Ukraine Crisis Over, or More Volatility Ahead?

While denying that he is annexing Crimea, Russian President Vladimir Putin also claims the right to protect the Russian Black Sea Fleet, whose base in Sevastopol has been leased from the Ukrainian government, as well as the ethnic Russian population.

Parts of Ukraine bordering on Russia have a heavy Russian-speaking population as well, so this argument could serve as a justification for taking over roughly one-third of the country's territory — and all of its coal and steel industry.

So far, there has been no shooting, and the Russian invasion has been a creeping annexation, not an all-out war. Still, the Moscow stock market tumbled by 11% on Monday. The ruble plunged to record lows against both the dollar and the euro, and the central bank hiked its interest rates to protect its currency.

The Bank of Russia, the country's central bank, spent $14 billion and more than 1.2 billion euros in the first two months of the year to protect the ruble, which was already softening. It still has plenty of gold and hard currency reserves — nearly half a trillion dollars worth, to be exact. So, Russian financial markets, while highly volatile, are not in danger of a meltdown, at least in the near term.

International markets, both emerging and developed, have become extremely nervous, too. Major indices in Asia dropped by an average of 1% in one day, and in Europe by 3%. The Dow suffered a 150 point drop. The dollar and, especially, the yen — which since 2008 has been a global safe haven — strengthened.

Investor Interests 

Wars are always bad for investors, but this aggression comes at a particularly inconvenient time for international markets. Emerging currencies and stocks fell starting in October: the iShares MSCI Emerging Markets ETF went down by 20% from peak to trough, and its recovery during February has been fragile, accompanied by continued massive outflows of funds. Now, the asset class has stumbled once more.

In the United States, meanwhile, the S&P 500 index has been at an all-time high, but stock prices have been mainly driven by a Bernanke (and now Yellen) put, or the hope that the Federal Reserve will continue to pump liquidity into the banking system as long as the underlying economic fundamentals remain weak.

Valuations have gotten rich in the United States, and even more so in Western European markets. European indices are trading at their highest levels since the 2008 crisis, but they are also on shaky ground, since eurozone fiscal crisis has been mitigated, not resolved. And Europe, of course, will be most dangerously exposed if the conflict between Russia and Ukraine escalates, or if oil and natural gas shipments from Russia are impacted.

Equally important is all the symbolism involved in this conflict.

Back in 2008, the global financial crisis started in Russia in August of that year, and it came about along very similar lines. Russia moved its troops into Georgia to defend an ethnic minority living along its border. The Russian stock market tanked and the ruble tumbled. A month later, world markets were also in a freefall.

True, there was no direct cause-and-effect link between Russia's invasion of Georgia and the global financial crisis, which was triggered by the subprime mortgage fiasco. On the other hand, international sanctions against Russia back then were very mild, because Georgia is a small country locked in the Caucasus mountains.

Ukraine is a very different story. It is a huge territory in the heart of Europe, bordering on three NATO members and sharing a maritime border with a fourth, Turkey.

Worse, Putin's moves are so reminiscent of Hitler's grab of Czechoslovakia in 1938, ostensibly effected to protect native Germans. This means that the West, and the United States, in particular, can't ignore it without drawing a very clear line in the sand.

Like any such move, it will raise international tensions and lead, if not to a selloff in world markets, at least to far greater nervousness and intensified volatility. Emerging markets, European markets and the price of oil and metals will be impacted the most.