July 23, 2014    2 minute read

Cold War in the Financial Markets

   July 23, 2014    2 minute read

Cold War in the Financial Markets

Headlines scream globally. Another disastrous fatality for Malaysian Airlines, following the crash of flight MH17 in Ukraine on route from Amsterdam to Kuala Lumpur. Various sources from the US intelligence authorities to the BBC have reported a ‘surface-to-air’ missile brought down the plane. Of course, it will not be known until a full inquiry has been conducted by the UN Security Council to understand the arising issues at hand. However, from a legal perspective, it is the state that has accountability in which the accident or incident occurred. Yet, such an international disaster will conflict to such legislation, and will inevitably spark an international inquiry.

Financially, the Russian stock market suffered the repercussions, suffering huge losses from 0.5% to 3.8%, as a result of the US’ hard sanctions placed against Russia’s financial markets and major banking institutions. Namely, these are the prohibition of US firms to provide financing to major Russian banks and energy firms. The danger of this is heightening a sense of fear and tension across US and European markets. Western financial markets, particularly those trading in London and New York, must tread with caution if they are to make profits from ‘shorting’ the Russian stocks. More importantly, it possibly alludes to the end of future money-making opportunities in Russian financial markets, announcing a West/East divide.

Hilary Clinton, former Secretary of State, stated and possibly suggested that Russia’s economy should be weakened in an interview on The Charlie Rose Show: “If there is evidence linking Russia to this…Europe should be inspired to do three things. One: toughen sanctions – making it very clear Russia should pay a considerable price, particularly in finance. Two: accelerate efforts to find alternative methods to Gazprom (Russia’s third largest bank).” She further points out that Russia’s economy has not diversified, providing examples that it is largely dependent on natural resources.

The effect of Obama’s administration in placing these sanctions will likely cause fear across the global financial markets. This could ignite a political war against Russia, and cause the markets to become extremely unpredictable and volatile. Having just recovered from the crisis in 2008, and with growing tensions amidst the housing bubble (alluding to a pre-financial crisis); such an event could remain a turning point in sparking a crisis beyond the public’s fears. Confidence is key – that ingredient is lacking heavily.

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