Russia's aggression in Crimea will affect more markets than energy

Ags also at play

Cold Weather and Cold War

Russia thumbs its nose to the West and moved to take control of the Crimean Peninsula causing sharp spikes in energy and precious metals as Putin’s gambit poses risk to the global economy and peace in the world. President Obama is calling for sanctions and secretary of State John Kerry is on his way to the Ukraine but everyone acknowledges there is no easy way out of this crisis. Russian Prime Minister Dmitry Medvedev said that Ukraine's leaders had seized power illegally, and predicted their rule would end with "a new revolution and new bloodshed."

In response to a falling stock market hitting six-year lows and a crumbling ruble that hit a record low against the dollar, Russia abruptly increased its interest rate by 1.5% points to 7% and its bank repo rate to 8%. Traders which at first focused on the potential demand destruction are now shifting to worries about the availability of supply.

While many market watchers tried to downplay the rising risks in the Ukraine we have been watching them closely. The high stakes impact for energy is clear and both Russia and the European Union have a lot to lose. The EU cannot afford to lose Russia’s energy and Russia can’t afford to lose the revenue they get from energy exports. The EU imports 31% of their natural gas and 27% of crude oil, 24% of their coal.  Yet over 51% of the Russian budget is dependent on the revenue from energy exports. It seems that Putin is gambling that Europe will not cut imports.

What Putin really wants is to get his grubby hands on the Ukrainian pipeline network. What good is it to have the energy if you have to rent pipelines. He may cut off supply to teach the Ukrainians a lesson. Already we are hearing of shortages of coal and oil that could be used to break the will of the Ukrainian government.

 This is another reason why the United States should move to approve energy exports. Putin has made no qualms about invading his neighbors and using energy as a political weapon. It is time for national security purposes that the United States moves quickly to approve oil and gas exports.

Record lows, with the dollar trading at 37 against the ruble and the euro at 51.2, the Central Bank of Russia raised interest rates by 1.5%, taking the key rate to 7%. It also bumped up its repo rate, at which banks receive liquidity to 8%, and banks said it sold dollars heavily to support the currency. Russia's deputy economy minister, Andrei Klepach, said that the central bank's move has nothing to do with inflation and is purely aimed at limiting losses in the ruble, Interfax news agency reported.

Natural gas at Henry Hub rose mainly on cold weather. Many parts of the Midwest saw temperatures hit record lows. Yet the gas in Europe is on fire as fears that factories will have to shut down if the supply through the Ukraine gets cut off. U.K. next-month gas jumped as much as 6.9%, the biggest intraday gain since October 2011 according to Bloomberg.

Other markets that are moving on weekend events are precious metals. Not only are people buying gold as a safe haven play, the Russian central bank sold massive amounts of dollars to try to support their currency. This intervention may be the first of many by the Russian central bank that wants to avoid an economic collapse. Wheat and corn are soaring as the market fears that Ukraine’s supply will be out of the market causing buyers to flock to U.S. grain. Ukraine is the world’s fourth largest exporter of corn. Pork could also move if sanctions mean that Russia will not get their hands on U.S. pork supply.

Timing is everything. To add to the tension, North Korea decided to put on a missile display. I guess they want to stay atop the evil empire list after Russia moves.

 

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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