Putin’s Ukraine power play exposes fragile economic recovery

GENEVA—European automakers cast a wary eye toward Russia on the first day of the Geneva Auto Show on Tuesday, poised for a quick strategy rethink as the threat of sanctions hangs over the country because of its intervention in Ukraine.

Russia has been a key market for recession-battered European automakers that have looked to expand sales and find partners for lucrative joint ventures. But new uncertainty has been raised by growing tensions between Russia and the West over the Ukrainian peninsula of Crimea.

“There is always going to be a surprise out there. Ukraine is an example. You have to be flexibile,” the CEO of Ford Europe, Stephen Odell, told journalists on the Geneva Auto Show’s opening press day.

With three plants and annual sales volumes around 120,000 units, Russia is important to Ford Europe’s goal of returning to profitability by 2015.

Odell says the company is not giving forecasts for 2014 volumes in Russia “and frankly, given the volatility we have to wait and see.”

But Russia is not the only jurisdiction facing economic uncertainty during the Ukraine crisis.

According to government figures, Canada-to-Russia exports have grown eight-fold in the past decade to $1.5 billion in 2011, and investment hit almost $5 billion in 2012 with a number of large Canadian firms having either planted their flag or begun the process of establishing a presence in the country.

Among then are Kinross Gold and other mining concerns, as well as other well-known names such as Bombardier, Pratt & Whitney Canada and SNC-Lavalin.

As well, Ottawa has been actively courting a wider engagement. With a population of 140 million, Russia is a priority market and Trade Minister Ed Fast led a trade mission to the former communist country in June 2012.

Recent events are not good news for that initiative, nor for Canadian firms with dealings in Russia, says Dan Kelly, president of the Canadian Federation of Independent Business. He notes any firm involved with the country likely has a large tolerance for risk.

“But these kinds of things do spook business owners when they are looking at expanding abroad,” he said, and doing business in Russia was already “not for the faint-hearted.”

Economists say the most significant impact on Canada’s economy of a chilling in relations would be through indirect channels, however.

“If it did escalate, it certainly could chill business and consumer confidence and spending, not just in Canada but around the world,” said Bank of Montreal chief economist Doug Porter.

“Russia is a trading partner with Canada and if there are serious sanctions put in place, then it could have some direct impacts. But those are a little less important for the broader economy than the potential indirect effects if the situation escalates.”

The last domino in this complicated web remains Ukraine’s shattered economy and it’s drag on the Eurozone said TD Bank’s chief economist Craig Alexander.

If Ukraine fails to meet its debt obligations and there is no international assistance to shore up its finances, it could put pressure on already troubled European banks thought to hold Ukrainian debt.

This would lead to more of the dreaded financial “contagion” which helped spur the last recession.

“That’s why international financial assistance is absolutely essential,” he said.

Additional reporting from Julian Beltrame, Canadian Press