The United States recently enacted several new sanctions against Russia, freezing assets of Russian defense companies.
The sanctions also target companies related to the energy and banking sectors. Companies like Rosneft, Novatek (NOVKY), and Gazprombank – which is related to natural gas giant Gazprom (OTC:OGZPY) – are now barred from the U.S. debt markets for long-term capital needs.
Plus, after the Malaysia Airlines crash– where the majority of people who died in the tragedy were Dutch – a once-timid European Union is considering tougher sanctions, as well.
But I’m not convinced this will be enough to crush Russia’s economy.
In fact, thanks to one trump card that Russia holds over much of the world, the Kremlin has made itself truly impenetrable.
The Capacity to Survive in Isolation
For starters, much like the United States, Russia could function independently if necessary.
It sports bountiful energy supplies, oceans and pastureland for food, along with industry and a workforce (albeit one that’s inefficient). And it has survived in isolation for decades in the past.
The Russia of today is not the Russia of the Cold War days, however.
It’s now a much stronger country financially. Its cash reserves (measured in U.S. dollars) are second only to China. Sitting on close to $500 billion in reserves, Russia is in no danger of financial implosion.
And the country owes very little money, less than 14% as a measure of debt to its GDP.
But here’s Russia’s true ace in the hole – and the reason that full-blown economic sanctions are not on the horizon.
Russia’s Kevlar Exposed
To truly damage Russia and force it to reconsider the mess in Ukraine, the world would have to sanction the country’s energy sector by banning imports of Russian oil and gas.
That’s just not going to happen.
First, there isn’t enough oil from other sources to make up for any Russian shortfall.
Sanctioning Russian oil exports would send the price of crude oil to the stratosphere – damaging nascent recoveries in Europe and Asia, and seriously hindering the more robust recovery in the United States.
If sanctions on Russian oil exports were to pass, we’d see gas hit $5. And that’s a hopeful scenario.
Not to mention, there’s no way for Europe to make up for the huge supplies of natural gas it imports from Russia. There isn’t enough LNG in the region to come close to satisfying the demand.
Also, Europe’s pipeline network is optimized to receive gas from Russia. It will be at least three or four years before any outside supplier can derail even part of the supplies.
Indeed, for all its bravado, the U.S. government doesn’t have the ability to sanction the one sector that makes Russia its money.
If there ever was a “best time” for a belligerent Russia to flex its muscles, it’s now. It has the energy trump card, financial strength, and a solidly unified government made up of cronies who back its despotic regime 100%.
In the next issue, I’ll share two companies that are best positioned when the situation in Russia clears.
And “the chase” continues,
BY Karim Rahemtulla