1. News
  2. Explained

Explained: The Russia-Ukraine Crisis and Possible Impacts on Markets and India

Jan 26, 2022 2:27 PM 7 min read

The past few days have been brutal for the world economy. Monday, in particular, was a bloodbath, with key indices nose-diving and markets - including in India, China and Japan - suffering costly corrections or entering bear territory.

Two main factors were behind this. One, widespread expectations that the US Federal Reserve will soon wind up or "taper" months of pandemic-necessitated easy monetary policy. And two, escalating tensions along the Russia-Ukraine border, which we'll delve into today.

Background of the Russia-Ukraine Conflict

To understand what's happening at the Ukrainian border, it's important to have a historic understanding of the conflict.

Ukraine sits at the crossroads between Europe and Asia. It links Eastern Europe with Russia and Turkey with Europe. And its ports along the Black Sea are critical chokepoints in global trade.

Historically, the country has never really been a well-defined territory. Like neighbouring Poland, Ukraine has been at the mercy of the rise and fall of many powerful empires, from the Grand Duchy of Lithuania and the Austro-Hungarians to the Ottomans and Tsarist Russia.

The Ukraine of today traces its origins to the waning years of World War One, when a national movement for self-determination resulted in the Ukrainian People's Republic. This entity later transformed into a socialist state after World War Two and became a part of the Soviet Union. Decades later, as the Union crumbled, Ukraine declared its independence in 1991 and the Ukraine as we know it today emerged.

Internally, Ukraine is an extremely diverse nation, home to numerous ethnic enclaves and cultural divides. But (very) broadly speaking, the Ukrainian people can be viewed along an east-west divide, with those in the western parts more in tandem with Europe while those in the east generally more sympathetic towards Russia (this is also where most of the country's 11 million ethnic Russians live).


Endless Escalation

Now, the fires burning across Eastern Europe today can be traced back to the embers planted in 2013-14. During this period, the pro-Russian Ukrainian President Viktor Yanukovych refused to ratify a measure passed by the Ukrainian Parliament that sought closer ties with Brussels (among other things, a free trade pact with the EU). Protests broke out across the country. Things rapidly disintegrated into violent confrontations between civilians and riot police.

By February 2014, Yanukovych had fled Ukraine ahead of an impeachment vote, an interim government was installed, and the agreement with the EU was signed as directed. These developments are known today as the Maidan Revolution aka the Revolution of Dignity.

Explained: The Russia-Ukraine Crisis and Possible Impacts on Markets and IndiaMeanwhile, Moscow looked on with increasing alarm. Russian forces swiftly invaded eastern Ukraine and masked Russian soldiers ("little green men", as they were colloquially known) took up strategic positions in Ukraine's Crimean peninsula. In a matter of months, (1) a controversial referendum supposedly saw people in Crimea voting to integrate with Russia, and (2) pro-Russia separatists took control of the strategic Donetsk and Luhansk regions of eastern Ukraine.

Fighting in the Russo-Ukrainian War gradually subsided over the years, especially after a ceasefire agreement brokered by France and Germany. But the conflict remains active: meaning, what's happening today is not a new development but an escalation of what has been a rather bloody status quo.


What Does Russia See in Ukraine?

The most important practical consideration catalysing the conflict is arguably Russian fears that Ukraine may be pulled into NATO, widely viewed as a US-backed anti-Russia alliance. Under NATO’s terms, an attack on a single member would elicit military retaliation by the entire group. (Fun fact: the Soviet Union once sort of tried to join NATO!)

Post-1991, Russia was incidentally one of the first states to recognise Ukrainian sovereignty. The prevailing notion was that post-Soviet states had to get their act together and fix their broken economies. With reformists at the helm in both countries, geopolitical nuances and strategic ruminations took a backseat.

Enter, Vladimir Putin, who firmly believes that the last tranche of Soviet leaders made a grave blunder by allowing Eastern European client states to breakaway and pushing them into the arms of the West. Mr. Putin is a relentless revanchist, viewing Eastern Europe as a critical buffer territory between Russia and Europe. The Soviet disintegration, for him, was a death-knell for Russian security, and one he wishes to reverse at all costs. (In relatable terms, this is similar to the rationale that was in Mao Zedong's mind before he green-lighted the Chinese invasion of Tibet to secure buffer territory vis-a-vis India.)

There's also a sentimental quotient. For Russia, Ukraine is integral to its founding story. The Kievan Rus (a medieval federation) was the predecessor to the modern Russian state. This is a legacy often invoked by Putin to vindicate Ukraine's historic ties to Russia. The President wrote in July: “I am confident that true sovereignty of Ukraine is possible only in partnership with Russia…For we are one people.”


But is Ukraine Joining NATO? 

The US has repeatedly said there are no plans for the same but has also refused to outright refuse Kiev admission, should it vote to join the pact.

Moscow, meanwhile, has never trusted Washington's intentions (by this metric, the Cold War never really ended!). Since 2004, a growing list of former Soviet states have joined NATO (the Czech Republic, Estonia, Latvia, Lithuania, Poland, Slovakia, Bulgaria and Romania). Ukraine's addition would mean a pro-West state sharing borders with Russia. With South Korea and Japan already allied with the West, Moscow fears it is being encircled by hostile forces. Mr. Putin will have none of this.


Okay…But Why Now? 

Well, if you look beyond Ukraine, you'll notice that Kremlin-backed hostilities have actually been happening for some time now.

Russian forces were recently welcomed by the Kazakh government to quell protests. A refugee crisis along the Polish-Belarussian border last year was engineered by Moscow. A war broke out between Armenia and Azerbaijan in 2020 over the status of Nagorno-Karabakh, a region in the latter that is dominated by ethnic Armenians (Russian “peacekeepers” now patrol this enclave). There is also an array of "frozen conflicts'', most notably in Abkhazia and South Ossetia, which have effectively seceded from Georgia with the Kremlin's help.

Ergo, Russia-West relations, while always frayed, have been worsening for some time now. That said, the timing may also have been influenced by the state of the Russian economy (which is on the tenterhooks) and the sheer scale of the recent domestic protests against Putin’s government. Which brings us to…


Recent Developments

Russia has reportedly amassed 100,000 troops along its border with Ukraine. In retaliation, Washington has sent "several thousand" American troops, warships and aircraft to NATO allies in the region (none yet to Ukraine, which, remember, isn't a NATO member).

Explained: The Russia-Ukraine Crisis and Possible Impacts on Markets and IndiaOngoing talks between the two sides at Geneva have yielded little result. Putin wants NATO to issue a permanent prohibition on Ukrainian membership, which the White House has called a "non-starter". The US is also on edge regarding Moscow's intentions, what with the latter's interference in American elections, cyber-attacks, and aggressive military posturing.


Wait…What Does the US See in Ukraine?

Mainly security concerns. As we’ve seen, the country sits on invaluable real estate which, in Moscow’s hands, could be disastrous for American and European interests.

Also, sanctions. Post-2014, Russia has been at the receiving end of numerous crippling economic sanctions that are battering its fragile economy. This partly propelled its revisionist foreign policy. Because Russian footholds or pro-Moscow regimes in Georgia, Moldova, Azerbaijan, Belarus, Kazakhstan or Ukraine = more scope for Russia to evade sanctions. Case in point: separatist-controlled regions in eastern Ukraine have, at least since 2018, been used to covertly funnel money and resources to Russia.


Market Impact

Okay, what’s in this for you and me? Well, geopolitics drives economics and, by extension, markets. A full-scale conflagration in Eastern Europe would mean a long period of volatility and the sort of turmoil that traders witnessed on Monday. It would also mean immense uncertainty in the energy markets - Russia supplies the bulk of European gas which, if a war were to break out, it would naturally withhold, leading to a different crisis altogether. (Natural gas has always been the Kremlin’s, for lack of a better phrase, Trump card.)


India Impact

Coming to India, we have traditionally enjoyed cordial relations with Moscow, from Soviet days to Putin ones. Even as the garb of non-alignment has faded away and US-India ties have grown stronger, Russia remains a key ally and trading partner (particularly when it comes to military imports). That said, a full-fledged war would make diplomatic neutrality a more delicate position to maintain.

A war would also drive crude oil prices to the sky (they are already at their highest point in years). High oil prices for an oil-importing nation like India that is still struggling to recover from the pandemic is unwelcome news, to put it mildly.

There’s also the worry that worsening ties with Europe will push Moscow further in bed with Beijing. The growing China-Russia bonhomie has been watched on with concern around the world. Stronger ties between the two giant neighbours bodes ill for India, for whom China is arguably the biggest strategic threat today.

But eventually, the biggest immediate fatality of a war would be the economy, stupid. Which is the same factor that catalysed Russia’s military adventurism. The same factor that has forced the EU to tread carefully all these years. The same factor that was the final nail in the Soviet Union’s coffin in 1991: “An autumn of grim food lines…pristinely empty stores…women rushing around in search of some food, any food…[and] an average salary of seven dollars a month”.


The cut-throat world of Business and Finance means that there is fresh News everyday. But don't worry, we got you. Subscribe to TRANSFIN. E-O-D and get commentaries like the one above straight to your inbox.