Why investors should be wary of Ukraine ceasefire this weekend

The deal agreed in Minsk earlier this week for a ceasefire between Ukrainian troops and Russian backed separatists gave the markets a ‘risk on’ boost but history and circumstances show why they need to be much more guarded over the next few days.

Key parts of Wednesday’s peace deal:

• Ceasefire from midnight on 15th February
• Heavy weapons to be withdrawn from East Ukraine from 16th February
• All prisoners on both sides to be released
• Withdrawal of foreign weapons from Ukraine

No guarantee of ceasefire holding – investors need to be guarded

History maintains that any ceasefire here should be watched carefully. Of course the last peace accord reached in September last year failed, hence the latest talks and the media has today published video’s of large Russian tanks convoys heading towards the Ukrainian border and key Eastern towns within Ukraine.

We should also be reminded that the US has openly communicated that it is prepared to potentially escalate tensions with Russia by formally arming the Ukrainian military with lethal weapons to defend itself against pro-Russian rebels. These two points are a clear warning sign to investors that they need to prepare themselves should the ceasefire fail to materialise this weekend. This point is even more important given the fact we have seen a relief rally in the markets after the peace deal was reached.

A failure for both sides to implement the peace accord could see the crisis take a more dangerous economic turn.

The Europeans, led by Germany, are against the idea of arming the Ukrainian army for fear that it could escalate economic hostilities between the West and Russia. At the same time, a failure of Russian separatists to honour the peace deal is likely to convince the EU and US to deepen sanctions against Russia, a fact confirmed by EU sources this week.

Impact on Germany not being fully recognised by many

The sanctions imposed on Russia by the US and EU has created a knock-on effect to German trade which has been underestimated by many. Germany has close economic ties with Russia and 300,000 jobs are estimated to rely directly on bi-lateral trade with the Eastern country.

Recent German GDP data has shown that the country’s trade with Russia has fallen by 20% in the last year as a result of the sanctions imposed, equating to around €8bn and highlights this is having on German business. In fact, this impact on German output is amplified further by weak European growth, a collapsed oil price and the debt crisis in Greece.

An increase in the severity and spread of sanctions, coupled with an escalation of the conflict in Ukraine, could spell trouble for the European markets. Russia has significant currency reserves of approximately $385 billion and a more robust economy than many give it credit for. It has also deepened its economic and business ties with the other BRIC economies, which could give rise to global trade wars if not handled delicately, especially China.

Beware developments in Ukraine over the weekend

If the diplomatic accord cannot be implemented successfully this weekend, risk appetite in European financial markets could sour and traders need to be aware and prepared.

Here’s a list of some key stocks with large exposure to Russia and how they have reacted to the peace accord this week . All of these markets need to be watched carefully and are likely to be under pressure on Monday should the peace deal fail and fighting escalates.

• Coca-Cola Hellenic (+5.4%)
• Carlsberg (+5.4%)
• Societe Generale (+3.5%)
• BASF (+3.2%)
• Nokia (+3.0%)
• Commerzbank (+2.8%)
• Adidas (+2.3%)
• BP (+1.0%)
• UniCredit (flat)