Pro-Russian activists gather in Crimea on Sunday.

Pro-Russian activists gather in Crimea on Sunday. Photo: Reuters

 

The move by Russia to seize the Crimean peninsula in Ukraine has hit energy and foreign exchange markets and experts agree that volatility could worsen if the situation escalates.

Ukrainian Prime Minister Arseniy Yatsenyuk said the nations were on the brink of war and Russia is thought to be preparing to occupy Crimea according to reports.

Russia's rouble plunged 1.9 per cent in US dollar terms to be the worst performing global currency on Monday; Ukraine's hryvnia was unchanged but it has lost 13 per cent of its value over the month. The US dollar rose as markets fell into a predictable pattern of safe-haven buying. Gold gained slightly to $US1342.66 an ounce.

In energy markets, oil futures rose sharply to $US104.51 a barrel.

Asian markets were down, responding to the tension and a weak China purchasing managers index released over the weekend. The official PMI fell to 50.2, the lowest reading since June 2013. Japan's Nikkei 225 was down 2.3 per cent and Hong Kong's Hang Seng lost 0.6 per cent early in the session.

RBS Singapore-based foreign exchange strategist Greg Gibbs said: "If Russia was to move from the Crimea to the rest of Ukraine and demand a response from NATO that would be viewed as more serious. If we don't see much movement from here over the course of the week the market will gradually dismiss the course of events."

For Australia, the significance of the events will depend on China's response. Credit Suisse strategist Ian Bremmer, head of the bank's Eurasia group, "believes our biggest trading partner will take a neutral position as there is little to be gained, and potentially plenty to be lost if it closes ranks with Russia". The Australian dollar was down slightly to US88.94¢.

The military action was also relevant to the outlook for global growth, which the International Monetary Fund forecasts will be 3.7 per cent this year, up from 3 per cent in 2013. Advanced economies had their prospects upgraded 0.2 per cent in January as developing market expectations remained unchanged. Russia is projected to grow 2 per cent and the Commonwealth of Independent States excluding Russia is forecast to grow 4 per cent.

"It does effect concerns around global stability and growth," said Mr Gibbs. "When major world powers are at loggerheads it's fairly unusual. Ultimately it has to come down to what markets it does effect more directly."

However, because the IMF is relying on the upswing in growth to come from developed markets, the outcome is less vulnerable than in the past when emerging markets were the primary driver of global growth.

"It still feels like that's the kind of trend we're in," said Mr Gibbs of the renewed focus on the established economies. "We're seeing firmer developed markets and emerging markets remaining softer on aggregate."