In the aftermath of the Western-backed protests that deposed Ukraine's democratically elected president, there is a Russian-backed counter-movement in the Eastern part of the country that is rejecting Kiev's right to rule altogether. Current events should not come as a surprise. After all, the very first thing the new Kiev government did in the aftermath of Yanukovic's departure was to repeal minority language rights. The decision was later taken back as the new government realized the damage they have done, but Kiev could not take back the gesture and the message of its actions. Therefore, it is increasingly clear that given the reluctance of people in the predominantly Russian-speaking East to continue to allow their fate to be decided in Kiev, Ukraine is likely to change dramatically in the near future.
In the best case scenario, there will not be a complete disintegration, but a more or less orderly federalization of the country, with strong autonomous rights for the regions inhabited by the Russian minority. This is the path of least destruction and the path that will affect global markets the least. The Geneva agreement between Russia, Ukraine, the EU and the US reached with all sides pledging to work towards this goal is a hopeful sign.
The unhappy outcome will be either a civil war, with Russia and the West fighting a proxy conflict by both sides throwing in indirect military support, or a Russian military intervention. In this case, we are looking at major disruption to the global economy given that Ukraine as a gas transit country will no longer meet the needs of the EU and unwise decisions may very well drag us into an economic confrontation between Russia and the West, which would be very painful all around as I pointed out in previous articles on this subject.
My hope lies with the first scenario becoming reality. It seems that Kiev's attempt at a tough response to people taking up arms in Eastern Ukraine is turning into a poorly thought out and executed fiasco. In many instances, Ukrainian soldiers either switched sides or gave up their equipment to local militias, refusing to do battle. This is to be expected given that the Kiev government likely gave strict instructions on rules of engagement knowing that a bloodbath, which might include many civilians being killed, would most likely trigger a Russian invasion of the country. The local unarmed population is turning out to be the best weapon against Kiev's military operations because civilians can just surround and trap military columns, leaving them with no choice but to surrender. Not to mention that many of the troops may not be willing to fight for a government they may see as illegitimate.
Regardless of the final outcome, at this point we know for sure that Ukraine is facing a period of turmoil. While this is a terrible thing to happen for Ukrainians, there are some aspects that many industries may find to be a positive outcome. The main effect that the current events will most likely have is a disruption to many of Ukraine's export industries.
Ukraine is the world's tenth largest steel producer. Its total production only amounts to 2% of global production, but Ukraine is also the third largest net exporter. Much of the production and supporting infrastructure is located in the Eastern part of the country that is currently trying to distance itself from Kiev's rule. This will inevitably create production disruptions, perhaps for a very long time to come in the event that the situation is not resolved fast.
US Steel (NYSE:X) is a company that could benefit from this situation. It has operations in Central Europe, therefore is well-positioned to make up for some of the lost production regionally. It can also do so at a higher spot price, because in the event that global supply will be cut by 2%, prices will inevitably move higher for a while.
Ukraine is the world's eighth largest manganese producer. It is responsible for roughly 8% of global supply. American Manganese Inc. (OTCPK:AMYZF) could be a great winner in case Ukrainian manganese output is disrupted. This is only something to look at and consider if one feels adventurous and wants to invest in a penny stock. BHP Billiton (NYSE:BHP) is a safer, more conventional bet. It is not a pure manganese play by any means, but it did produce 8.5 million tonnes of ore in last fiscal year (link). I should note here that a company like BHP can also benefit from the Ukraine crisis due to a possible drop in iron ore production, as well as coal mines that might be disrupted in the East of Ukraine, given that it is involved in mining these minerals as well.
There are many other potential winners as a result of recent geopolitical events. It is probable that European objections to shale gas will moderate somewhat as a result of the realization that when push comes to shove, their foreign policy can be a prisoner to their dependence on Russian natural gas. American shale oil and gas companies such as Chesapeake (NYSE:CHK) and others that are facing difficulties due to the need to out-pace geological realities in North America in their quest to recuperate the money invested over the past half decade, could effectively get a time extension if they invest in producing shale gas in Europe. As I pointed out in previous articles, shale oil and gas production gains from this point on will no longer be as spectacular, and some fields such as Haynesville and Barnett already peaked.
There may be good news today on the diplomatic front, with all sides coming to an agreement on a path back from the brink. Implementing the agreement, however, will most likely prove to be difficult. Ukraine for its part needs to grant a certain degree of autonomy to the regions inhabited by ethnic Russians. This is the same government that thought it wise to take away basic minority rights the first day it came into office. It is a government supported by the hard-line Svoboda political faction, which we expect to now agree to change Ukraine's constitution in order to facilitate this proposed greater autonomy within Ukraine.
We also expect Russia to magically be able to command armed groups within Ukraine, as if it has complete control over them. I have no doubt that Russia helped them with weapons, money and perhaps even direct human resource support. At the same time those people are not just simple pawns for Russia to completely control and move around as it desires. They have their own feelings about things. They may not trust the government in Kiev to meet its end of the agreement; therefore, they may not be so keen to relinquish control they gained in the past few days. Therefore, it is unlikely that things will go smooth enough to avoid significant economic disruptions.
For part two of this two-part series, I want to focus on investments that are vulnerable to the current developments in Ukraine.
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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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