Russia's Oil and gas is essential to the US economy

“Are you mad – it’s the start of a new cold war”

This was the response from a reader last week when I said that in the scheme of things, what is going on in Russia was just a skirmish.

Since then rhetoric from both sides has increased. The usual hawks have been calling the Russians names and Russia has threatened to protect its interests.

Despite all this, I have not changed my view. I think a buy opportunity has been created for stocks with Russian exposure.

So, my answer to that email is as follows:

No, I am not mad. And no, we are not entering a new Cold War.

Let me explain why.

Russia and the west are inextricably linked by a massive financial web. The Russians need the West and the West needs Russia.

The Russians are very upset by the reaction to the situation in South Ossetia. For a start, the Georgians were the first ones to attack – against all sensible advice.

The Russians also draw parallels with Kosovo. As far as the average Russian is concerned, the supporting of the breakaway of South Ossetia from Georgia is identical to the breakaway of Kosovo. It’s just that the breakaway of Kosovo was in the interests of the US and the breakaway of Ossetia is not.

Rightly or wrongly, they feel they are being criticised for acting in exactly the same way that the Americans did six months ago.

The missile shield announcement by Poland was also needlessly inflammatory. I don’t blame the Russians for being annoyed.

The shield is an outrageous proposition from a Russian point of view. In fact, I think it is quite outrageous too.

America is being provocative

Imagine the reaction if Russia declared it was building a radar and missile shield around Cuba in order to protect its interests from rogue South American states… it would be the 1962 Missile Crisis all over again. The US would certainly threaten military action. Just as Russia has done.

Russia is involved in a game of chess.

It is asserting its strength and is seeking border security. It is not in Russia’s interest to let this situation carry on for much longer. It is not in our interest either.

The most obvious financial hit seen by Russia has been in its stock market. But this contagion has spread to all aspects of business and finance.

The amount of debt raised by Russian companies in August slumped 87% from July to $1.18bn. Equity market issuance has almost vanished, with $3m raised in August compared with $933m in July.

Russia is no longer a self-contained entity trying to spread an ideology. It is a fully paid up member of the global capitalist world.

The Russians have had a taste of financial freedom and they love it. They have a lot to lose. They care more about cold hard cash than a new cold war.

Russia is helping to fund the US deficit. It is one of the world’s largest holders of US Treasury Bills. In fact, it has doubled its holding of US debt over the last year. It holds $65.3bn worth of US debt as of the end of June.

The only countries that hold more US government debt than Russia are Japan, China, the UK, Brazil and Luxembourg.

Then there’s energy

Russia’s economic development has been based on soaring energy costs. It still needs those rubles… and we need their gas.

The biggest gas importer from Russia is Ukraine. A massive 66% of the gas used in the country comes from Russia. The second largest importer of Russian gas is Germany, where 36% of domestic gas consumption comes from Russia.

In Italy, Russia supplies 25% of all gas used. For France the figure is 20%. We all need their gas – and they need our gas dollars. For this reason alone any further escalation is likely to be avoided. Light would go out across Europe and ordinary Russians would see the wealth they have built up start to collapse.

America also needs Russian oil.

Oil exports to the U.S. have almost doubled since 2004, rising to over 400,000 barrels per day in 2007. In total, Russia exports around 7 million barrels per day. This generates around $826m in cold hard cash each and every day.

If this flow of this money stopped, Russia would be financially doomed.

It’s not just oil and gas

Russia is also essential to the US economy.

Commerce Department figures show that US exports to Russia in the year to date were worth $4.659bn. Imports from Russia to the US were worth $13.332bn.

To get an idea of the importance of Russia for US businesses just take a look at results from Ford Europe, which were released last Tuesday.

The US auto sector is collapsing, but Russia is helping to ease the pain.

Ford's sales in its 51 European markets were down 4.7% in July to 149,800 units, compared with the same month in 2007. Russia bucked this trend. Sales of new vehicles in the country rose 26% in July.

So far, more than three million vehicles have been sold in Eastern Europe this year, a staggering 40% increase. With American carmakers racking up the losses, sales in Russia and Eastern European nations are essential.

Russia continues to help prop up the failing US economy. Last week, Russia finance minister Alexei Kudrin confirmed that the country was still buying debt issued by Fannie Mae and Freddie Mac, albeit on a smaller scale. That’s something that I would not do.

Cold war certainties have been removed.

The West and Russia are no longer competing ideologies throwing massive amounts of cash at plans to defeat each other.

Russia is now a competitor, not an opponent.

We need Russia to help fight terrorism and also to reign in Iran. Russia no longer wants to win a war with us. It wants to win influence and generate cash. Russian people want bank accounts in the West so they can do business here. They just don’t want to be humiliated on the global stage… which is what the world reaction to the South Ossetian crisis did.

Russians feel bullied.

I believe that these tensions will be short lived because there is too much at stake for everyone. It is not in anyone’s interest to escalate them to a critical level. The US does not have the soldiers or the funds to get involved in any more conflicts.

I expect the Russian market will recover. There are two shares in my portfolio that I expect to recover once this current situation has resolved itself.

It may take some time for the present game of chess to get to its stalemate situation, but after that Russian markets will recover.

This is NOT the start of a new Cold War. Anyone who thinks that should take a look at history. Then buy Russia.

To discover more about my Russian investments click here

Regards,

Garry White
Editor
Smart Commodities UK

P.S. If you enjoyed this article then sign up for Smart Commodities UK. It’s dedicated to searching out the investment trends that could provide our biggest profit opportunities for the next decade…

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Russia's Oil and gas is essential to the US economy

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