What If The Ukrainian Crisis Gets Worse?

Includes: FXE, UDN, UUP
by: Ralph Shell


What will happen to the Ukraine's $2B energy Bill?

Are there to be additional G 7 sanctions against Russia?

Does Russia have external debt which exceeds $600B?

Is the EU recovery at risk?

Barely three weeks have gone by since the Russian annexed Crimea and markets are again moving higher. Granted, equities and currencies were spooked for a couple of days after the Fed's Rookie Chairman Yellen disclosed too much information at her first solo press conference. A review of some of the Greenspan conference techniques might be needed so future sessions will contain the proper amount of ambiguity.

Next week's pending fundamentals which, in the US, includes the durable goods number, and the quarterly annualized GDP number estimated to be a respectable 2.7%, may serve the markets' bulls well. Gradual growth is preferred. Then there will be no fear of a speed up date for higher bank rates, or a higher USD which might harm global growth.

For a few days, the Russian Ukrainian crises has had to compete with other news, but that does not mean the crises had ended. Should Putin find reason to enter Eastern Ukraine, this will heighten tensions. There is also the Russian claim that Ukraine owes them $2B for previously supplied energy, which is bound to stoke controversy.

The feeble response by the West may be emboldening Putin and this is dangerous. Appeasement does not work with bullies. Perhaps a stronger response from the pending G 7 meeting will evolve, but the Germans, in particular, face tough decisions.

Last year the Germans exported €36B of products to Russia. According to Der Spiegel, 300,000 German jobs are dependent on business relations with Russia. Imports from Russia amounted to €40.4B in 2013. Germany relied on Russia for 36% of their total oil consumption and 35% of their natural gas use.

But the Germans are not the only members of the EU that are at risk. Total exports to Russia from the EU amounted to $264B while their imports from Russia were $162B. Then there is the not-so-small matter of Western loans to Russia. According to Reuters, the total amount of Russian debt to the external world may be as high as $650B.

The usual European bankers and countries are heavily involved. There is also ownership of a portion of the Russian state oil company Rosneft (OTC:RNFTF) by BP. It is rumored Rosneft is currently attempting to raise an additional $5B from BP.

Perhaps Putin has decided the Western leaders are a bunch of weaklings. No doubt sanctions will hurt but politicians have big egos and none want to be compared historically with Neville Chamberlain or Jimmy Carter.

As a line in an old song said, "breaking up is hard to do." There is no doubt the EU is more at risk should sanctions expand. A combined banking and energy crises would quickly reverse their claim to an economic recovery. We wonder if the markets are hoping this crisis will merely vanish. If it does not vanish, the USD should continue this weeks' gain versus the euro.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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