Russia-Ukraine conflict, not Greece, seen as biggest threat to eurozone

Greece’s potential exit from the European Union has gained the full attention of investors, but the ongoing conflict between Russia and Ukraine might still be the bigger risk to markets in Europe, says Tina Fordham, geopolitical strategist at Citigroup Capital Markets.

“Indeed, markets continue to be little moved by the Russia-Ukraine crisis, regarding it as a local dispute, while we regard it as the most significant geopolitical flashpoint in the 2015 outlook, given its potential to move from a regional to a systemic risk in the event of new sanctions or resumed tensions over gas supplies,” she said in a note to clients Tuesday.

On Wednesday, the leaders of France, Germany, Ukraine and Russia will convene to negotiate ways of preventing the conflict from escalating further.

Ms. Fordham is skeptical about a diplomatic breakthrough and reiterated her base-case scenario of a “frozen conflict,” and called the potential for further escalation and new sanctions levied against Russia more than just a tail risk.

“Current negotiations may produce an agreement to continue talks, but, in our view, the asymmetry in the ideology and interests of the key players is widening,” she said.

“Moscow will likely continue to place greater weight on geopolitical interests than economic ones, and is unlikely to agree to the West’s terms, suggesting a continuation of the conflict.”

She added that positions tend to harden the longer a geopolitical crisis of this nature continues, but growing calls to arm Ukraine would only further undermine relations between Russia and the West.