Opportunities to Profit from the New Cold War

Like it or not, with the invasion of Georgia, we have a new Cold War – as well as the profit opportunities that accompany such a conflict. International investors were able to make a lot of money during the “first” Cold War, so if any more politicians or TV commentators tell me they don’t want a return to those halcyon days, I shall scream.

And since the situation in Georgia has effectively created a new Cold War status, it’s worth reviewing where the profit opportunities will be this time, and which countries the sensible, geo-strategically conscious investor will avoid – especially since Vladimir Putin looks a lot more dangerous than the sluggardly Leonid Brezhnev.

Danger on the Inside

You probably didn’t have much money in Georgia, Ukraine, or Kazakhstan, the three countries most immediately affected by this.

That’s good. And here’s why:

• Georgia, which had been well run economically, but was too small to be on most investors’ radar screens, has become a very dangerous investment location, indeed.
• Kazakhstan is likely to turn much more hostile to Western investors as it reorients itself towards a newly aggressive Russia. Companies like Italy’s Eni S.p.A. (E) that had appeared to do well out of their ability to invest in difficult environments like Kazakhstan will watch as that “difficult” mutates to “impossible,” perhaps even losing their proverbial shirts there.
• Only the Ukraine seems to be trying its best to remain pro-Western, with its president, Viktor Yushchenko, flying in to Tbilisi to express solidarity with Georgia. However, Ukraine has a presidential election next year – and no prize for guessing who will be trying to influence that election in favor of a pro-Russian anti-Western candidate, by violent means if necessary.

Then there’s Russia itself. Investing in Russia has always been a bit like visiting Las Vegas – but now it’s like wagering large amounts of money in a casino you know to be controlled by the Mafia. You might win, but the downside potential is much greater than the upside.

What’s more, Russia’s tendency to take aggressive action without worrying about Western reactions is likely to cause sharp stock market crashes when it happens, as Wall Street panics and rushes for the exits. And it’s not as if Russia is economically well run; it has done very well since 2000, but entirely because of rising oil prices. At some stage, oil prices will reverse – at which point Russia, with its thuggish approach and expensive military machine, is likely to run out of money quite quickly. As with Venezuela, foreign investors will then be the most obvious people to loot.

Watching and Waiting to Feel the Pain

There are also implications for investors outside these most-deeply affected countries – but those implications are much-less extreme.

Most of the Eurozone is vulnerable to energy blackmail by Putin’s Russia, which has effectively put out of action the oil and gas pipelines that pumped non-Russian energy through Georgia. Moreover, if Russia’s belligerence continues, this new Cold War reality will force EU countries to reverse their current plans calling for minimal defense spending – they will want to protect both themselves and the particularly vulnerable EU members of Eastern Europe (notably Estonia, Latvia and Lithuania, which were part of the Soviet Union in 1940-1991) from sudden Russian assaults.

On one hand, that will put an immense strain on government finances and slow economic growth. On the other hand, such defense-oriented stocks as BAE Systems PLC (BAESY.PK) and EADS (EADSY.PK) can be expected to benefit.

The United States will also need to boost its defense spending – no matter which candidate wins November’s presidential election, putting a major strain on an already sagging U.S. federal budget, probably leading to higher interest rates and lower economic growth.

Defense industry favorites, especially those oriented towards high-tech conventional war such as The Boeing Co. (BA), B-2 Stealth Bomber maker Northrop Grumman Corp. (NOC) and Lockheed Martin Corp. (LMT) can be expected to benefit accordingly, as these firms did during the 1980s, in the last major military buildup of the Cold War.

Looking Inside From the Outside

The other beneficiaries will be those countries that are uninvolved. India did well in the 1950s and 1960s through its posture of neutrality between the West and the Soviet bloc; this time it will be firmly in the Western camp, but relatively uninvolved so its rapid growth can be expected to continue.

China shares a border with Russia, but its military forces are already so huge that Putin is unlikely to want to mess with them. Last time around, China was a Russian ally until 1972; this time Putin may find he made a major mistake in timing his invasion of Georgia to coincide with China’s Summer Olympic showcase. Matters of “face” are very important to the Chinese government, so China is more likely to be drawn into siding with the West, in any case an infinitely more important business partner than Russia and its rag-tag allies.

Finally, Brazil is so remote from the action that its growth is also likely to be unaffected, with any attempts by Russia and its friends, Venezuela and Cuba, to sow subversion in the region being easily resisted by the much larger Brazil.

A Different Kind of Cold War

It’s not entirely a re-run of the “first” Cold War, to be sure. One enormous advantage is that Russia alone is much smaller than the former Soviet Union, both in terms of population and its weight in the world economy.

And this time around, oil will be a major focus.

If oil prices stay high, Russia’s strength might grow, but lower oil prices are now so obviously in the interest of the United States and Eurozone that they will surely pursue every avenue to get them down, including the hitherto forbidden policies of higher interest rates and offshore drilling.

The World is Flat was – in many ways – a lovely dream, as in Thomas L. Friedman’s 2005 book.

It was never entirely realistic, and certainly isn’t now. But there are many profit opportunities available for the shrewd investor in this newly lumpy world – especially one afflicted by a new Cold War.

Original post

Comments

[dieuwer:]

Perpahs Russia will form a coalition of the evil with Cuba and Venezuala? Puttin(g) a few nukes in the carribean?

2008 Aug 15 08:28 AM

[User 86999:]

I wonder if there is an ETF that contains BAESY.PK and EADSY.PK, instead of using the pinks directly.

2008 Aug 15 10:24 AM

[moneysurf:]

These oppurtunities are very uncertain from an investment point of view. War cold or hot between Russia and Us the whole world feels the burnt.

2008 Aug 15 05:10 PM

[MLG:]

Possible scenario but very speculative at this point. In any case, Russia's fortunes are tied to high oil prices, so the best way to fight this new "cold war" is to invest in new energy sources and bring oil prices down. Companies developing such technologies should be added to the list.

Also, this is another reason why the Euro's high flying days should be coming to an end. The comparative safety of the US dollar, given Europe's economic and geographic proximity to Russia, adds to the mix of factors that make the US currency a good buy at this time.

2008 Aug 16 12:59 PM

[Alex Filonov:]

'Perpahs Russia will form a coalition of the evil with Cuba and Venezuala?'
Venezuela, yes. Unless people slap Chavez on the wrist, which they did several times lately. He is not a complete autocrat, yet.
Cuba, no. Raul will be moving to the West. Slowly, but surely. He's got no choice. There was a lot of enthusiasm there in 1962 for socialism and against USA, but, two generations later, there is none. Add 3+ million Cubans in USA, which is a huge investment opportunity just waiting to happen.

But, our goal is to make money! Author forgot General Dynamics and Raytheon. I vouch for the last one, it makes almost all modern electronics for fighter jets and missiles. More here:
muddlinginvestor.blogs...

2008 Aug 19 11:29 AM

[Booba:]

I'm sorry, but it seems like this guy has no clue what he is talking about!
1) "Georgia, which had been well run economically"
Yea, it is so "well run" that hundreds of thousands of Georgians went to Russia to find work!
And some other facts:
"Corruption is perceived as significant. Georgia now ranks 99th out of 163 countries in Transparency International's Corruption Perceptions Index for 2006".
"Judicial corruption is still a problem despite substantial improvement in trying to raise the level of efficiency and fairness in the courts. Both foreigners and Georgians continue to doubt the judicial system's ability to protect private property and contracts."
www.heritage.org/index...
More over, Georgian President was accused in corruption and and seizing property illegally:
www.guardian.co.uk/com...
The fact that World Bank controlled by American Government prises Georgia doesn't mean this is true.
This is well-known fact that Georgia is tightly US-controlled "project" with President that graduated in America and his wife is an American citizen (not naturalized one) with tight political connections in Washington.
2) "especially since Vladimir Putin looks a lot more dangerous than the sluggardly Leonid Brezhnev."
Really? And what did you make you think so? The conflict with Georgia?
Let me remind you what have happened there. Georgina troops started shelling and bombing City of Tshinvali. Most of its residents are Russian citizens. What should Russia do? Whatch and relax?
What else makes this guy think that "Putin is dangerous"? What about Bush then that invaded Iraq and Afghanistan? Look at the map: where is South Ossetia and Russia, and where is Iraq and Afghanistan and America? So, who is "dangerous"?
If you do an economy analysis, you shouldn't put all of that CNN-style "we all hate Russians and Putin" bullshit here!
Brezhnev's USSR openly declared that it supported all countries that "chose socialism", and it did. Does Russia or Putin says or do that?
3) "Only the Ukraine seems to be trying its best to remain pro-Western, with its president, Viktor Yushchenko, flying in to Tbilisi to express solidarity with Georgia."
My poorly informed "analyst", "Yuschenko" does not mean "Ukraine". His approval rating is around 10% now, and even those who fiercely supported him now very disappointed. Not to mention that "pro-Western" president prohibited to use Russian language, the native language of 60% of Ukrainian residents, on TV and in commercials completely. Imagine what would happened if American President prohibited to use Spanish on TV and in commercials?
4) "Investing in Russia has always been a bit like visiting Las Vegas – but now it’s like wagering large amounts of money in a casino you know to be controlled by the Mafia"
Investing, my friend, is ALWAYS risky!
Sure, investing in mortgage-backing securities with AAA rating was completely safe, right? :)
5) "At some stage, oil prices will reverse – at which point Russia, with its thuggish approach and expensive military machine, is likely to run out of money quite quickly"
This is another very observation!
Russian gold and hard currency reserve holdings hit a record of 483.9 billion US dollars, having increased by 2.6 billion USD in a week, the Central Bank said. Russia has the world’s third largest gold and hard currency reserves after China and Japan.
www.globalfirepower.co...
This means that Russia has 3,500 USD of hard currency/gold reserves per capita.
How many thousands dollars of deficit per capita Americans have?
6) "As with Venezuela, foreign investors will then be the most obvious people to loot."
As with Venezuela????? I cannot see any similarities between Russia and Venezuela! Russia works with America and other Western nations in G8 trying to resolve global problems and spending money to fight famine, poverty, global warming, nuclear weapon control, etc. Russia works with America in space. Russia has been sharing intelligences with America and other Western nations that help them to fight terrorists. "Dangerous" Putin was first that called Bush to express his support his sympathy after September 11 and later went on to help American troops in Afghanistan.
Did Venezuela do anything like that?
7) "this time Putin may find he made a major mistake in timing his invasion of Georgia to coincide with China’s Summer Olympic showcase."
Oh, boy! Did the author forget WHO started it exactly when the Olympic Games was opening? Putin? Even CNN and AP say that Saakashvili started first!
8) "The United States will also need to boost its defense spending"
Really? And why we need to do that? To fight with Russia?
9)"One enormous advantage is that Russia alone is much smaller than the former Soviet Union, both in terms of population and its weight in the world economy."
So what? Russia is still able to evaporate this lil' blue planet!
There is NO advantages to have second Cold War and especially call for it, as you do in your article!
Nobody win it this time because post-Cold War history clearly showed Russia that in reality the West doesn't want to see Russia other than weak and humiliated. So, I doubt second Gorby will emerge from Russia!

2008 Aug 19 01:33 PM