April 6, 2014 9:47 am

FT - Opinion

Ukraine: A rude awakening to a new world order

By Yuri Bender

Ukraine’s last full-time president, Viktor Yanukovich, fled his country to Russia in February. He feared the wrath of 46m citizens, after his riot police killed 100 anti-government protesters in the centre of Kiev. The previous incumbent, Viktor Yushchenko, was mysteriously poisoned and disfigured during his ultimately successful 2004 election campaign.

Despite the undoubted hazards and controversies surrounding Ukraine’s presidency since the country won independence from the Soviet Union in 1991, several willing and wealthy candidates have registered for the forthcoming election on May 25.

Currently leading opinion polls is “Chocolate King” Petro Poroshenko, a greying businessman and experienced politician, who unlike most “oligarchs”, has been prepared to lose profits for his political ambitions. Russia targeted him personally by restricting imports of his confectionery goods, taking over his factories and raiding businesses linked to him in newly annexed Crimea.

Next is “Gas Princess” Yulia Tymoshenko, recently released from prison after serving two years of a seven-year sentence for political charges of “exceeding her authority” in energy negotiations with Moscow. A third candidate, Vitali Klitshcko, former world heavyweight boxing champion, has pulled out and will run for mayor of Kiev instead. Observers say the 6ft 7 inch pugilist is “too gentle” for the blood sport of Ukrainian politics.

Should this Byzantine state and its head-on collision with Russian president Vladimir Putin’s expanding Russkiy mir (Russian world) be of concern to investors, or are they right to treat it as a colourful sideshow?

A rude awakening to a new world order is nearer than we think, with Russia finally emerging as a global power, believes Didier Duret, who advises private clients of ABN Amro, the Dutch bank.

State-sponsored showboating in Sochi and military action against a weaker neighbour are just the first chapters in an unfolding story. The west has underrated Russia – now seized by a renewed self-confidence and nationalist fervour – for several decades, says Mr Duret.

Most investors still think of Russia as a failing, somewhat criminal state with high mortality and few births. “They have not yet come to terms with improving demographics, falling crime rates and rising national pride,” he says.

A new era of political risk lasting several decades, as both Russia and China vie for influence, is yet to be priced into markets, through a political premium for euro-denominated assets. Recovery hopes could be derailed.

Few European nations have grasped the implications of a near-bankrupt neighbour on their community’s eastern fringes. A Russian troop build-up on Ukraine’s eastern border could provoke civil unrest, “economic catastrophe” and “spillover” implications for the rest of Europe, says Mark McFarland, chief economist at Coutts, the private bank.

The IMF’s $20bn bailout must be accompanied by boosting Ukraine’s government with technocrats steeped in crisis-avoidance techniques.

Effects on asset prices will depend on the severity of sanctions. Real damage to Russia is possible if the US restarts petroleum exports to Europe, denting global oil prices by up to $20. Investors might avoid “any trading with Russian companies, financial holdings in any Russian asset or exposure to Russian individuals”, as happened with Iran, Mr McFarland says.

If Russian holdings are effectively gated, investors in “crowded trades” could struggle to liquidate emerging market bond assets, while defence sector shares should thrive.

“Defence budgets have fallen. But one of the key implications of the Ukrainian crisis is that you need to have a properly functioning military,” says Mr McFarland. Innovative cybersecurity firms will also benefit, with hackers recently crashing government-linked websites in post-Soviet states.

These are all challenges faced by presidential candidates as the election carousel starts to spin. Big business backers in the shadows are prepared to pay millions upfront for their rides, expecting to collect abundant prize monies in due course. But first the fairground must survive fireworks thrown by noisy neighbours from the east.