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Ukraine crisis has potential to hurt economy

OTTAWA - The Russian army's march into Ukraine's Crimean peninsula has added to the already formidable risks facing the global recovery and by extension Canada's economy, according to analysts and business leaders.

The economic ripples from Russia's widely condemned action over the weekend began being felt as markets opened for business Monday, with the Russian exchange tumbling 12 per cent and the ruble falling to the lowest point ever against the euro and U.S. dollar. Markets in Europe and New York also fell.

The Toronto Stock Exchange avoided the worst, closing marginally higher as rising gold an energy stocks offset declines elsewhere and also helped support the Canadian dollar, which fell less than most amid a flight to the perceived safe have of the U.S. greenback and treasuries.

Whether the political crisis has a profound, longer-term impact on the Canadian economy will depend on how long it lasts, whether it escalates, and on the West's response, says Bank of Montreal chief economist Doug Porter.

Some western governments have ramped up the tough talk, with U.S. Secretary of State John Kerry opening the doors to sanctions.

On Monday, Prime Minister Stephen Harper warned Moscow it faced "diplomatic and economic isolation" and the risk of being kicked out of the Group of Eight leading industrial countries.

In a further response, Harper spokesman Jason MacDonald said that the prime minister had instructed officials to review "all planned bilateral interaction with Russia."

"We will continue to work with our allies as we consider the full range of bilateral and economic consequences, such as travel bans and sanctions," he added.

In direct terms, Russia is a small but growing player in the Canadian economy.

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 (TSX:K) and other mining concerns, as well as other well-known names such as Bombardier (TSX:BBD.B), Pratt&Whitney Canada and SNC-Lavalin (TSX:SNC).

As well, Ottawa has been actively courting a wider engagement. With a population of 140 million, it has identified Russia as 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."

A spokesperson for Toronto-based Kinross, one of Canada's top investors in Russia, said the events had not affected its operations in Russia's far east.

"Our strong co-operative commercial relations with the Russian government have served us well for over a decade and are a key strength for Kinross in the region," said Andrea Mandel-Campbell, the company's director of corporate communications.

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 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."

As with all geo-political crises, such as war in the Middle East, markets tend to react by seeking shelter from the storm, said Craig Alexander, TD Bank's chief economist, and this one is no different — hence the flight to the U.S. dollar and U.S. treasuries.

"Financial markets don't like uncertainty and this has economic uncertainty, it's got financial uncertainty, it's got political uncertainty, and when the international community is upset with Russia, financial markets are not going to view it as a positive either," he said.

Alexander said the first pressure point could come if the Ukraine fails to meet its debt obligations and there is no international assistance on offer to shore up its finances. This could put pressure on already troubled European banks thought to hold Ukrainian debt and lead to contagion.

"That's why international financial assistance is absolutely essential," he said.

Porter said the Ukrainian situation may get a mention, even if indirectly, from Bank of Canada governor Stephen Poloz in Wednesday's interest rate announcement as just another question mark about the future economic outlook that policy-makers need to consider.

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