prisoner’s dilemma – while both sides have a clear interest in cooperating, each may opt for conflict and betrayal.

What could be the consequences for the markets?

The region is certainly in for renewed volatility. After experiencing extreme financial oscillations during the past decade, strategic natural resources are back in the spotlight. Fears of monopolisation and supply disruption are re-emerging, although groups active in the exploration and distribution of gas and shale oil will act as a stabilising factor.

The prices of uranium, nickel, potash and some grains are also at risk. Some Australian-listed companies and Norwegian and Canadian producers are potential beneficiaries, which could help their home currencies. The world’s economic recovery will also add to the commodity demand.

The euro zone is experiencing inflows from the eastern periphery. The area is a relative shelter in terms of geostrategic security. This is confirmed by the recent and opportunistic renewed interest of the Polish government for membership in the euro zone. It may also reignite interest in industrial investments in a few southern peripheral countries.

Germany, Austria and continental banks heavily involved in the East have already seriously underperformed. They could be supported by the formation of a geopolitical premium on oil prices, but a potentially stronger dollar will get in the way of pricing, just as it has for precious metals.

Philippe Schindler is the chief investment officer at Blue Lakes Advisors, a Swiss company that advises financial institutions in Europe and the Middle East.

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