Wealth Management Blog

Posts published in March 2014

Russia’s Moves Are A Concern For Everyone

By JJ Burns

March 29, 2014

There's reason to be concerned about Russia and the situation in Crimea; perhaps not so much in the short-run, but over the longer-run, we may see some challenges.

The concern stems from Russia's decision basically to steal the Crimean Peninsula from Ukraine. The move creates two important questions: How will Russia's reawakened nationalism affect economies in Europe as a whole and potentially the global economy, and what happens if tensions spin out of control?

In the short run, Russia’s move should not have much effect on the United States. True, grain and energy prices have moved higher in recent weeks. The odds are, however, that tensions won't escalate enough to disrupt the economic interests of the Russians or the West.   Here's why.

Russia and Ukraine are major exporters of wheat and grains and this year should supply 17% of global wheat exports and 18% of coarse grain exports: corn, sorghum and the like: however, the United States is still the world's largest grain exporter -- 20% of wheat and 30% of coarse grains. It has ample stocks to limit domestic shortfalls.   Add Australia, Canada and Argentina and Brazil to the mix, and world supplies are covered.

  • Russia is also a major exporter of oil: 13.5% of global crude oil output.  Thanks to vast reserves of natural gas, the state-owned Gazprom supplies about 30% of Europe's gas needs.
  • The U.S. is not a major importer of Russian oil or gas. Our imports come mostly from Canada, Mexico and the Persian Gulf. Russian oil imports are just 2% of the U.S. total. Natural gas imports represent about 12.4% of consumption, but most come from Canada and Mexico. Russian gas imports are negligible.

It's the longer run situation that's concerning, in part because European and American companies have made big investments in Russia.  Growing tensions could lead to more economic stresses on Europe in particular and the global economy as well. Here's what we mean:

  • If sanctions result in disruptions in Russian grain exports, you can bet grain prices will jump globally and even boost food prices here at home. On the positive side, farmers could see profits rise.
  • Europe's dependence on Russian natural gas, oil and coal makes its economies vulnerable. The problems would be most acute in places such as Finland, which depends on Russia for 100% of its gas supplies and two-thirds of its oil.  Germany gets a fifth of its coal and 25% of its oil from Russia.  If supplies to the West are halted, Europe could see its nascent recovery abruptly halted.
  • Trade relationships might deteriorate. With Russian partners, McDonald's operates more than 400 restaurants across Russia and 73 in Ukraine. It has developed a sizable network of local suppliers to provide meat, buns and French fries.
  • American manufacturers could be disrupted. Boeing Co. obtains about 35% of its titanium, the light but hyper-strong metal used to build airliners, from Russian sources. Russia is General Motors' fifth-largest market, representing about 2.8% of global sales. Ford Motor Co. has sold more than 1 million vehicles in Russian.   Both have plants in the country.
  • Exxon Mobil, Chevron and other oil companies have formed joint ventures to explore for more oil and gas. Sanctions could expose both to significant losses.

It is true that problems create opportunities. The most obvious is this: Let's say Russia stops shipping natural gas to central and western Europe; Russia is the region's biggest natural gas supplier. That could create a large market for liquid natural gas exports from the U.S. Already, companies are working on developing liquid natural gas terminals on the Gulf Coast.

Our team at JJ Burns is closely following events and we are assessing how other countries in greater Europe, India, and Asian economies are behaving.  Many of these regions could decline sympathetically from Russia’s moves thereby creating investment opportunities.  It may be a bit too early to jump on board or add to existing positions but not too early to understand the potential longer term benefits as they could enhance returns.