Russia’s Bear Case Scenario Political Bully Financial Cripple $RSX, $VIX, $VXX, $OIL, $GAZ, $SPX, $SPY, $DJX

Ukraine and Putin’s latest gambit take up too much ink in front page news. Russia which has been described as a gas station that thinks its a country by Senator McCain has changed bluster and basically has blinked.

Russia wanted Crimea as a physical possession and essentially annexed it by surprise. Imperialistic tendencies drove Russian behaviour. What they did not calculate is the massive flight of capital from Russia by Russian oligarchs.  Russia is doing poorly and the masses have been distracted. The elite know better and are voting with their pocket book.

Putin cannot control the flight of capital. Being a former KGB black ops guy he is used to massive government support and money is no object. Not sure that Putin has truly though through the ramifications of capital flight.

So now he increases the rhetoric about Ukraine’s gas bills and demands up to ten times what may be truly owed. Why? He sees massive Western funds being thrown at Ukraine and he wants most of it. An independent Ukraine on financial life support to the west paying protection money to Moscow will work just fine. Russian speaking interests be damned.

So he will use local dissidents who have been emotionally duped into wanting some kind of union or protection from Moscow as a leverage stick all the while demanding huge ransoms through gas pricing.

The sooner Ukraine and other European countries wean themselves off of Russian Oil and Gas the safer they will be militarily.

My advice frack away big time.

In the mean time if Putin had territorial ambitions he will shelve them in the interests of economic blackmail. BTW the occasional infrastructure problem deep inside Russia would be useful just to change their perspective and get Russians worried about internal security. If you could make Moscow’s lights go out for an hour or  two that would be great.

George Gutowski writes from a caveat emptor perspective.

Crimea’s Bear Case Scenario for Russia $SPX, $SPY, $DJX, $GAZ, $OIL

Crimea under military occupation appeased Moscow and voted to leave the Ukraine. As Mario Gabelli pointed out in a tweet on the weekend the following metrics look difficult for Crimea.

  • 90% of their water comes from Ukraine
  • 80% of their electricity comes from Ukraine
  • 60% of primary goods comes from Ukraine
  • Crimean tourism consists of 70% Ukrainian citizens
  • Moscow pays a rent of $98 million per annum for the use of Black Sea ports.
  • Crimea runs an annual deficit of $1 Bln which will now need to be covered.

Moscow will stop paying rent to the Ukraine and Ukrainian tourism to Crimea will disappear. Russian forces recently took over a natural gas pumping station just outside of Crimea. Someone realized that 100% of Crimea’s natural gas passes through Ukraine in one pipeline. Not sure if the Ukrainian workers are reporting for regular work. But eventually something will break down and need repairs. That will be interesting.

The Ukraine also paid approximately $1.1 billion in state funds for pensions and transfer payments to Crimea and residents. Moscow will have to cover the tab or else face charges of betrayal.

While the gas, electricity and water will probably continue to flow primary goods will probably dry up and Russia will need to replace.

Crimea does not seem to be economically viable. Their value is strategic from a military point if view. Warm water port for Russian navy has been a critical factor since Catherine the Great. The costs will continue to mount for Russia. Military activities are parasitic from an economics perspective. Russia is going to expend wealth and only have military prestige to show for it.

To finance Russia will need to continue selling Oil and Gas for hard currency.

George Gutowski writes from a caveat emptor perspective.

China to Benefit from Crimean Crisis. Bear Case Scenario for Western Economies $DJX, $SPX, $SPY, $XLF, $BIK, $OIL, $GAZ, $FXI, $EWH

The west will continue to isolate Russia. This means reducing purchases of Russian energy and other commodities. Russia will of course become desperate for foreign reserves. The ruble does not buy that much.

China is sitting on top of a very large amount of US Dollars and other hard currencies as well. They clearly need commodities and will do business with the Russians after extorting some excellent pricing. Continuing on this diabolical thread the Chinese will only be too happy to supply Russia with goods that Russia can no longer import. All at a substantial mark up.

If its good enough for Wal-Mart it probably will be welcomed in many parts of Russia. What China cannot manufacture they will import and sell to Russia.

So commodities exporters may find some unusual competition that they cannot match. Also China after decimating western manufacturing with cheap labour will market to Russia. If production bottlenecks develop the Chinese will increase prices to the west and suck more hard currency out.

China will also benefit from cheap Russian oil and gas. A cost advantage that western economies will not have. This will be a strategic advantage.

George Gutowski writes from a caveat emptor perspective.

President Obama Bear Case Scenario with Comrade Putin $BIK, $BKF, $EEB, $QQQ, $DJX, $SPX, $XLF, $SPY

President Obama is scrambling for options over Crimea. Some long-term cards look good. Stop importing energy from Russia. But Europe must do this. Basically Putin is a KGB bully who has never lost a fight in the school yard and therefore is prone to miscalculation.

The G8 meeting in Sochi is all but dead. Can you imagine the other G7 leaders showing up and saying what they are thinking. Putin doesn’t need that but would find it hard to walk out in his own country.

Europe will be at the forefront of effective trade sanctions against Russia. North America and other oil rich countries will need to increase production to compensate for Russian supply. I believe this will happen in a stealthy fashion and the Russians will one day wake up to pathetic export revenues.

The rest of the world will need to increase imports from Europe to compensate. So maybe the prize of a Benz or Beemer will come down some?

Obama’s short-term problem is getting respect from Putin. Probably through fear as Putin in a bully mentality only respects raw power. Obama needs to overcome the Edward Snowdon issue. Obama needs to overcome the Syria and Chemical weapons trump card that Putin played.

Obama needs a way to kick Putin in the balls so that he is gasping for air and no one dares come to his assistance.

That means financial consequences so that Russia cannot move money around on the world stage and further their agenda. Buckle up if Obama is going to redeem himself, and he has to, this will be a rumble to remember.

The Berlin Air Lift was successful.

George  Gutowski writes from a caveat emptor perspective.

Bear Case Scenario from Russia $VIX, $VXX, $SPX, $DJX, $XLF

We all saw it coming. The Olympics are over and Putin moves on the Ukraine or more specifically on Crimea. The former KGB thug cannot stand the constant retreat of Russia interests and loss of prestige.

Here are a few points to remember.

Gas to Europe may be a black-mail tactic that Putin can use. But there is only one pipeline into the Crimea and it goes through the Ukraine. He will be hurting the very people he seeks to protect. Despite the propaganda that will come out of the Kremlin Russian interests are not served by a frozen Crimea.

Russia needs the foreign exchange that gas and oil sales bring. he can threaten to cutoff Europe. He probably will remind the west he knows where the shutoff valve is. But he will also hurt his own pocket-book and forever isolate Russia as a supplier. If Russia cannot sell oil and gas it will run short of foreign exchange very quickly.

Putin has his own dissent problem. If conditions in Russia worsen his grip on power will loosen. Maintaining an active hostile occupation of Crimea in a belligerent context is expensive. He needs to keep the game up and that costs cash. He does not have it.

The Pro-Ukrainian sentiment is very strong in both USA and Canada. Elections are nearing. Putin may die the death of a thousand cuts.

Much of Russia’s response is a nostalgic throw back to olde cold war days. The Russian fleet is not what it used to be. Russia does not have the same interests it used to have. Russia is spending resources on prestige and not on factors which will make them strong.

Russia needs access to the western financial system. Iran learned this the slow and hard way.

Syria continues to bleed with a stupid civil war. Russia will find it difficult to continue maintaining their involvement. Crimea will trump Syria when Russia considers its interests.

China is of course watching this very quietly. They know that a distracted Euro-focused Russia will fumble the ball in Siberia and Asia. If Russia is interested in Crimea than China covets much if not all of Siberia.

Russian oil and gas resources are optimized by western energy companies. If this were withdrawn oil and gas resource production would decline rapidly and create more internal dissent.

In the meantime the market hates uncertainty. Don’t do deals where Russia is a factor. No one can assess the wild card factor.

George Gutowski writes from a caveat emptor perspective.