Updated from 12pm ET
Financial markets were back in 'risk-on' mode Tuesday after Vladimir Putin blinked.
"We aren't going to fight the Ukrainian people," Putin said Tuesday after ordering Russian troops participating in so-called military exercises near the Ukrainian border back to their bases. “The use of the military is an extreme case.”
In reaction, global markets reversed Monday's action with stocks rallying while "safety trades" like gold, the dollar and U.S. Treasuries weakened and crude gave back much of Monday's 2.2% gain. Update: The Dow gained 226 points Tuesday, recouping all of Monday's declines -- and then some. The S&P 500 climbed 1.5% to a new all-time at 1873.91 while the Nasdaq jumped 1.7% and Russell 2000 surged 3%.
Putin's first public comments since ousted Ukrainian President Viktor Yanukovych took refuge in Russia also featured the following, according to various reports:
- Putin still considers Yanukovych to be Ukraine's president and defended Russian's actions in Crimea as responding to "a direct request from a legitimate president...to protect Ukrainian citizens.” He said Russian military deployment in Crimea was within the limits of a bilateral agreement covering its military base there and that Russia reserves the right to protect ethnic Russians in Crimea. But there is “no such necessity” to do so now.
- Putin said the West wants to drive Ukraine into anarchy: "There can only be one assessment of what happened in Kiev...this was an anti-constitutional coup and the armed seizure of power," he said.
- Putin warned that economic sanctions against Russia would backfire and hurt the West, particularly Europe, which imports 34% of its natural gas imports from Russia via Ukraine.
European economies, most notably Germany's, would indeed be at risk if the Ukrainian crisis worsens: Germany gets more than one-third of its natural gas from Russia and is Russia's third-largest trading partner, The WSJ reports. If the Germany economy sneezes, the rest of Europe would almost certainly catch a cold -- and likely tip back into recession after the EU economy finally seems to be regain its footing.
But the reality is that Russia has the most to lose economically from a prolonged showdown with the West. This was starkly evident in Monday's 10% decline in its major equity index and the ruble's fall to record lows vs the dollar and euro, prompting a rate hike from the Russian Central Bank to stabilize the currency.
It appears Putin heeded the market's unadulterated and instant reaction to Russia's provocation in Crimea. If nothing else, Putin is very good at protecting his personal interests and must know that economic instability in Russia isn't good for his long-term prospects -- financial or political.
If that's the case, the Crimean Crisis will go down as a victory for free markets and a sign that the the rapid flow of global capital can be a force for good in geopolitics, as Henry Blodget and I discuss in the accompanying video. While that may seem self-evident, much of the discussion since the 2008 crisis has been about the destabilizing impact of global flows and this episode should serve as a retort to that meme.
That said, there's a risk here in assuming the crisis is over. Putin left the door open for military action and may simply be buying time and trying to lull the West into a false sense of security about his intentions in Ukraine. Let's hope this is not the case.
In terms of the markets, the danger here is that the "buy the dip" mentality gets reinforced, a major step in the road to shifting sentiment from one dominated by skepticism -- the prevailing mindset in recent years -- to the kind of euphoria that typically occurs when bull markets peak. We're not there yet, but more action like this could get us there in a hurry.