El-Erian: How the markets should read Ukraine's crisis

March 3, 2014: 12:04 PM ET

The European nation is a tiny part of the global economy, but its political fallout is far from contained.

By Mohamed A. El-Erian


FORTUNE -- With the fluid situation in Ukraine dominating the geopolitical narrative -- and rightly so -- many global investors are wondering what it means for their portfolios. Here are some key  takeaways:

On a standalone basis, Ukraine is not systemically important. With a relatively small GDP (around $175 billion), its external economic links are limited, as is its role in global supply and demand chains. Indeed, other than gas pipelines form Russia to Europe, there isn't much that Ukraine buys, hosts, or sells -- whether physical products, services, or financial instruments -- that cannot be easily absorbed by the international economic and monetary systems. Moreover, its currency has little global reach; and the country's bond issuance is relatively small, with holdings unlikely to create real or technical financial market shocks beyond segments of the emerging world.

Yet Ukraine is in the midst of an unpredictable tug of war between East and West. This, of course, is the key issue; it is what makes Ukraine more systemic; and it is why investors are correct in seeking information about the situation there and how it may evolve. If the current course of action is maintained, the escalating geopolitical tensions among major world powers would end up by spilling over to financial markets. This is already occurring to some extent, illustrated most vividly by the sharp decline this morning in Russian equities and some generalized flight to quality in global markets.

MORE: Ukraine's uprising: More than an economic crisis

No side, whether internal or external, is strong enough to impose its will at this stage. Absent overwhelming outside military intervention (whose outcomes would be far from certain, and its chaos would be considerable and inevitable), it is hard to argue that any single side is in a position to prevail decisively in the next few weeks. Russia does not have sufficient influence with enough of Ukraine to pull the whole country back into its orbit; and it cannot do so by force. For their part, the European Union and the United States do not have the means to decisively pull all of Ukraine the other way. And the reality of these external anchors means that a partly fragmented Ukrainian society is unlikely to resolve the tensions internally any time soon.

In favorable circumstances, calmer heads would prevail and iterate to a negotiated compromise. Given the cul de sac that all parties find themselves in, and if the issue were just Ukraine, both Russia and the West would quickly conclude that it is in their individual and collective interests to de-escalate the situation and reach a compromise. A negotiated resolution would be the base case. As such, they would also be able to establish some guardrails for opposing political forces within Ukraine. But there is much more at stake here.

Ukraine is but the latest illustration of a deeper geopolitical rift that has played out elsewhere, including in Syria. This inevitably complicates national strategies, while rendering multilateral cooperation much more difficult. It also makes it hard for all parties involved to resist the narrower agendas of domestic constituents -- all of which give rise to talk of sanctions, boycotts, and G-8 malfunctions.

MORE: What Citi's Mexico scandal says about SarbOx

Even under a set of most optimistic (and still-realistic) assumptions, the tensions over Ukraine will not be resolved in one or two rounds. If the immediate tensions subsides -- a big if -- we should still expect difficult Ukrainian issues to resurface over and over again in the next few months. As well as what we all observe publicly, competing external back channels could well fuel divisions within a Ukrainian society that, as yet,  is neither able to return to its past nor able to forge a decisive new course.

In sum, global investors are right to be asking lots of questions about Ukraine. Importantly, the vast majority needs to do so in a broad context and, thus, immediately confront the most basic -- and, yes, most contentious -- question of all: Is Ukraine simply the latest example of a more disturbing general phenomenon of less effective global political coordination, and the tensions that inherently come with that?

I worry that the answer to this question is yes. If you agree with me, then overall geopolitical risk may not, as yet, be adequately reflected in some risk markets.

Mohamed A. El-Erian is the outgoing CEO and co-CIO of PIMCO.

  • Moody's junks Ireland

    Ready for another bailout of Ireland? Moody's is.

    The rating agency slashed Ireland's ratings to junk Tuesday, just three months after its last downgrade of the debt-soaked former Celtic Tiger. Moody's warned that Ireland isn't likely to be able to raise funds in the bond market after its current bailout loan expires at the end of 2013.

    Ireland, laid low by its decision to bail out its reckless, feckless banks, took 85 billion MORE

    - Jul 12, 2011 4:02 PM ET
  • Walking the Greek tightrope

    Greece and its patrons took a half-step forward Thursday, leaving just a few hundred billion more to go.

    Greek leaders reached an agreement with the European Union and the International Monetary Fund on another round of tax hikes and spending cuts, Reuters reported.

    The deal was taken as a positive on a day otherwise dominated by the sinking prospects for U.S. growth and policymakers' latest act of desperation, the release of oil MORE

    - Jun 23, 2011 4:50 PM ET
    Posted in: , ,
  • World Bank hires ex-Lehman risk manager

    In the echoes-of-2008 department, the World Bank just hired a former Lehman Brothers risk manager to run its finances.

    The bank, which lends money to developing countries in a bid to curb poverty, said Madelyn Antoncic will "be responsible for maintaining the World Bank's high standing in financial markets."

    It is tempting here to make a joke about Antoncic's qualifications for that task. After all, you could hardly have a lower standing in MORE

    - Jun 23, 2011 1:26 PM ET
  • The coming jobs crisis

    If you think our employment problem is bad now, consider this: the U.S. economy is on course for both a job shortage and a worker shortage.

    So says McKinsey, the consultancy that just released a report on projected American job creation over the next decade. As you might expect, the outlook is not all that rosy.

    A return to full employment, defined as 5% joblessness, "will occur in only the most optimistic job growth scenario," MORE

    - Jun 23, 2011 11:50 AM ET
    Posted in: , ,
  • Bernanke brushes off Greek risk to banks

    A Greek default would deliver a "very small" hit to U.S. banks, Fed chief Ben Bernanke said Thursday.

    Bernanke, speaking in Washington at a Federal Reserve press conference, said the central bank has been "doing all we can to monitor the situation" in Greece, where the markets have been acting as if a default by the cash-strapped country is inevitable.

    A Greek default would be the biggest global financial shock since the fall of MORE

    - Jun 22, 2011 3:04 PM ET
  • Europe's sickly banks

    Trichet's nightmare?

     You could knock Europe's banks over with a feather.

    Financial institutions across the Continent share a terrifying trait with Lehman Brothers before its 2008 collapse: they rely too much on borrowed money, especially the cheap, short-term loans that are vulnerable to a market shock.

    That's not exactly a handy characteristic when a Greek default seems almost inevitable. European policymakers this weekend failed to agree to terms on a 12 billion-euro ($17 MORE

    - Jun 20, 2011 6:30 AM ET
    Posted in: , , , , ,
  • Moody's warns it may downgrade Italy

    A whole day without European debt fireworks is too much to ask for, apparently.

    Moody's said Friday that it may downgrade Italy's debt, thanks to "fragile market sentiment" for deeply indebted European governments. It is the first downgrade warning for one of the stronger European economies since the Greek debt crisis flared up this spring.

    The rating agency said that as investors grow more risk averse, Italy -- currently rated Aa2, the second-highest rating -- MORE

    - Jun 17, 2011 3:47 PM ET
    Posted in: , , , ,
  • Contagion takes a day off in Europe

    Europe is taking a deep breath Friday, which is good because there is still a lot of heavy lifting to do on its debt crisis.

    Markets rallied after Germany backed off its demand that the next Greek bailout include mandatory concessions from the private sector lenders who financed Greece's descent into the sovereign debt swamp.

    The deal means that European policymakers are now counting on bankers to voluntarily roll over their loans to Greece, MORE

    - Jun 17, 2011 12:03 PM ET
    Posted in: , , ,
  • Will money funds spread Greek tragedy?

    Greece is in the soup. Are we about to get scalded with the spillover?

    The odds say no, thanks to official support for Greece and the European banks that look most apt to suffer in a default. Yet it's clear that the U.S. financial system remains vulnerable to trans-Atlantic aftershocks.

    One pathway that could wash Greek problems onto these shores is Europe's wholesale bank funding market, which relies in large part on MORE

    - Jun 16, 2011 1:14 PM ET
    Posted in: , , , ,
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by VIP.