2014-03-28 by Kenneth Maxwell
The international consequences of Russia’s reincorporation of the Crimean peninsula are still unfolding.
The leaders of the G-7 industrialized nations, meeting at the Hague, Netherlands, abandoned their participation in the G-8 summit, scheduled to take place in June, in the Russian Black Sea resort of Sochi, where Russia hosted the Winter Olympic and Paralympic Games.
Yet, despite much hot air from the West, and some modest sanctions imposed on Putin’s inner circle, the overall reaction of global financial markets has been surprisingly muted to the crisis over Crimea and the potential Russian threat to the Ukraine.
But the key question remains. Is this relative calm the result of wishful thinking, or are there real reasons of concern?
Mohamed El-Erian attempted to answer this question in “The Financial Times.” El-Erian chairs Persident Barack Obams’s global development council and is now chief economic adviser to Allianz, the Munich based German multinational financial services company.
Allianz Asset Management is the parent company of the US fixed income specialist, the California based Pacific Investment Management Company (PIMCO). El-Erian was CEO of PIMCO until he announced his surprise resignation in January after disagreements with Bill Gross, PIMCO’s founder. El-Erian left PIMCO in mid-March.
El-Erain has a habit of leaving companies before the boom busts: He headed Harvard University’s US$32 billion Endowment Management Company for two years, posting a return of 23% in one year, before he returned to PIMCO in September 2007, a year before the financial crisis hit, and Harvard’s endowment shrank by 27.3%.
El-Erian warns that the “tranquil response masks rising geopolitical risk.”
He says that the markets have brushed aside concerns over Putin’s ambitions just as they have over Iran, Iraq, North Korea, Syria, Turkey, Venezuela and Thailand, which they regard as marginal to the global economy, trade and financial networks,
They also believe that the economic situation is improving in North America and in Europe, and they have faith in the power of central banks to insulate them from political and economic risk.
But such complacency is dangerous.
The West may well accept Putin’s annexation of the Crimea. And Putin may curb his ambitions in the Ukraine.
Yet underlying geopolitical tensions are building up towards a tipping point.
El-Erian believes markets are “underpricing” geopolitical risk.
For some of our earlier pieces on Ukraine and the Crimea see the following: