20140302-美银美林-Ukraine_and_Russia_Watch_War_and_peace_12页_489kb

Summary of the Document: War and Peace in Ukraine and Russia

Core Content

This document provides an analysis of the escalating tensions between Russia and Ukraine in early 2014, focusing on the likelihood of military conflict, economic implications, and the impact on financial markets. It outlines the views of Bank of America Merrill Lynch (BAML) analysts regarding the political and economic risks associated with the situation, as well as the potential consequences for various markets and assets.

Main Views

• Military Conflict Unlikely: Despite heightened tensions and parliamentary approval for military action, a full-scale war is not expected. Russia still has other forms of leverage on Ukraine, and the current situation is seen as a threat rather than an actual military action.
• Crimea's Status and Autonomy: Crimea's local authorities are not recognizing the Ukrainian government and have moved to hold a referendum on its status earlier than planned. It is likely that Crimea will seek autonomy rather than independence, and this could influence the broader political landscape in Ukraine.
• Ukraine's Financial Vulnerability: Ukraine is facing significant financial challenges, including a large amount of maturing external debt (EXD) and a current account deficit. The country is relying heavily on international funding, particularly from the IMF, to manage its financial obligations.
• IMF Support and Debt Restructuring: The IMF is expected to provide support, and a potential programme is likely to be signed within two months. However, there is a risk that Ukraine may attempt to restructure some of its local FX debt, which could create a financing gap for EXD.
• Impact on Financial Markets: If a war breaks out, there could be significant contagion effects across EEMEA debt, FX, and broader markets. Assets like Russia's Eurobonds, CDS, and OFZs are particularly vulnerable. The RUB has already weakened and may face further pressure if the situation escalates.
• Ukraine Banks: There are signs of stress in Ukraine's banking sector, with some banks restricting cash withdrawals and facing liquidity challenges. The NBU has promised liquidity support, but the situation remains precarious.
• Corporate Issuers in Ukraine: Ukrainian corporate issuers, particularly in the energy and metals sectors, are affected by the political climate. Some companies have significant exposure to Ukraine and may face challenges if the crisis continues.
• Fund Positioning and Valuation: GEM funds have reduced their exposure to Russia, and the market is trading at a deep discount relative to the GEM index. Russia's energy sector is also undervalued, while other markets like South Africa and Turkey show more resilience.
• Earnings Momentum: Russia's earnings momentum remains strong, with a 3-month earnings revision ratio above 1, indicating a positive outlook from analysts.

Key Information

Political and Military Developments

• Russia's Parliamentary Approval: Russia's parliament approved the use of military force in Ukraine, but this is seen as a threat rather than an immediate action.
• Ukraine's Response: Ukraine placed its military on high alert and warned that any Russian military intervention would lead to war.
• Crimea Situation: Crimea is under de facto control by Russian-speaking forces, and a referendum on its status has been moved forward. Local authorities are calling for Russian support.

Economic Implications

• Ukraine's External Debt: Total maturing EXD in 2014-16 is about $22bn, with $10.7bn due in 2014, $5.3bn in 2015, and $3.1bn in 2016.
• IMF Support: The IMF is likely to provide a $15bn-$20bn programme to support Ukraine, which would cover its financing needs in the short term.
• Economic Costs of War: A war would cost Russia at least 3% of GDP, including disruptions to gas exports and political backlash from international partners.

Market Impact

• Contagion Risk: If a war breaks out, there could be sharp volatility in EEMEA debt and FX, with the most significant impact on Russia's Eurobonds, CDS, and OFZs.
• Corporate Exposure: Companies like Gazprom, OTP, VTB, and Sberbank have substantial exposure to Ukraine, which could lead to financial losses if the situation worsens.
• Valuation and Discount: Russia trades at a deep discount to the GEM index, with a 12m fwd P/E of 4.7x, which is 54% below GEM. Russia Energy is even more undervalued.

Banking Sector Exposure

• Russian Banks in Ukraine: Russian banks have exposure to Ukraine of about USD28bn, which is manageable due to state support.
• Ukrainian Banks: Some Ukrainian banks are restricting cash withdrawals and may face liquidity issues if capital markets remain closed.

Investment and Risk Considerations

• Market Positioning: GEM funds have moved to a neutral stance on Russia, with EM Europe funds maintaining a 59% allocation.
• Investor Risk: The report highlights the risks associated with investing in certain securities, especially those rated below investment grade, and advises institutional investors and market professionals.

Conclusion

The document suggests that while the risk of war remains, it is not expected to materialize. Instead, the focus is on political and economic leverage, international support, and the potential for a negotiated resolution. If the situation escalates, the financial markets, particularly in EEMEA, could face significant volatility and contagion effects. Investors are advised to monitor developments closely and consider the risks associated with exposure to Ukraine and Russia.