Russia versus The West. Is it a Duel or a Mexican Standoff?

The MH17 crash in the Ukrainian skies has made the Russia-Ukraine crisis very serious. US has imposed heavy sanctions on Russian banks and energy companies. Europe may follow suit, although unwillingly. Here is a brief analysis of the sanctions and their effects on the World Economy.

What are sanctions?

A sanction simply means permission or rather restriction. They are imposed by one country against another due to political differences. In Russia’s case, they started with the unrest in Crimea. US and EU imposed sanctions on Russian officials, businessmen and Putin’s allies. As the situation is getting more severe, US and EU might impose Economic sanctions on Russia which typically means ‘no trade’.

What are the effects of sanctions?

The sanctions have the Russian economy shaken and its currency is depreciating. The trust of the investors in fading and they are pulling their money out. The Russian Businesses are also finding it difficult to invest in US capital markets.

Russia is the major power supplier in Europe and a ban on trade could be devastating for Russia as oil export is a major pillar of the Russian economy.

Moreover, the Europe does not want that to happen either because if the oil supplies from Russia to Europe are suspended oil prices could soar above $200 per barrel, sparking a global economic crisis.

European Union economy is still very fragile and an energy shortage could prove to be catastrophic for them. Even USA, which is imposing stricter sanctions on Russia and also forcing the EU to do the same, is taking a risk here. Even though USA has seemingly recovered from the 2007-08 recession, a ‘powerless’ Europe would only cause harm to its economy.

How heavily is Europe relied on Russia for power? And otherwise?

The EU buys 84 percent of Russian oil exports, and 76 percent of natural gas exports. About a quarter of European countries completely rely on Russia for gas or oil supplies. The EU's trade with Russia is worth nearly 270bn Euros.

The table below lists major European countries and what they stand to lose along with their peachy trade relations with Russia:

Country	Imports	Exports	What they stand to lose
Germany	€38bn	€36bn	It is Russia's biggest trading partner, could lose the position to China.
France	€10.3bn	€7.7bn	Has an arms deal with Russia worth €1.2 billion. Its banks stand to lose if Russian companies are unable to repay the debt.
UK	€8bn	€4.6bn	There might be a power crisis and problem in recovery of loans.
Italy	€20bn	€10.8bn	The stream pipeline based in Russia worth €17billion.

 

What are Russia’s options?

1.    Russian parliament member Andrei Klishas has suggested the country could pass a law giving the government the power to take control of Western assets within its borders. This would mean seizure of all the European and American multinationals from Ford to Adidas to Pepsi in the Russian territory. Brand-name consumer companies have a great deal at stake in Russia, which has attracted them because of its long-term economic prospects and growing middle class. This could harm US and Europe’s economy.

2.    They can seek a new oil market in China and India, two countries which have very cordial relations with Russia and a big market for energy. Russia could look to build on the $400 billion dollar natural gas deal it recently signed with China.

 

The investor’s point of view

The old adage of "buy on the sound of cannons, sell on the sound of trumpets" applies here. The Russian-West standoff will sooner or later dissolve and Russian economy being long standing with a growing middle class would recover from the crisis. A growing economy in crisis due to non economic reasons is a great entry point for investors. Once the peace trumpets are blown and money starts flowing in the market, the consumer is hungrier than ever and wants to get back to normalcy as soon as possible. It starts buying heavily resulting in bullish run in the market. Those who had bought at the low point during the war can now sell and earn good profits.

The BRICS angle

I am simply speculating here. The BRICS countries are more in sync than ever since the creation of NDB and all of them wish to end the US dollar dominance in the global economy. They termed the West’s sanctions as hostile in March and China has defended Russia over the MH17 criticism. It is also hard to believe that Putin wouldn’t have talked with other leaders about the Ukraine Crisis and the consequences of sanctions against it during the BRICS Brazil summit. If USA and Europe cut off ties with Russia, then it would soar up the oil prices and create another depression in Europe whereas Russia could find alternative market for oil in ‘power hungry’ China and India to try to stay afloat. The rise in gold prices could also help Russian Gold Miners. The USA would be forced to come to Europe’s rescue leaving its own economy at risk. With both Europe and USA vulnerable, China might take over the world economy. It is a duel Mexican standoff where China goes for the kill when the West is busy handling Russia. Improbable but not impossible!

China right now!