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Contagion risks from Europe's new battlefield

Thursday, February 20, 2014 - 01:58

Feb. 20 - Over 50 people have been killed in Ukraine after fresh fighting shattered an overnight truce. Ivor Bennett looks at the economic impact of possible sanctions and any damage the crisis is doing to other emerging markets.

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It looks like a warzone. And as the death toll mounts, so does the risk to Ukraine's economy. The escalating violence in Kiev has weakened an already fragile currency - now flirting with its lowest levels in 5 years. Rabobank's Christian Lawrence says a devaluation may not be far away. SOUNDBITE (English) CHRISTIAN LAWRENCE, EMERGING MARKETS FX STRATEGIST, RABOBANK, SAYING: "It's notoriously difficult to try and factor in this political risk into the market view, and particularly that's the case for the currency. So at the moment our base case is that we muddle through. But certainly the risk is very high that we do see a devaluation there and it's something that we cannot rule out." The chaos in Kiev's already being felt by neighbouring currencies too. Poland's zloty fell half a percent against the euro on the flare up of violence. Hungary and Romania saw similar drops. Russia's rouble hitting an all time low against the euro. The worry now is contagion, as investors run for the hills. IG market analyst Brenda Kelly. SOUNDBITE (English) BRENDA KELLY, MARKET ANALYST, IG, SAYING: "I would say the neighbouring countries of Ukraine will more than likely see a negative impact. I will be watching quite closely for the likes of Poland, whether or not its economy can hold-up in respect of what's going on there. But certainly the contagion effect will more than likely have a greater effect I think on the likes of Russia, which is already a little bit of an outlier when it comes to investors' eyes." Russia stands to lose 30 billion dollars should Ukraine default. With yields maturing in June now pushing 35 percent, it's a very real prospect. Moscow had said it would resume handouts to Kiev this week - but the truce breakdown has put the transaction on hold. Markets are desperate to see dialogue, hoping Russia and the EU will add some sway. But with sanctions like asset freezes and travel bans the more likely outcome from Brussels, things may get worse before they get better.