By Tomek Jankowski
Things go wrong. Anyone who plays poker knows this. One moment you're on the verge of a royal flush, and the next, you pull a six of diamonds, and you're called. Things do indeed go wrong.
Russia's Vladimir Putin reacted in November of last year to a European Union aid and reform package for ailing Ukraine by strong-arming Ukraine's leadership into rejecting the EU package, and accepting a Russian counter-package instead.
The result was an explosion in popular demonstrations in Ukraine's western and central regions, which eventually drove Ukraine's pro-Russian president out of office. Down but not out, Putin decided to take a consolation prize, Crimea.
Crimea has a long and very eclectic history but Soviet ethnic cleansing during World War II left it artificially with a majority Russian population. Soviet leader Nikita Khrushchev, a Russian native of Ukraine and leader of Soviet Ukraine before succeeding Stalin, transferred Crimea from Russia to Ukraine in 1954. When the Soviet Union imploded in 1991 and Ukraine declared its independence, Moscow and Kiev signed an agreement reaffirming Crimea's status within Ukraine in exchange for Russia being allowed to retain a few naval bases for its Black Sea Fleet.
So now Putin has decided to take it back. The fact that Crimea contains large oil and gas reserves may be an important factor in Putin's decision. Regardless, Western countries are hitting Russia with sanctions.
THINGS ARE GOING WRONG.
It may feel satisfying to see Russia pay for its 19th century-style misadventures in Ukraine, but there are consequences for everyone. Despite Putin's mishandling of the Russian economy, some sectors have nevertheless seen growth and development.
The Russian state has shepherded the energy sector and fostered such giants as Gazprom, Rosneft and Yukoil, which have all become global conglomerates heavily invested in the energy sectors of countries around the world, including the West. But even without Moscow's stewardship, other industries such as Russia's financial services sector have burgeoned in recent years, with the old Soviet Sberbank ranking in the top twenty banks in the world by market capitalization.
Russia's financial services sector has seen genuine and broad organic growth in recent years as other sectors of the Russian economy (retail and construction) have quietly been benefiting from a growing Russian middle class—and need increasingly sophisticated banking, insurance and investment services as they themselves grow. And despite the country's reputation for corruption, many Russian financial services clients have hired global consulting firms to address regulatory, auditing, transparency and reporting issues.
Some Russian businesses are becoming genuinely competitive.
Russia only has a handful of growth industries and Western sanctions are likely to target these. Many Western businesses are also heavily invested in Russia and Ukraine, and they will also feel pain as a war of sanctions erupts. There may also be other consequences; a civil war in Ukraine may lead to hundreds of thousands or even millions of refugees flooding into the EU border states, destabilizing what are currently some of the EU's star economic performers.
Russia's current actions cannot be condoned but in our increasingly globalized and integrated world, states and their leaders need to understand the real consequences of unresolved political disputes such as this. And as for companies eager to expand geographically in search of new markets, let this serve as a warning: Things go wrong.
Tomek Jankowski is Senior Analyst, Financial Services Research Lead, Kennedy Consulting Research & Advisory. For details, visit Kennedyinfo.com/consulting.
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