Crisis: Likely To Stop With Crimea

BMI Vie w: Russia's decision to assume de facto control of Crimea over the weekend has substantially raised political risks in Ukraine. While our core view is that Russia will consolidate control in Crimea and end its actions, there are outside risks that eastern Ukrainian oblasts fall victim to ethnic disturbances, potentially leading to further Russian intervention.

Russia has moved quickly to shore up its military presence in Crimea, and over the weekend of March 1-2 effectively assumed de facto if not de jure control of the peninsula. Russia's actions have more or less been in line with our expectations - we stated last week that Russia would stop short of invading Ukraine, instead choosing to bolster its troop numbers in Crimea in response to local developments ( see February 27, 2014, 'Will Russia Invade?'). However, Ukraine's interim government and several Western leaders are characterising Russia's moves as aggression, thereby raising the stakes. In addition to pre-existing Russian troops already stationed at the Russian naval base in Sevastopol, some additional 6,000 troops have reportedly entered the region, easily overwhelming the light Ukrainian army presence in Crimea.

We do not expect to see any Western military intervention as a direct result of Russia's actions in Crimea, with NATO reliant on Russian transit to secure the return of its hardware from Afghanistan. Our core view at present is that any US and EU actions will be limited to diplomatic mediation efforts, with the possibility of targeted economic sanctions in the future. With no support forthcoming from Western powers, we expect the Ukrainian army will be unwilling to launch any offensive against Russian troops, which substantially outnumber the Ukrainian forces.

Crimea Situation Driving Up Default Risk
Ukraine - US$2014 Government Bond, % yield

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This article is tagged to:
Sector: Country Risk
Geography: Ukraine, Russia

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