Home About Archives RSS Feed

The Independent Investor: Beware the Russian Bear

By Bill SchmickiBerkshires Columnist

Twenty-thousand Russian troops are massing along the Ukraine border. Wednesday, in retaliation for another round of Western sanctions, Vladimir Putin imposed sanctions on certain U.S. and EU imports. And yet the markets barely registered the event. Are investors a bit too complacent?

Price action in the stock market would indicate that global investors believe both sides are bluffing. Putin is simply playing a game of chicken, pundits contend, betting Europe and the U.S. will blink first. They seem unperturbed that the hardware being deployed by the Russians on the Ukrainian front could roll back all the hard-won gains of the Ukrainian government over the past few weeks in a matter of hours.

As for Putin's economic trump card — an embargo of energy exports to Europe this winter — no one believes it will happen. And here's where financial people, especially free market types like those who reside on Wall Street, sometimes get it wrong. They believe that no one would shoot themselves in the economic foot simply for political gain.

Russia makes $1 billion a day from its natural gas and oil exports to the EU. The Russian economy is on the brink of recession after 15 years of strong growth driven by higher commodity prices. GDP is slowing from 0.9 percent in the first quarter to a forecasted 0.5 percent in the second. Inflation is rising, now 7 percent, and so is unemployment. Given the economy's weakened state, the sanctions imposed by the West are having a negative effect.

Its common knowledge that Europe depends upon Russia for a full third of its energy needs. It is also true that Russia's economic growth depends upon its energy exports, which accounts for over 50 percent of all exports. An embargo would hurt Russia far more than it would hurt Europe.

So, from a financial perspective, it would make no sense at all for Russia to shut off Europe's supply of energy this winter. The problem with that logic is that Putin, backed by a cadre of hardliners, does not necessarily believe that economic concerns should be their number one priority. Recent history proves this fact.

Back in the winter of 2006, during Russia's ongoing energy squabble with the Kiev government, they shut off gas supplies. Putin ordered another Ukrainian energy embargo in January, 2009. That one severely curtailed energy supplies throughout eighteen European countries. Some nations reported major drops or a complete cutoff of energy supplies at the time. The EUs distress was simply collateral damage from the Russian's point of view in its dispute with the Ukraine.

As for the argument that Putin would not dare to push too hard, give the state of his economy, investors have an extremely short memory. In the summer of 2008, the Russian economy was weakening as well, but it didn't stop Russian troops and tanks from over-running Georgia. Putin simply blamed the resulting economic weakness on the American financial crisis.

Today, things are different. The majority of Russians approve Putin's actions. During this crisis, unlike the 2009 gas embargo, the EU is not only supporting Ukraine, but also levying sanctions on Russia as well. Annexing the rest of the Ukraine, after getting away with swallowing up the Crimea, would be a logical next step from Putin's perspective.

Given all of the above, I am far less confident than the majority of investors that this conflict will go the way we expect.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

     

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Scoil Rince Bréifne Ó Ruairc Participated in North American Open Championships
Pittsfield Police Participating in US 20 Speed Enforcement Project
MassDOT Project Will Affect Traffic Near BMC
Dalton ADA Committee Explores Expanding
Milne Public Library Trustees Announce New Library Director
Clark Art Presents Free Thematic Tour on Music in Art
BCC, Mill Town Partner to Support Philanthropy Through 40 Under Forty
SVMC' Wellness Connection: March 15
Pittsfield Community Meeting On Rest of the River Project
Slavic Easter Egg Decorating At Ventfort Hall
 
 


Categories:
@theMarket (480)
Independent Investor (451)
Retired Investor (183)
Archives:
March 2024 (5)
March 2023 (4)
February 2024 (8)
January 2024 (8)
December 2023 (9)
November 2023 (5)
October 2023 (7)
September 2023 (8)
August 2023 (7)
July 2023 (7)
June 2023 (8)
May 2023 (8)
April 2023 (8)
Tags:
Commodities Stimulus Taxes Stocks Debt Recession Greece Election Japan Selloff Employment Stock Market Federal Reserve Interest Rates Debt Ceiling Pullback Banks Metals Economy Jobs Retirement Currency Euro Europe Crisis Markets Energy Fiscal Cliff Bailout Rally Oil Congress Europe Deficit Banking
Popular Entries:
The Independent Investor: Don't Fight the Fed
Independent Investor: Europe's Banking Crisis
@theMarket: Let the Good Times Roll
The Independent Investor: Japan — The Sun Is Beginning to Rise
Independent Investor: Enough Already!
@theMarket: Let Silver Be A Lesson
Independent Investor: What To Expect After a Waterfall Decline
@theMarket: One Down, One to Go
@theMarket: 707 Days
The Independent Investor: And Now For That Deficit
Recent Entries:
@theMarket: Sticky Inflation Slows Market Advance
The Retired Investor: Eating Out Not What It Used to Be
@theMarket: Markets March to New Highs (Again)
The Retired Investor: Companies Dropping Degree Requirements
@theMarket: Tech Takes Break as Other Sectors Play Catch-up
The Retired Investor: The Economics of Taylor Swift
@theMarket: Nvidia Leads Markets to Record Highs
The Retired Investor: The Chocolate Crisis, or Where Is Willie Wonka When You Need Him
The Retired Investor: Auto Insurance Premiums Keep Rising
@theMarket: Melt-up in Markets Fueled by Momentum