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.