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How to Profit from the Russia Ukraine Conflict

Stock-Markets / Russia Jul 30, 2014 - 08:00 PM GMT

By: Submissions


Ted Baumann writes: Russia has a history of sacrificing its own cities and people before giving in to the demands and confrontations of dissidents and aggressors. The situation is no different today. And for investors concerned with developing a fortified portfolio of diversified investments, it’s a situation you must pay attention to.

During 1941 to 1945, when it wore the mantle of the Soviet Union, Russia suffered almost 30,000,000 deaths — in combat, through Nazi atrocities and from civilian famine and disease. That was almost one-fifth of its pre-war population. The war was tilted so far out of Russia’s favor that at one point almost four-fifths of its European landmass was under Nazi control.

And yet, incredibly, Russia emerged from the war victorious — indeed, more powerful than at any time in its long history. Unlike Napoleon before him, Hitler failed to capture Moscow. But even if he had, it’s quite likely he would have still lost the war.

After all, within hours of Napoleon’s occupation of the Russian capital, the Russians burned the city to the ground and withdrew to the boundless east, leaving the illustrious French general once again in the middle of the frozen steppe — overextended, vulnerable, his troops staving. Hitler would experience the same thing at Stalingrad 130 years later.

Today, a new Russian leader faces a threat from the West — and with the full weight of his forebears on his shoulders, do you honestly think he will blink first?

The strip of Europe running from the Baltic to the Black sea — what historian Timothy Snyder called the “Bloodlands” — has always been to Russia what the Atlantic and Pacific Oceans are to America: its first line of defense against invasion.

This belief explains — but does not excuse — the course of action upon which Russian President Vladimir Putin has embarked. He’s taken the bait of Western provocation in Ukraine — for that’s precisely what it was — and reverted to true Russian type: anything goes to protect the sacred Motherland. It doesn’t matter that Ukraine isn’t formally part of Russia. It remains essential to Russia’s security. It must not be allowed to pivot towards Europe.

Can You Back a Bear into a Corner?

Three weeks ago, Russophile irredentists using Russian missiles murdered almost three hundred people on an overflying Malaysian airliner, thinking it was a Ukrainian military plane. Putin has dug in his heels, insinuating that Ukraine committed this atrocity to cause a false flag crisis. That is patently absurd, but that’s Putin’s story, and he’s sticking to it.

In response, after much dithering, the U.S. and the European Union yesterday agreed to bar all “EU persons” from investing in debt or equity sales by state-owned Russian banks, i.e. most of the financial institutions in the country. This is a big deal.

Between 2004 and 2012, such institutions raised $16.4 billion through IPOs in EU markets. In 2013 alone, about 47% of all bonds issued by those banks — €7.5 out of €15.8 billion — were issued in the EU. EU exchanges are also barred from listing new securities from the targeted Russian banks, to prevent them from raising capital in Asia and elsewhere.

The agreement also restricts future sales of high-end energy technologies, covering deep-sea drilling, Arctic exploration and shale oil industries.

Conspicuously, natural gas and nuclear technologies are exempted.

Adding fuel to the fire, the U.S. announced — also yesterday — that Russia was in violation of a 1987 arms treaty that bans American and Russian ground-launched ballistic or cruise missiles capable of flying 300 to 3,400 miles. That treaty sealed the end of the Cold War, and is as a cornerstone of American-Russian arms control efforts. The U.S. has known about this since 2008, so the announcement was clearly no coincidence.

Poking the Bear — or Profiting from It?

None of this will matter to Putin. He sees himself as the inheritor of Alexander Nevsky, Peter the Great, Alexander I and Stalin, all glorious defenders of Mother Russia from Western invasion. The recent escalation in sanctions, along with Ukraine’s military success on the ground, will push Mr. Putin into a corner in a way that will make him less willing to back down.

True, Russia’s economy is already under enormous pressure. Growth is nonexistent, capital is fleeing the country, the ruble is stressed and foreign investors are staying away. But those same words have been used to describe the EU itself over the last few years. And Europe is not the only game in town, as Russia’s participation in the IMF-challenging New Development Bank shows.

That is why the EU has refused to go as far as the U.S. wants.

The arms embargo, for instance, will affect only future sales, and will not stop France from delivering completed warships to Russia.

Britain will not cut off the entire Russian financial industry, which is a major player in the City of London.

And above all, Germany will not agree to measures affecting Russian natural gas, on which it relies for energy. Indeed, Germany is the most dependent of all European nations on commerce with Russia, its historical enemy.

Fortify Your Portfolio With Diversified Investments

The bottom line is that a nation willing to sacrifice 20% of its population, its western frontiers, and its towns and cities to resist invasion from the West is unlikely to flinch at financial and investment sanctions. The bulk of Russia’s population is behind Putin, or at least skeptical of the West, which it rightly sees as hypocritical, vacillating and weak.

From that, I draw two conclusions.

For those who have the stomach for it, now is a perfect time to invest in Russia. Prices are low and the ruble is cheap. Right or wrong, Russia will survive this episode and life will return. There is potential for great returns over the medium term. That may seem callous, but it is true nonetheless.

The second — be careful on whom you rely. Europe cannot strike at Russia without slitting its own throat. Their fortunes are intertwined. Don’t be like Europe. Think ahead and make sure your money, investments and property aren’t locked in one country or currency. Diversify … and always have a back-up plan.

Kind regards,

Ted Baumann Offshore and Asset Protection Editor
© 2014 Copyright  Ted Baumann - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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