His dominant political position buttressed by gains for his United Russia party in regional and local elections held in September 2013, and a raised international profile for Russia after successfully hosting the Winter Olympic Games earlier this year, President Vladimir Putin has stepped up repression of dissent at home while adopting a disconcertingly aggressive posture in the foreign policy arena.

Putin has seized upon the ongoing political crisis in Ukraine to make the case that Russia must once again be seen — and treated — as a legitimate world power. This has raised questions concerning the viability of the diplomatic model that has contributed to a relatively stable east-west relations since the collapse of the Soviet Union.

A nationalist fervor has gripped the Russian electorate, resulting in Putin’s approval rating soaring to the heights last reached during the early years of his presidency more than a decade ago. Likewise, support for United Russia currently stands at close to 55 percent, compared to 7 percent for its nearest rival, the Communist Party of the Russian Federation (KPRF).

Exactly how far Putin is willing to go in applying pressure on Ukraine is unclear at this point. It is equally difficult to predict where Russia’s display of belligerence might lead, regardless of what the Russian leader intends.

Investors have good reason to be concerned about the risk of conflict.

Putin is carrying a big stick. The build up of Russian military forces along the Ukrainian border following the annexation of Crimea in early March has encouraged secessionist elements in eastern Ukraine to declare their independence from the government in Kiev, and could stir secessionist moves elsewhere in the country. The Ukrainian government will have no choice but to respond with force if the threats to national sovereignty cannot be peacefully resolved. And Putin, having cited the protection of ethnic Russians as the justification for his nationalist intervention in Crimea, could be compelled by similar logic — and political pressure at home — to intervene elsewhere in Ukraine.

Our baseline forecast is that cooler heads will prevail, and the situation will de-escalate over time. U.S. Secretary of State John Kerry continues to hold meetings with his Russian counterpart, Sergei Lavrov. And statements out of Moscow related to the uprising in Donetsk, which amounted to calls for both the separatists and Kiev to act with restraint, suggest that Russia is keen to avoid painting itself into a corner with regard to the question of secession by Ukraine’s ethnic Russian population.

That said, western threats to tighten sanctions and talk of the U.S. possibly providing arms and other equipment to Ukraine’s military will hardly be conducive to defusing the potentially explosive diplomatic crisis. Moreover, given the clear importance that Putin attaches to his public image, it cannot be taken for granted that he will adopt a pragmatic posture if he feels that his international credibility is at stake.

Consequently, investors have good reason to be concerned about the risk of conflict, which, given the numerous other shortcomings of the climate for investment, makes it very likely that Putin’s adoption of a belligerent posture will produce negative economic fallout. Indeed, the self-inflicted damage could very well be much greater than that resulting from sanctions imposed by the Ukrainian government’s western supporters.

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The PRS Group
About The Author The PRS Group
The PRS Group is a leading global provider of political and country risk analysis and forecasts, covering 140 countries. Based on proprietary, quantitative risk models, the firm's clientele includes financial institutions, multilateral agencies, and trans-national firms.




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