Name That Trade – Putin’s Game of Chicken Kiev

by Dan February 27, 2014 10:20 am • Commentary

In case you missed it, things continue to heat up in the Ukraine.  Here is the headlines we woke up to this morning from the


With the last couple weeks’ violence in the Ukraine we’ve seen a revolution in the capital of Kiev that caused the Russian backed President Yanukovych to cut and run. I am hard pressed to think that the stepped up rhetoric overnight does not result in further armed confrontation.  With the Olympics over and 98% of the global media out of the area, Russian President Vladimir Putin can now flex his muscles.

David Clark of the Russia Foundation had a guest post in the FT this morning outlining what he feels are Putin’s options.  Great read (here) in full, but here are some excerpts:

The one thing we can be certain of is that he isn’t about to give up on Ukraine. It remains Russia’s biggest gas export market, a crucial transit route to the rest of Europe, the main base of Russia’s Black Sea Fleet and home to an estimated 7.5m ethnic Russians, including an unknown number of Russian passports holders.

Putin’s short-term options for recovering lost ground in Ukraine are not good. Despite the decision to raise the alert status of Russian troops based near the border with Ukraine, a military intervention to partition the country would leave Russia dangerously isolated. Under the terms of the 1994 Budapest Memorandum, signed as a condition of Ukraine’s decision to relinquish its stockpile of Soviet-era nuclear weapons, Russia, along with the US, France and the UK, has pledged to uphold Ukraine’s territorial integrity. Any violation of that undertaking would put it on a collision course with the West.

The ideal solution would be for the EU, Ukraine and Russia to work together to create a common economic space from which everyone would benefit. Unfortunately, all the indications are that Russia remains a long way from being willing to embrace the kind of change that would make this possible. Ukraine is likely to remain an arena of tension and competition for some time to come.

So, what’s the trade?

My sense is that for some odd reason, risk assets are not pricing the potential for a showdown in the Ukraine. And this is at a time when U.S. / Russian relations are as bad as they have been in many years.  The question is, what are the ramifications of armed conflict?

First, the Ukraine defaults  and aid could be hard to come by as Russia is not going to pump billions into Kiev while the West is supporting the Revolutionaries.  U.S. Treasuries are probably the best trade from the long side.  Despite the relative cheapness of Russian equities, they probably finally make a new low after hovering above 5 yr support (5yr chart of RSX, the Market Vectors Russia etf):

RSX 5yr chart from Bloomberg
RSX 5yr chart from Bloomberg

And then what are the reverberations for other emerging market currencies if and when Ukraine defaults on its debt??

Do we see a spill over into other emerging markets like Turkey that have been battered now for months and do we see a re-ignition of the emerging market fears that caused the volatility in global markets in January into early February? Is it time to re-short EEM using a $40 stop on the upside?

Or maybe the better risk/reward trade is to simply play for increased volatility with a cheap VIX structure like the one CC and Enis laid out last week.  The Russian Ruble is right at its all-time low vs. the dollar, hit exactly 5 years ago, on February 27th, 2009.  That was a much different risk environment across the world.  Today, Russian stock traders are back in crisis mode, while U.S. traders party like it’s 1999.