Russia’s Impact

banker xThe news coming out of Russia and Ukraine is not encouraging. It looks as if the Russians are not content with flexing their muscles anymore but may be in the beginning stages of selective reunification. It won’t be hard. They have the military and political will to go after whichever former vassal state that made up the former Soviet Union and certainly no former Soviet Republic has the ability to stop them directly, or indirectly.

The current situation is not a direct economic threat to US markets but could have a profound impact on European markets and the global energy market.

Europe and Russia are huge trading partners and Russia is the largest supplier of energy to European countries. As the owner of the most prolific oil fields outside the Middle East, the Russians account for close to 10 million barrels per day of oil production with a big chunk of that going to places like Germany. In addition, Russia holds the world’s largest proven reserves of natural gas, supplying no only places like Ukraine, but also a host of European countries at prices that are three to four times those found in the US or Canada. It is monopoly provider to many countries.

The country with the most to lose in Europe is also the country making the least noise about what is going on in Ukraine and threatening the least action. Germany has been less than vocal about sanctions against Russia as it counts the Russians as a major trading and as mentioned above, energy partner. Unlike countries such as Iran or North Korea, the Russians have a lot that the West wants from resources to real estate investors and markets for automobiles. Russia produces very little that is in demand locally and most Russians who can afford to buy goods want those out of places like Germany which are perceived as much higher quality and also status symbols.

When it comes to trade with the US, there is no comparison. The US and Russia do very little commercial trading. The biggest potential loser in all of this will likely be the Germans if the EU and its partner apply sanctions. For a country that is leading Europe out of near-depression, this is not good news for its markets.

The second market impact that the Russian incursion will have, if protracted, is on energy markets. Oil prices could be impacted if economic sanctions include energy imports. It would be akin to taking between 5% and 10% of global supply off the market. As it stands, the rest of the world’s producers are making up for shortfalls in supply from Iran, Iraq and Libya. More supply disruptions could easily send the price of oil significantly higher. This is Russia’s wild card. They are a country that can survive without the West, but the West is highly dependent on Russia for energy and resources.

While the situation in Crimea and Ukraine may prove to be a “one-off”, it could still potentially have significant impacts on the US indirectly in the form of higher energy prices in the months ahead. The US economy can withstand short-term energy volatility but a protracted crisis could play havoc with a recovery that is still far from robust. The first danger sign, however, will come from European markets.

To your wealth,

Banker X.

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