Is The Russian Black Swan Dead?

|
Includes: BTU, RSX, SPY
by: The Panoramic View

Summary

Russia recently agreed to supply natural gas to Ukraine for $4.6 billion.

The deal does not decrease Russia's leverage over Ukraine, as Russia can turn off the gas supply at any time.

The deal does show that tensions between Russia and the West are receding and the probability of a Russia black swan scenario is diminishing.

Over the past few weeks, there have been several signs that tensions in the Ukrainian crisis are receding. First, there was the September cease fire between the pro-Russia Ukrainian rebels and the Ukrainian government. Then there was Russia pulling its troops back from the Ukrainian border in mid October. Finally, there is the October 30 deal in which Russia agreed to supply Ukraine with winter gas supply for $4.6 billion.

The natural gas deal may come as a surprise to some observers, as an approaching winter and Russia withholding natural gas would likely destabilize the Ukrainian government, giving Russia a victory. This destabilizing scenario is not very likely, however, as the West would likely support Ukraine and prop up its government.

Moreover, supplying Ukraine with natural gas does not reduce Russia's leverage over Ukraine. Putin can destabilize the Ukrainian government by turning off the natural gas at any time. With the natural gas deal, Russia gets paid billions, looks good for providing natural gas to Ukraine, and keeps the option of shutting off Ukrainian natural gas at any moment.

Possible reasons for the new found pragmatism

One reason for the new found pragmatism could be that Russia has achieved its aims. Russia wanted a buffer zone between it and Nato, and with loyal separatists firmly ensconced in Eastern Ukraine, Russia has successfully achieved its goal. Russia has also achieved its goal of retaining control over its only warm water base by successfully annexing Crimea.

Another reason for the more pragmatic attitude could be that crude oil prices are a lot closer to $80 a barrel than $100 a barrel. Russia depends crude oil for a large part of its government budget, which requires Brent to trade around $104 per barrel to break even. Having stronger Western sanctions in addition to $80 crude oil and a weak economy may have been too much even for Vladimir Putin.

Because of the new found Ukrainian peace and low crude prices, Russia is less likely to split from the international system. As a consequence, European natural gas prices are less likely to spike and coal miners such as Peabody Energy (NYSE:BTU) are less attractive, as it reduces the probability of a bullish scenario where American coal miners supply Europe's energy needs in lieu of the Russian natural gas. The decreasing tensions makes the S&P 500 a safer bet in the intermediate term, and makes investing in a Russian ETF like Market Vectors Russia ETF (NYSEARCA:RSX) less risky (although it is still speculative). Unless crude oil prices rise to the triple digits again and the Ukrainian cease fire breaks, the Ukrainian crisis will likely remain latent for the foreseeable future.

Disclosure: The author is short SPY.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.