The past couple of weeks had been relatively quiet for Russia and Ukraine due to the Russian orthodox Christmas holiday, but this week the rollercoaster started again.
A meeting between leaders from France, Germany, Russia and Ukraine was scheduled to take place on Thursday in Astana, the capital of Kazakhstan.
Hopes were rising that there would be, if not an end to the conflict, at least some sort of de-escalation. However, as new violence erupted in Ukraine over the weekend and again on Tuesday, those hopes were quickly dashed.
Before this week, there were various signs that a de-escalation of the conflict could be on the cards.
Ukrainian President Petro Poroshenko said before the holiday that his country could not afford to take back by force the areas controlled by the pro-Russian rebels.
A day later, his Prime Minister, Arseniy Yatsenyuk, said that Ukraine may have to leave the fate of Crimea to future generations.
There were subtle changes of previously bellicose statements coming from Russia, too. President Vladimir Putin referred to the Ukrainian regions of Lugansk and Donetsk as Eastern Ukraine rather than as part of Novorossiya (new Russia), John Paul Smith, a strategist and co-founder of London-based research house Ecstrat, noted.
The EU’s foreign policy coordinator, Federica Mogherini, said last week that there had been “limited but positive” signals from the Russians over the past few weeks. Mogherini raised the possibility of lifting the EU sanctions on Russia “partially or fully.”
There were economic considerations, too, that led to hopes that talks to reach a solution would bring some progress.
The cost of a divided Ukraine is “becoming a major consideration” for both Russia and the West, given the fact that many manufacturing industries have been isolated by the conflict, having lost access to either customers or suppliers, Smith said.
Last week, a team from the International Monetary Fund (IMF) resumed talks in Kiev on an existing $17 billion loan. Billionaire investor George Soros called for financial support of $50 billion for Ukraine.
But more than money, Ukraine needs “peace and solid governance, rather than a continued flow of funds that just hides the real problems,” Simon Quijano-Evans, emerging markets analyst at Commerzbank, said.
If Ukraine “were allowed to get on without a war in its borders,” its currency would recover considerably and its debt-to-GDP ratio would drop from around 75% currently to between 50% and 60%. This way, the country would be able to generate the funds it needs to finance its external debt “without an extra cent of support from abroad,” he added.
For the moment, however, there seems to be no clear solution, “but that is exactly why we need to see more talks,” Quijano-Evans said.
“The breakthrough will come at some stage in our view, and hopefully before end-January, but until then Russian and Ukrainian assets will remain under pressure,” he added.
Investors should watch the progress of any talks closely. If the situation does indeed improve, Russian stocks, which are trading at crisis levels, are sure to benefit – but it takes a very brave investor to dare to put money in them, because political uncertainty remains high.
“In terms of valuations, Russia looks very interesting,” analysts at Austrian bank Raiffeisen said in a recent note on asset allocation.
One alternative play if tension between Russia and Ukraine is reduced would be German stocks, which some analysts say have been punished unnecessarily by the eurozone crisis and are trading at discounted valuations. They could benefit from a de-escalation of the conflict because Russia is a good export market for many German companies.
Among them BMW, the maker of premium cars, is particularly attractive: it is trading on a PE of around 9 despite its sales breaking through the two million vehicles barrier for the first time last year.
In the financial sector, a high risk (but possibly high reward) play is Austrian Raiffeisen Bank International, which has a strong presence in Russia and Ukraine. The stock lost nearly 60% in a year — but on the other hand it still doesn’t look like a bargain, as it trades on a PE of more than 16.
Other European banks with exposure to Russia and Ukraine — and which could benefit from a de-escalation of the conflict that would bring a partial or total lifting of the EU and US sanctions imposed on Russia — are Germany’s Commerzbank, France’s Societe Generale and Italy’s UniCredit.
The author, Antonia Oprita, holds no positions in any of the securities mentioned in this article at the time of publication.