With the Dow Jones Industrial Average moving from a low of 7,500 points five years ago and closing in New York last night at 16,818 points, albeit well down on the day, there can be little denial that those who took the plunge and dived back into equity markets in the aftermath of the 2008 financial market collapse have done very well. The same is equally true for the more widely used S&P 500 index which, on a past year basis alone and that was also down yesterday closing at 1,949.98 points, is still showing a rise of in excess of 25% over the past year alone!
True, markets are somewhat nervous in the wake of rising geo-political tensions, uncertainty over sustainability of growth; of the potential and timing of what at some point must of inevitability be a rise in interest rates and lessening buy-back of bonds I am left with an uneasy mind believing that markets are turning far too much of a blind-eye to events in Iraq, Syria and Ukraine.
While specific events in Ukraine, such as the alleged shooting down of a helicopter yesterday, which is the second such incident involving a Ukraine armed forces aircraft in less than a month, it appeared to make only secondary headlines in the western press and media, perhaps reasoned by lack of proof of Russian involvement and misguided belief that now President Putin has asked the Russian parliament to revoke his legal authority to invade Ukraine all will probably now be well, I am bound to worry that soon the ‘west’ might all but remove Ukraine off its agenda. I agree that in terms of the annexing of Crimea this is a done deal and that there is nothing to be gained by western diplomatic posturing. I agree also that as the ‘west’ has little control over events in Ukraine, and no absolute power of attorney to help ensure Ukraine’s independence as a sovereign state, there is little that we can do beyond what we have done diplomatically in terms of reducing Russian authority in global institutions such as the former G-8.
When it comes to sanctions, the idea the White House is happy smacks slightly of an element of ‘pass the parcel’ with regard of Ukraine. I suspect that this may be due to the fact that, as Russia’s exports of oil and gas having no direct impact on the US economy, this should be something that the EU pushes a great deal more than it seems to be doing. I can certainly observe an increasing number of voices in Senate and Congress calling for the rest of the world to increase sanctions on Russia. To that end it can be anticipated that at the next meeting of the European Council being held in Brussels on Friday, the US will call for a sharp increase in sanctions and other restrictions of not only Russian oil and gas but oil and gas industry technology.
While raising the level of sanctions imposed on Russia is bound to have some limited additional impact on Russia, if that is what is agreed the sceptic in me suggests, and although there will be a further impact on the Russian economy, it will be Europe that loses out far more than the US. That is not to suggest that I am against the imposition of more sanctions, or that I place any greater degree of trust in Russia’s future intentions now that Putin is seeking to show the rest of the world a desire to play down future intent.
In Russia, where the firm hand of the President rules, we should better note that special powers can be reversed in a day – either way. I doubt that France will be pushing to increase sanctions against Russia while it is building warships for that country. Meanwhile, it seems that constant violations by so-called rebel forces combined no doubt with Russian insurgents, have already damaged the prospect of a current ‘cease-fire’ arrangement in eastern Ukraine continuing beyond Friday.
I see no end to the worsening situation in Ukraine believing that over time, albeit in the months ahead perhaps out of the gaze of the western eyes, Russia will continue to manipulate affairs in Ukraine to the point that eventually the Poroshenko administration is merely a puppet administration, albeit an elected one, of the Russian government. Put it another way if you like, history repeating itself all over again.
Should markets be that concerned about Ukraine? Despite the consensus view that Russian actions will probably not spread beyond Ukraine to other former Soviet satellite states, I do believe that we should be more concerned about events in Ukraine than we seemingly are. As I heard said yesterday, Ukraine is to Russia far more than what the Falklands was to Mrs Thatcher, it is family. Does that mean Russia seeks to rebuild an empire? Maybe not beyond the inclusion of Ukraine of which Russia not surprisingly considers to be vital in terms of regaining not only its self-respect but also to bolster its natural defence. Was it Zbigniew Brzezinski, former US National Security Advisor who said, “Without Ukraine Russia no longer has an empire”?
Iraq is a different situation altogether and one that is potentially far worse in terms of the damage that could be done to the western economy. Middle East oil and gas may play less of a political and economic position for the US, but that is not so for Europe. While US policy has been to attempt to keep the worsening situation in Iraq at arms-length I believe that markets would do as well to understand that politics and sectarianism are in reality two sides of the very same coin. Both can and do impact on markets when they appear albeit to differing degrees, but if we really are witnessing a significant change in world order and perhaps a geo-political shift then I believe that markets should take heed.
It is not only the US that should look at where it needs to be in regard of a fast changing situation in the Middle East region, but politicians in Europe too. The worst case scenario is that following Iraq, within which there is already an argument for partition, and after Syria in where there is a clear desire of the people now returning to bombed out and destroyed cities for ‘normality’ to resume now that the Assad administration appears to gained the upper hand; it could be the Hashemite Kingdom of Jordan next on the list. Propped up by Saudi Arabia and to an extent the west, and having gained the upper hand in Syria and Iraq, if Sunni militants waving an ISIS flag do penetrate Jordan, Middle East politics will see dynamic change.
Yesterday, listening to a fascinating lecture given by Alastair Crooke, diplomat, former MI6 operative and founder director of Conflicts Forum, I was left in little doubt that what we are observing in Syria and Iraq and the change in structures and institutions elsewhere in the Middle East, could well be far more significant than the markets are currently giving credence for. Indeed, they could be tantamount to significant global strategic change.
CHW (London – 25th June 2014)
Howard Wheeldon FRAeS