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Investing in Russia - Crimea Fallout Part 2
As we noted in our first article in this series, the Russian Federation has annexed part of a neighboring country. Russian troops are occupying Ukrainian bases in Crimea and massing troops along their shared border with Ukraine. In the first article of this three part series about investing in Russia and the Crimea fallout, we looked at the historic backdrop to events in Ukraine and the annexation of Crimea by the Russian Federation. In this second article we will look at the Crimea fallout over the short term as it will effect investing in Russia (or not), the value of the Ruble and political and economic relations with the European Union and the USA. In the third article we will analyze how to proceed at investing in Russia in what is being characterized as the worst situation since the end of the cold war. Now the G 8 economic group has kicked Russia out and both the USA and EU are ramping up selective economic consequences for those involved.
Europe, Russian Oil and the US Oil Boom
One of the issues that concern the European Union is that they have been dependent on Russia for lots and lots of natural gas and oil. Another is that the largest part of that oil and natural gas moves by pipeline through Ukraine. Meanwhile sustainable fracking technology has resulted in an oil boom in the USA. To the extent that the EU and especially Germany want to reduce their dependence of Russian oil, they will likely look to the USA for exports. To the extent that the USA wishes to make Russia feel the impact of their annexation of Crimea without taking military action it may find ways to further ramp up production and meet any shortfalls that Europe may experience.
Kicked Out of the Club
The major economic powers (USA, Japan, Germany, France, Great Britain, Italy and Canada) met as the Group of 7 until they invited Russia to join fifteen years ago to create the Group of 8. Now Mr. Putin’s government is out of the club. To quote the G7 annexation of the Ukrainian republic of Crimea was not consistent with the group’s shared beliefs and responsibilities. The G8 was going to meet at the site of the recent Olympic games in Sochi, Russia but the meeting has been moved to Brussels and Mr. Putin will be alone if he goes to Sochi. It is clear that the USA and NATO are not going to intervene militarily in this matter and it is unlikely that Mr. Putin will back down and give Crimea back to Ukraine. But being kicked out of the club is only the first of a series of measures meant protect Europe from a Russian Bear reminiscent of the Soviet Era.
2. As we noted in our first article in this series, the Russian
Federation has annexed part of a neighboring country.
3. Russian troops are occupying Ukrainian bases in Crimea
and massing troops along their shared border with Ukraine.
4. Before We Continue…
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5. In the first article of this three part series about investing in
Russia and the Crimea fallout, we looked at the historic
backdrop to events in Ukraine and the annexation of
Crimea by the Russian Federation.
6. In this second article we will look at the Crimea fallout over
the short term as it will effect investing in Russia (or not),
the value of the Ruble and political and economic relations
with the European Union and the USA.
7. In the third article we will analyze how to proceed at
investing in Russia in what is being characterized as the
worst situation since the end of the cold war.
8. Now the G 8 economic group has kicked Russia out and
both the USA and EU are ramping up selective economic
consequences for those involved.
13. To the extent that the EU and especially Germany want to
reduce their dependence of Russian oil, they will likely look
to the USA for exports.
14. To the extent that the USA wishes to make Russia feel the
impact of their annexation of Crimea without taking military
action it may find ways to further ramp up production and
meet any shortfalls that Europe may experience.
16. The major economic powers (USA, Japan, Germany,
France, Great Britain, Italy and Canada) met as the Group
of 7 until they invited Russia to join fifteen years ago to
create the Group of 8.
18. To quote the G7
annexation of the Ukrainian republic of Crimea was not
consistent with the group’s shared beliefs and
responsibilities.
19. The G8 was going to meet at the site of the recent Olympic
games in Sochi, Russia but the meeting has been moved
to Brussels and Mr. Putin will be alone if he goes to Sochi.
20. . It is clear that the USA and NATO are not going to
intervene militarily in this matter and it is unlikely that Mr.
Putin will back down and give Crimea back to Ukraine.
21. But being kicked out of the club is only the first of a series
of measures meant protect Europe from a Russian Bear
reminiscent of the Soviet Era.
23. As Mr. Putin flexes Russian military muscle against a
virtually defenseless neighbor, anyone investing in Russia
needs to be concerned.
24. There appears to be an escalating tit for tat going on that
could end up damaging the Russian economy and the
interests of anyone with money invested in the Russian
Federation.
25. We already mentioned the issue of oil and natural gas but
there is much more to trade between the EU and Russia.
According to the European Economic Commission annual
report, in 2012 the EU imported 212.9 Billion Euros worth
of mostly raw materials from Russia and exported 123
Billion Euros worth of finished products.
26. Russia is the third trading partner of the EU and the EU is the
first trading partner of Russia.
EU exports to Russia are dominated by machinery and
transport equipment, chemicals, medicines and agricultural
products.
EU imports from Russia are dominated by raw materials, in
particular, oil (crude and refined) and gas.
The EU is the most important investor in Russia. It is
estimated that up to 75% of Foreign Direct Investment stocks
in Russia come from EU Member States.
27. In the short term, foreign direct investment in Russia may
be risky and investors should probably adopt a wait and
see attitude.
28. The Ruble is down versus all major currencies, wealthy
Russians may find it hard to move their money through
Western banks, and President Obama has taken to calling
Russia a regional power as he seeks agreement on further
sanctions against the Russian Bear.
