Are markets really worried about Ukraine ?

No one will go to war over Ukraine. Moscow knows this. So does Washington. So does the market. Recent calls from pro-Russian 'rebel' factions in Donetsk for independence from Ukraine are no real surprise although EM traders seem to have been taken aback by fresh selling pressure on MICEX. Moscow can,and will, use western indecision as an opportunity to continue to stir up trouble in its Ukrainian neighbour. Senior Staff in the Kreml, Defense and Foreign Ministries are united in viewing events there are being a threat to the cohesion and stability of Russia itself.

The Kremlin has been delighted with the lack of response from the US and the EU to its takeover of Crimea. Frank-Walter Steinmeier, the anti-US, anti-NATO German Foreign Minister, has been instrumental in shaping a policy of 'don't bait the bear'. In this he follows in the pro-Russian foreign policy footsteps of his friend and mentor, former Bundeschancellor Gerhard Schroder. Frau Merkel may talk a somewhat tougher line but she does so in the knowledge that Steinmeier and his SPD colleagues have won the public argument within Germany. He is now deemed the country's most popular politician. Other EU states have fallen in line. France , in part, because of the dependence of its naval shipyards on a Russian order for Mistral assault ships, and the UK because of the large ( although not as large as some might imagine ) Russian presence in Cayman Island and BVI structures in London's financial centre.

The running with regards to sanctions has been made by the US administration. The White House has until very recently failed to understand that Russia has no interest in a reset of relations. In fact Moscow understands that in a world where US hegemony is on the wane its own regional power can increase. President Obama's advisers have belatedly come to this realisation and are now faced with formulating some response , as much for domestic political reasons as for any deep seated foreign policy goals, to halt further expansion into Eastern Ukraine.

Until this week investors have responded to these developments with indifference. There has however been a recent change of tone. Defensive stocks have benefited from  strong rotational inflows.  Markets seem to be coming to the view that 1) Russia will continue its opportunistic adventures, 2) sanctions will only serve to shift the economic centre of gravity in the Russian economy towards China ( look for major oil, gas and defense deals being signed in Beijing when Putin visits in May ) and 3) America having downgraded the importance of its old allies ( Israel, UK, Saudi, Japan ) is finding it difficult to find new ones. As such the days of a pax Americana are well and truly over and geopolitical risk in investment determination is back on the table. Could we now see a repatriation of funds out of EM's into DM safe havens?