Good Luck Forecasting The Ukraine

On The Desk

Stock market analysts — known around here as z-vals due to the zero-validity of their 50 pct mistake rate — are busy forecasting what the turmoil in the Ukraine will mean to financial markets. Here we go again. There is no way to know, but that doesn’t stop them from posing as if there is. Let’s have a look at the absurdity of this effort.

First, a quick recap of what happened.

Freshly deposed former Ukrainian President Viktor Yanukovych was unpopular, and many believed he was unfairly elected. He has always been in the back pocket of former KGB thug and current Russian President Vladimir Putin, who wants to keep the Ukraine (now sometimes referred to as just Ukraine, without the definite article in front of it) politically and economically beholden to Russia rather than losing it to the European Union. Much of the Ukrainian population, however, wants to strengthen ties to the more progressive and sophisticated Europe and wash its hands of the backward and corrupt Russia. With Yanukovych at the top, however, Putin pulled the puppet strings.

A few months ago, citizens rose up and protested this subordination of the will of the people to foreign influence. In January, they became angrier when Yanukovych rejected a deal for closer integration with the European Union that he previously indicated he would support. There were other reasons for their anger, as well, and disposition varies by region of the country, with the Ukrainian-speaking areas in favor of European ties while the Russian-speaking areas prefer Russian ties.

Last week, the until-then mostly peaceful stand-off blew up. Riot police stormed Kiev’s Independence Square (also called Maidan in some reports, which Wikipedia can explain). The air filled with percussion grenades from the cops and Molotov cocktails from the protesters. Snipers picked off people in the crowd. Doctors operated on dining tables between incoming smoke grenades sent crashing through windows.

Politicians are nothing if not fickle fans of power, so when they sensed Yanukovych losing his they abandoned him in parliament. He also lost support of rich elites. Parliament passed a resolution ordering riot police to back off. With protection gone, Yanukovych fled his office and personal estate, leaving by helicopter as his belongings were trucked away. As protesters took over government offices and perused the fallen president’s palatial home, Yanukovych phoned in from an undisclosed location to mention that he hadn’t resigned. Parliament took care of that minor detail by dismissing him and his cabinet last Saturday. His own party called him a coward and a traitor for killing his countrymen and bankrupting his nation. Parliament bestowed interim presidential authority on speaker Oleksandr Turchynov, who said, “We have to return to the family of European countries. We are ready for a dialogue with Russia … on a new, fair, equal, and neighborly basis, acknowledging and taking into account Ukraine’s European choice.”

With that, the gauntlet was thrown and all eyes to turned to Vlad the Impaler, who finds himself in a tough spot. If he invades to win back the western-leaning Ukraine, Putin will spark an expensive war against a nation chock full of Russia lovers. If he does nothing and simply cedes the Ukraine to Europe, he’ll lose his aura of authority and vision of a Eurasian Union. Just as the Ukrainians tossed out Yanukovych the moment he looked weak, so might Russia give Vlad the boot if he looks powerless in the face of a populist uprising against a wishy-washy leader ping-ponging between Europe and Russia for more grease in each palm.

The western parts of the Ukraine want to ally westward while the southern and eastern parts are gathering people in support of Yanukovych and Russia, and calling for the sort-of-deposed Yanukovych regime to crush the rebellion decisively.

That’s where it stands now, and this is where the coin-flipping stock market analysts arrive on the scene to toss their guesses into the forecasting ring. Raising questions meant to imply trouble ahead is a time-tested way to get the attention of investors. For example, the question, “Will the Ukraine be the next black swan for financial markets?” implies that you’d better watch out because it very well could be. In fact, it’s just a question, reaching no more of a conclusion than this one: “Will the Ukraine drop off the radar screen soon, just like Greece and Syria before it, with no impact on markets or relevance to your life?” We don’t know the answer to either one, as they’re just open-ended musings on possible outcomes.

The worry most presented is that the Ukraine will devolve into a civil war between its European-leaning factions and its Russian-leaning factions, that such a civil war could draw in support from the West and Russia, and that such an escalation could ultimately pit the United States against Russia in a hot war for the soul of the Ukraine. Because we’re discussing the view from stock market analysts, the further fear is that such a blow-up would cause worldwide stock prices to collapse.

Look at the layers of uncertainty involved here to the point of rendering forecasts silly. We don’t know:

  • Whether Ukrainian factions will fight.
  • If they do, whether it will be a big fight.
  • If it is, whether it will draw outside support.
  • If it does, whether it will escalate further.
  • If it escalates, whether financial markets will care.

Within this collection of shoulder shrugs, consider that past wars have been good for stock markets, not bad; that any outside support for factions fighting in the Ukraine would probably arrive in the usual manner of weapons, drones, intelligence, and so on rather than with Russian troops and American troops meeting directly on the battle field; that talk from the White House about consequences carries the weight of a helium balloon after the current president threatened them without follow-up in Syria; oh, and that the Ukraine matters about as much to financial markets as your napkin matters to the quality of your dinner. Sure, it’s part of the picture, but not exactly critical.

Just how minor is the Ukraine’s economy? It doesn’t even crack the top 50 by various world GDP rankings. Let me put it this way: Nigeria’s economy is bigger than the Ukraine’s. So is Thailand’s. Heck, even Glorious Nation Kazakhstan has cobbled together an economy bigger than the Ukraine’s.

Am I saying that the Ukraine’s strife will mean nothing to financial markets? No. Am I saying it will become a black swan? No. I’m not saying anything because I don’t know — and neither do the analysts, or the presidents, or the guys down at the bar, or you. Nobody knows, so why bother listening to forecasts?

As with all things related to the financial markets, intelligent reaction trumps folly-filled forecasting every time. Contrary to the image analysts love to put in popular media, it’s not necessary to know the future in order to do well in the stock market. This is good news, since nobody can know the future, not even the talking heads in fine suits. Keep your methodical investment plans on track through whatever scare angle they serve up next. Yes, someday something will send stock prices down again, but they don’t know when or what, so there’s no point tuning in to these coin-flipping exercises. Just react intelligently to what actually happens, not blindly in advance of what some z-val says might happen.

The Ukraine matters, of course, socially, politically, and in other ways. It might even matter to financial markets. There’s just no way of knowing in advance.

Back to it. Have a good day,
Jason Kelly

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  1. Ivan
    Posted February 27, 2014 at 1:40 pm | Permalink

    As one of your Russian readers, I would definitely like to share some of my thoughts.

    The fears around Ukraine, and the impending Russian reaction, are over exaggerated. I am not a good writer, so I’ll just go though your text, and point out where the media has simplified (and sensationalized) the narrative.

    1) Former Ukrainian President Viktor Yanukovych was unpopular, and many believed he was unfairly elected.

    He was unfairly elected in 2004, that’s when the first Maidan deposed him before he even took office. In 2010, the race was close, and no solid evidence has emerged to show that he cheated. At the onset of his term he was popular as popular as any of the few American presidents.

    2) Yanukovich has always been in the back pocket of Russian President Vladimir Putin.

    Lazy narrative on part of the Western press. Yanukovich was never particularly loyal to Moscow. He pursued an independent policy, and in 2011 he was the one who initiated the long process of signing the Association Agreement with the EU. When the Russians finally started pressuring Ukraine this summer (by closing off Ukrainian exports), Yanukovich did not balk and continued working on EU agreement. His years in office also overlapped with the massive reduction of natural gas imports from Russia. Whether he was directly responsible for it, I do not know, but he obviously did not try to reverse the trend. Just so you understand the significance of it — Ukraine has always been very dependent on imports of cheap Russian gas as a major energy source. Russians used this to their advantage every time a major dispute came up. To top it all off, inside sources claim that there always was significant tension between Putin and Yanukovich, and that Yanukovich was endorsed simply because he was the least anti-Russian player available.

    3) A few months ago, citizens rose up and protested this subordination of the will of the people to foreign influence. With Yanukovych at the top, however, Putin pulled the puppet strings.

    Sounds like a plot for great movie, but mostly false. The issue of Russian influence was never at the heart of the matter, because such influence, as I explained above, was quite limited. The people rose up because Yanukovich turned on a dime and refused to sign the Association Agreement. The same treaty that he got everybody pumped up about. People were thinking that they are about to finally start the long haul of joining the EU, but then Yanukovich scrapped the whole thing. The entire nation viewed this opportunity as the last ray of hope that things will get better, and so the people exploded. As far as subordination to Russia goes — Yanukovich swindled the Russians for a cool $15B plus gas discounts before the whole thing came down. He was not a very good puppet.

    3) So when they sensed Yanukovych losing his power, [his allies] abandoned him in parliament. He also lost support of rich elites.

    True, but in reverse order. To Yanukovich, the Presidency was, by most measures, a business venture. He was remarkably corrupt even by Ukrainian standards. After the Thursday showdown that left dozens of protesters dead, he simply decided to take his profits and move on. Had he not left Kiev, he would still be president. His party was loyal to him. More importantly, the police was loyal to him. It is once he fled Kiev and abandoned his supporters that they switched sides.

    4) With that, the gauntlet was thrown and all eyes to turned to Vlad the Impaler, who finds himself in a tough spot. If he invades to win back the western-leaning Ukraine, Putin will spark an expensive war against a nation chock full of Russia lovers. If he does nothing and simply cedes the Ukraine to Europe, he’ll lose his aura of authority and vision of a Eurasian Union.

    Once again, a nice headline when you want to sell newspapers, but mostly a non-issue. There will be no war for Ukraine. Putin is very risk-averse. He meticulously plans his moves, and does not pounce unless he is confident of victory. See Georgia, 2008, for an example. Any reflexive force majeure actions against Ukraine are out of question. Right now Putin is still taking his time to make any major announcements. Consider this, however: mere hours after Yanukovich fled, Kremlin-controlled media began circulating programming that defamed Yanukovich as inept and corrupt, a complete turn around from a day before. And I will bet you my hat that in the coming weeks Russian state media will tune out the Ukrainian issue all together. In fact, the only tidbits of news to come out of Kremlin so far suggests that they consider Timoshenko to be an acceptable partner. Putin treated with her extensively between 2004 and 2010, when Timoshenko and other pro-Western leaders governed Ukraine. Actually, if you recall, we’ve already gone though this “Battle for Ukraine” dance before — at the time of the first Maidan. Nothing major happened back then. But ‘nothing’, of course, doesn’t make for an exciting story.

    5) Just as the Ukrainians tossed out Yanukovych the moment he looked weak, so might Russia give Vlad the boot if he looks powerless in the face of a populist uprising.

    Mostly false, although one can dream. A situation where a million Moscovites start building barricades, burning tires, and killing cops is not in the cards. To repeat the Ukrainian scenario, you require a mass of angry, dissatisfied voters. It has to be either the relatively wealthy and educated middle (and upper) class citizens who are tired of a corrupt government wasting their taxes, or the destitute lower class who can readily associate their daily struggles with a corrupt elite. In Ukraine, I think, it is the latter that allowed the things to unfold. In Russia, however, the power of the upper class comes directly from Putin. The middle class is too small and too disorganized to challenge him. And the less-educated masses are not needy enough to participate in a populist uprsing. In fact, Putin presided over 15 years of economic growth that had a significant positive impact on their daily lives, and so the vast majority consider him to be a capable leader. Besides, during those 15 years at the wheel, he doled out plenty of pork to everyone, and so he can rightly be considered the biggest populist in Russia. Not to say that Putin can’t be dislodged, but it will either take years of sustained growth that boosts Russia’s middle class, or years of economic decay and a global economic blow up to stoke populist sentiment (the closest we got to a popular outlash against Putin was actually at the height of the sub-prime meltdown).

    There is a couple of other small points. For example, the Russian-speaking Eastern/Southern Ukraine are certainly not gearing up for war. The two major politicians, who started this particular line of gossipy half-truth, have already abandoned Ukraine and fled to Russia. But I think I’ve already written more than you care to read. The morale of the story, I guess, is that things in Ukraine are not as bad as the media makes them out be. News for the sake of news, as always. It’s easy enough to post pictures of burning Kiev, or to demonize Putin and the nature of his relationship with Yanukovich, but the truth, I think, hides in all the details that the media usually eschews. So, no, there is not going to be a war in Ukraine. The whole things will disappear from headlines in less than a week.

    Thank you kindly,

    your subscriber

    In Russian, Vlad is short for Vladislav, an entirely different and a very common first name. Haa… Western reporters calling Putin “Vlad”, a lazy reference to Count Dracula, and thinking they are being clever is almost as funny as Senator McCain writing a letter to the Russian people in Pravda, a newspaper that has been dead for 25 years. (It was supposed to be his rebuttal to Putin’s New York Times editorial last fall).

    • Ivan
      Posted February 27, 2014 at 1:43 pm | Permalink


      I meant to say ‘At the onset of his term he was as popular as any of the last few American presidents.’ My apologies.

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