From Iran With Love, How Russia Wins Regardless

Includes: ERUS, OGZPY
by: Elliott Auckland

The Western world has edged closer to a war with Iran as the politically well-connected Russian newspaper Kommersant revealed the pivotal nature of the upcoming "Big-6" talks with Iran. "The Americans are insisting that the meeting is the last chance for Tehran ... Clinton has asked her Russian colleague (Foreign Minister Lavrov) to pass on this message to Iran".

This message was all but backed up by a Reuters poll indicating that 53% of Americans back an American led military operation in spite of higher energy prices. The combined message from the American public and the government present a new worrying phase in this Iran debacle. Earlier this month Israel's prime minister had warned that time is running out for diplomatic means of preventing an Iranian missile. Incidentally 62% of Americans backed Israel for military action.

The talks between Iran, its two allies; China and Russia and the Western contingent of the U.S, U.K., Germany and France will recommence this month. All earlier meetings dating back over 5 years on the subject of nuclear facilities in Iran have ended in a breakdown. The difference this time is the Israeli's have pushed all their cards on the table, and seemingly, today, so too has America.

There are a few ways to defend against a military conflict in Iran, previously I have suggested global security companies . However, I feel indirect approaches which offer both upside in the global economy as well as a military conflict in Iran, present the most attractive opportunities.

Last year as the world began to worry about the Arab spring and possibly knock-on effects -- the shutting of the Suez Canal for example -- energy prices spiked rapidly, and with it so did Russian equities as Russian oil and gas became more expensive but with no supply risk. Similarly, this time around with very real possibilities of the Straits of Hormuz being shut, Russia is lined up well to benefit in many ways.

1. Oil and Gas supplies from the middle east fall, pushing up global prices. The Russian trade surplus surges as Government and private entities profit from spike.

2. Conflict in Iran develops, or even Syria and further military supply contracts are handed to Russia.

3. Iranian energy supply and production lines are hit, increasing China's willingness to develop a Russian-Chinese pipeline (talks are constantly on-going).

The fantastic aspect about being long Russian equities, is that even if there is no war in the middle east, Russia is still poised to outperform most global markets. The Russian economy is extremely wealthy, with very little debt and rich in resources from the well known oil and gas, to soft commodities like wheat. The recent election has lead to social security commitments by Putin that will boost Consumer demand across the board, and unlike most global economies Russia thanks to it surplus and tiny amount of issued debt, has more than the capabilities to boost any growth shortfall in the economy, while standing well positioned to gain from any pick up in global growth.

What price does one pay for all this? 6x PE, in an economy that is growing.

ERUS is a good proxy for the Russian economy, tracking the largest banks and energy companies. My favourite, its largest holding: Gazprom (OTCPK:OGZPY) On 3.5x earnings, with the backing of the entire Russian government and ample resources. A potentially deal supplying the Chinese economy would cause a major re-rating of the stock unparalleled in its vastly successful and profitable history.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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