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How Do You Play the Ukraine? - Real Time Insight

Posted: 3/14/2014 8:14:00 AM
Referenced Stocks: A;B;C;QIWI;YNDX

Yesterday, investors took a nasty hit from Ukraine's crisis.  How to play a political crisis is worth discussing in a Real Time Insight.

First, study the historical background on Crimea.

Sevastopol is and has been the headquarters for Russia's Black Sea Fleet for over a century.  In the west of the city, there are well-preserved remains of the ancient Greek port city of Chersonesos .  It was founded in the 5 th century BC.  The name means "peninsula". 

In U.S. terms, the peninsula of Crimea is NOT Guantanamo Bay, or Puerto Rico, or Okinawa. It is NOT a far-flung post used and occupied by the U.S. Navy.  Rather, it is San Diego, where the U.S. Pacific fleet is stationed and has been using for over a century. Would we protect core military assets in San Diego from any threat? Of course!

I see a zero percent chance of Russia moving away from the acquisition of Crimea.  80,000 troops are massing on Ukraine's western border, which tanked markets on Thursday.  I put a 50-50% chance of Russia invading Ukraine from the west.  That land does not have the same military importance to Russia.

Second, gauge what politicians will do.

I expect negotiations to drag on for a long time.  Germany's Merkel, with her Russian speaking abilities and East German Communist experience, will lead the way in negotiations.  The U.S. will take a back seat.  I can't see anything but negotiations and aid packages for the Ukraine, from either the U.S. or the E.U. 

There has been no appetite for military engagement in Syria.  I can't imagine there will be any appetite for war in Crimea or the Ukraine for that matter.

Third, what do markets do?

They are stewing right now.  I think it becomes background noise with time.  That is a base case.  The problem is markets (and me) can't put a small probability on a Russian intervention from their shared border with East Ukraine/West Russia.  That uncertainty is being priced in.

Take a broader example on emerging market correlations for insight: Brazil and India and Russian share indexes are tracking one another. Attractive valuations are the way up and out. But they need a postive catalyst.

To conclude, here is a great line from the FT. 

Speaking to the German parliament immediately after Chancelor Angela Merkel, Gregor Gysi, the Linke parliamentary leader, delivered a stinging criticism of western policy in eastern Europe in attacking Russian interests over decades.

"Everything that Nato and the EU could have done wrong, they did wrong."

Presenting Ukraine with an either/or choice between the west and Russia was a failure of both sides, he said.  I agree.  In a poll in the FT, 69% of Germans think sanctions won't help. I agree again. That approach makes things worse.

Ukraine's leaders need to sort this puzzle out.  I support civilian aid there, and little else. Treat them like grown-ups.  Let them take full responsibility for their revolution. Stay away from punishing and scolding Russia like a child, as we are now.  Sanctions reinforce their existing prejudice that they must act fiercely. 

Sanctions are also a blunt tool, even these modest proposals for visa restrictions and asset freezes on leaders.  Once proposed, global markets react.  They fear a tit-for-tat escalation.

My Two RTI Questions?  

(1) As an Investor, How Do You Play the Ukraine?

(A) Buy
(B) Sell
(C) Hold

(2) As U.S. Sectetary of State, How Would You Handle the Ukraine?

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