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Executive summary:

  • If Russia invades part of Ukraine, it will probably have to invade it all.
  • Ukraine is one of the World's largest exporters of grain.
  • At the very least, it's likely that Ukraine and other Eastern European countries will have an arms race. This might also lead to a wider arms race. This is positive for defense companies.

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This article presents 3 different thoughts on the Ukraine situation which ought to be considered by those investing in the markets.

If Russia invades part of Ukraine, it will probably have to invade it all

Ukraine was once the 3rd largest bearer of nuclear weapons in the World, after the U.S. and Russia. This all changed with an agreement to scrap all its nuclear weapons reached in 1992. By 1996 Ukraine was free from holding such weapons.

However, it needs to be understood that all of Ukraine's nuclear delivery systems were designed and produced within Ukraine. And Ukraine remains able to produce fissile material for new nuclear weapons. It is thus possible for Ukraine to again regain its nuclear status.

Indeed, with Russia having broken the terms of the treaty which lead Ukraine to give up its nuclear weapons, it becomes obvious that Ukraine might try to again produce nuclear weapons. It is this likelihood which will prompt Russia to invade all of Ukraine instead of just its Eastern provinces where ethnic Russians are the majority. After all, it is unlikely that Russia would want a potentially unfriendly State it had just partially invaded be armed with nukes right at its border.

At the very least, it seems likely that Russia will invade enough of Ukraine to include Yuzhmash, the main industrial complex able to produce nuclear-related weapons. But much more likely would be for Russia to invade all of Ukraine.

Ukraine is one of the World's largest exporters of grain

This is self-explanatory. Ukraine is not only one of the largest producers of grain including wheat and corn, but it is consistently one of the World's largest exporters of such commodities, given its rather small population (around 46 million).

Given this, both corn and wheat are being speculated upwards due to internal strife and now the conflict with Russia.

Finally, we might see an arms race

At the very least, Ukraine and other Eastern European States will see the need to re-arm themselves. This includes the likelihood that Ukraine might seek to regain its nuclear status.

But even beyond Ukraine and Eastern Europe, the fact that Russia is rearming itself and is now consistently making incursions outside its borders might lead to a renewed trend towards higher defense spending around the world.

If this were to happen, then defense suppliers including Lockheed Martin Corporation (NYSE:LMT), Raytheon (NYSE:RTN) and General Dynamics (NYSE:GD) stand to benefit. These stocks aren't exactly cheap as they've been carried by the Federal Reserve's largesse, but in the short term it wouldn't be surprising to see them react positively to the news from Ukraine.

Conclusion

While at first the news from Ukraine was more or less dismissed, it is becoming increasingly likely that this news might have significant impact. There's a chance that Ukraine will try to regain its nuclear-armed status - and if such were to happen the World would either see much higher risk from a conflict, or alternatively Russia would see the need to invade all of Ukraine. Either development seems to increase risk materially.

Impact is also to be expected on wheat and corn prices worldwide given that Ukraine is a large exporter of both. This might also push inflation measures up, which will make a continued taper by the Federal Reserve more likely. The same might happen to crude. As for natural gas, U.S. natural gas bears little relation to European natural gas prices (where natural gas flows from Russia through Ukraine pipelines).

Finally, the situation seems likely to generate an arms race which might be regional or maybe even more widespread. Either way, it's likely that defense contractors will see their shares speculated upwards on the news.

Source: 3 Thoughts On Ukraine