Russia: The Ukraine Situation And More

by: Paulo Santos

The Russian markets are home to some of the cheapest assets in the world.

Part of this is tied to the idea that Moscow is in an expansionary mood, leading to punitive sanctions.

This article delves into this and other issues, and shows why things are likely to improve.

The SU-57. Russia has actually been dis-investing in its military over time, and thus faces some trouble in staying with the head of the pack. Arguably, China is becoming more of a military threat.

In trying to figure out whether to invest in Russian assets, including equities, it’s important to understand if Russia is as expansionary as many in Europe and the U.S. would make it believe.

When Russia took over Crimea, many saw that as the expression of such an expansionary desire. That at the same time a Moscow-supported separatist guerrilla war was raging in Eastern Ukraine, especially the Donbass region, made it all more credible.

The story quickly turned into a scenario where Crimea, Eastern Ukraine, Ukraine itself and then other former URSS countries could quickly follow. Since then, the fears have eased, but the overall thesis hasn’t left the table. This thesis maintains Russia is in an expansionary mood, and that we’re just seeing a lull in it. This thesis made it easy for recurring sanctions to be imposed on Russia to this day, both by European countries and the U.S.

However, I think there's a better explanation for these events, and this explanation means that there’s no expansionary agenda by Moscow. Let me explain.

The Alternative Thesis

The alternative thesis is that Russia is doing what it says: It’s protecting ethnic Russians abroad. This thesis explains taking over Crimea, because:

  • Crimea held a referendum where its voters expressed the will to join Russia. This vote was overwhelming (96.77% voted in favor, with a high 83.1% turnout eliminating the theory that those against would be relevant, even if they didn't vote).
  • Crimea identified itself with Russia, culturally, and more than 75% of its inhabitants had Russian as a native language. This also explains the overwhelming vote.

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  • And most importantly, because ethnic Russians composed the vast majority (~58.3%) of Crimea’s population, which also explains the overwhelming vote.

Image result for ethnic russians per zone ukraine

  • Finally, it should be noted that Crimea was populated mostly by ethnic Russians because Crimea was essentially Russian. It was only back in 1954, so during the USSR days and very recently, that Crimea was administratively transferred to Ukrainian control from Russian control.

The ethnic Russian distribution within Uktraine doesn’t just explain why Crimea chose to join Russia and Russia took it. It also explains something else.

It explains the ongoing conflict in Eastern Ukraine, most specifically in Donetsk (38.2% ethnic Russian) and Luhansk (39% ethnic Russian) - together these form the “Donbass” region. The conflict there raged and rages because both of those districts (“oblasts”) also contain a very high – though not a majority – percentage of ethnic Russians and, more broadly, citizens which identify themselves with Russia (this could actually be the majority).

The separatist resistance which emerged in Eastern Ukraine, and which was backed by Moscow militarily, thus had a “reason to be.” This “reason to be,” though, was not Russia's expansionary design. Instead, it was simply a conflict because a very large fraction of the population wanted to follow Crimea’s lead and secede from Ukraine.

That said, this situation in Donbass was far from being as clear cut as in Crimea. Hence, while both Crimea and Russia moved quickly on annexing Crimea, the same didn’t happen in Eastern Ukraine. Instead, a prolonged conflict emerged.

That conflict, where Moscow obviously takes sides, is still compatible with the notion that Russia is protecting what it sees as a Russian population under siege. At the same time, if that’s all that Russia sees, then Russia has no motive to even invade the rest of Ukraine, or other ex-URSS states for that matter.

An Important Development

It's in the context of what was described, then an evolving development needs to be considered. This development makes the “Russian thesis” even more credible.

Were Russia bent on taking over even Eastern Europe, and what would Russia do? It would certainly settle as many Russians there as possible. And indeed, the conflict itself naturally produces this outcome (as many non-Russians flee), which would make things easier for Moscow.

But did Moscow do that? No. Instead it did the opposite: It made it easier for ethnic Russians in Eastern Ukraine to exit Ukraine and go into Russia. From 2014-2017 around 312,000 Ukrainians did just that, obtaining Russian citizenship. And over time, Russia is making this easier still. Indeed, Russia isn’t just making it easier for Russians in Ukraine to immigrate to Russia, but for Russian-speaking persons in general.

This policy has two benefits:

  • It protects ethnic Russians, as well as those identifying with Russian culture.
  • It also helps lessen Russian’s demographic troubles, which could otherwise be a severe obstacle to its economic growth. Russia, like Japan, is facing the prospect of having a declining population.

Source: Google

Together with those two benefits, though, it also has a third consequence: It lowers the percentage of ethnic Russians (and people identifying with Russia in general) in Eastern Ukraine. Over time it defuses the situation, instead of making it worse. It removes the need for any kind of invasion.

This is something powerful to consider. Russian stocks are amazingly cheap because of extremely negative sentiment vs. Russia. The extremely negative sentiment is compounded by sanctions and talk of more sanctions. A large reason for all of this is that Russia’s actions in the Ukraine were seen as portraying an expansionary Russia. That’s clearly a big no-no.

Yet, as we see above, there's a much simpler explanation which is in line with the facts. Russia did what it did because it was protecting what it saw as Russians being under distress. Implied here is that Russia has no reasons to invade anything where Russians are not in distress.

Other Developments

What keeps the market’s sentiment towards Russia extremely negative isn’t just its imagined expansionary mood. There's also a branch of negativity tied to Russia’s attempted U.S. election manipulation.

This is portrayed most effectively by the hacking of Democratic Party servers during the past U.S. presidential election, but also encompasses such things as public relations and propaganda trying to influence voters.

Leaving aside the fact that there will be countless actors using propaganda to influence voters, there's another relevant development here: The development is that the U.S. midterm elections take place tomorrow, and there hasn’t been any large scale “Russian scandal” yet. Barring such a scandal and overt interference, it’s likely that the “need” for further sanctions will start being significantly reduced from tomorrow onward.

Hence, we could look at tomorrow’s U.S. midterm elections, and the lack of any Russian scandal, as a positive for Russian assets. This could be a slow catalyst, though.


Longer term, the situation in Ukraine can be explained benignly. There's no need for a belief that Russia wants to expand its borders to understand why the dynamics are what they are there. Russia’s willingness to ease the emigration from the contested territories back into Russia means that over time the situation is likely to solve itself peacefully and with no invasion.

Shorter term, tomorrow’s U.S. midterm elections and the lack of obvious Russian interference should start to lessen the perceived need for more sanctions on Russia. Now, U.S. sanctions on Russia, except for their impacts on specific equities, don’t really affect Russia’s economy much. But they do affect sentiment toward Russian equities – making these arguably the cheapest in the world. That could start changing tomorrow.

Idea Generator has positions in several extremely cheap Russian equities.

Disclosure: I/we 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.