Russia is a key supplier of natural gas and other goods to Europe and to the entire world, and The EU balance of trade with Russia for 2012 is negative, as shown in the figure below.

EU Trade with Russia

The Russian market enjoys a global trade surplus for a long time while the US balance of trade is in negative territory for a long time, as shown in the figure below. The economic strength of Russia will make it hard for the US and for NATO countries to risk their economic benefits by military action in Ukraine or by imposing heavy sanctions against Russia.

 Russia’s economy

The Russian economy is also mainly oil- and minerals based, not really industrial based. Europe gets over 30% of its energy needs from Russia. Germany has a dedicated Russian natural gas pipeline which doesn’t cross Ukrainian territory, but the other members of the EU depend on safe transit of natural gas via Ukraine. Although it is possible for Europe to get energy products from North Africa and the US, the cost of these produces will be significantly higher than the cheap natural gas and oil produced in Russia and shipped via Ukrainian pipelines.

Some European financial institutions are exposed to Russian and Ukrainian loans, but their exposure is not dangerous: $25 billion to Austrian banks, $35 billion to Italian banks, and $52 billion to French banks.

All in the hands of the Russians…

If Putin doesn’t back down after the annexation of Crimea, and continues his ambitious expansion plan by annexing other sections of Ukraine, Belarus, and the Baltic nations of Latvia, Estonia and Lithuania, the EU and the US will most likely intensify the sanctions against Russia, and possibly hurt the Russian economy somewhat, but no military action against Russia will be taken by the US and NATO by the current Obama administration. It is not clear at this point how united are the NATO countries, the UN and the US in their opposition to Russia recent actions in Crimea.

Since the crisis began, the value of the Russian ruble fell 2.5 % against the dollar and 1.5 % against the euro. This is because Russian oligarchs and foreign investors are selling rubles to purchase foreign exchange. The central bank of Russia has had to buy $10 billion worth of rubles in a single day last week to protect the currency. It has also raised interest rates by 1.5% to render the ruble more attractive.

Prediction

Russia is the world’s largest energy and minerals producer. It cannot afford to not sell oil, natural gas, and extractive minerals to its customers because then its economy will crash. Russia is a hostage to its own economic structure and addiction to oil’s easy profits. If a real political crisis erupts, the main beneficiaries will be the Asian currencies. Both the euro and the dollar will suffer mildly and then recover: the euro because of the short-term and limited economic implications of an all-out conflict on the EU, and the USD because it is a “refuge currency” where people invest when geopolitics heats up.

It appears as if Putin calculated move to annex Crimea will be paying off in the long run. In the short run, Russia might suffer somewhat from political isolation and from a minor economic downturn, but in the long run it will gain its political and economic power back. Most of the world could not care less about Crimea, and the EU and NATO will most likely not react militarily to additional annexations of previous soviet territories by Putin.