The Russian Federation and Ukraine have edged closer to a military conflict after Vladimir Putin, Russia’s president, asked the upper house of the Russian parliament to approve the deployment of the country's armed forces in Ukraine. The war seems to be “unofficially” started, as a Ukrainian military airport in Kirovsky was attacked on February 28, by some three hundred and fifty camouflaged men, widely believed to be linked with Russian armed forces.
The situation seems to be escalating fast, and the United States has expressed its concern over the state of affairs in the Crimean region. If Russia officially goes to war and annex Crimea, it will surely bring international condemnation and, quite probably, some form of implicit or explicit international trade sanctions.
Figure 1: USDRUB Currency Chart
The Russian Ruble has been performing poorly since the year 2014 started. In early January, the USDRUB penetrated above the major psychological resistance level around the 33.25 area, and continued to soar past all major Fibonacci extension levels. By the third week of January, the USDRUB reached the 161.8% extension level, around 33.83, and last week, its price touched the 423.6% extension level, at 36.17.
Fundamentally speaking, the Russian economy is heavily dependent on its Oil industry. Any international sanction will effectively halt its oil exports abroad. Russia is currently the 12th largest oil producer in the world. According to a Bloomberg report, Russian energy industry, including natural gas and oil contribute up to 25% of its annual GDP.
Figure 2: GDP Growth Rate of the United States and Russian Federation (1990-2012)
Military conflicts are always bad for the economy as it creates additional burden in terms of fiscal spending by the government. When the Soviet Union was broken, the Russian economy took five years to reach zero percent GDP growth rate (Figure 2) from a negative of fifteen percent! If Russia is denied its right to export oil, then Russian economy will shrink by a quarter overnight, and the Ruble will simply crash. As a direct consequence, the USDRUB will surge above the chart.
Furthermore, it will be virtually impossible for foreign investors to repatriate their profits and initial investment which has been part of the large foreign direct investment pool in the Russian economy. As investors will try to pull their money out of Russia, it will create further pressure on the Ruble against major world currencies.
Once the sanction takes place, legitimate banking channels will be blocked by the US and its allies as well. Foreign exchange brokers who are based in Russia will be unable to send withdrawals from international clients via the means of international telegraphic transfer (ITT) or wire channels (SWIFT). As a result, foreign funds held by the Russian brokers will be locked, indefinitely.
At ThirdBrain Wealth Management, we are concerned about our clients and other investors in general, who are currently using Forex brokers situated in the Russian Federation. As the cloud of war looms over Russia, and its long term economic sustainability is at risk, it is strongly advised that investors holding funds in prominent Russian brokers, such as; Alpari, LiteForex, FxCompany, MRC Markets, MasterForex, ForexClub, FxProfit, North-West Financial Broker, Alfa Bank, Akmos Trade, and InstaForex should consider moving their funds to a broker located in a safer economic climate. Such as, in the United States or even better, in historically politically neutral locations.
