If you believe as I do that one of Russian President Vladimir Putin’s goals in igniting the current conflict in Ukraine was to attempt to use Europe’s dependency on Russia natural gas to drive a wedge among NATO members, the most recent developments make a great deal of sense.
And we look like we’re on the road to a major escalation of the conflict in the Ukraine.
Today, Friday, February 18, the Russian-backed leader of a separatist-controlled area of eastern Ukraine said that officials there were launching a mass evacuation of civilians into neighboring Russia, citing the threat of military action in the region by Ukrainian troops. This picks up on Putin’s charge that Ukraine was pursuing genocide against Russian-speakers in the eastern break-away regions of Ukraine. And it continues the Kremlin’s efforts to cast this as a battle to protect Russia and Russian’s against enemies in Ukraine and the West.
The logical extension of that isn’t a general invasion of Ukraine by Russian troops–now up to 190,000 massed on Ukraine’s borders, according to NATO estimates–but rather some limited conflict aimed at occupying those separatists regions of eastern Ukraine to protect Russian-speakers there from a Ukrainian invasion with a potential recognition of the self-proclaimed Donetsk People’s Republic in Ukraine’s Donbas region as an independent country.
That kind of limited invasion could potentially splinter NATO beaus members of that organization would then be faced with a choice between imposing the kind of powerful sanctions that might get Putin to back down and the cutoff of natural gas supplies at the end of the European winter.
I’m not inside Putin’s head, but this kind of move is consistent with his methods for advancing what he sees as Russia’s interests and his goal of restoring Russian influence in Eastern Europe.
I think that at least initially NATO would hang together and impose significant sanctions on Russia that would halt Russian exports of natural gas and other commodities to European and U.S. markets and that would, in essence, shut down the Russian financial system.
For investors, the bottom line is that sanctions and a disruption of global commodity and financial markets is a very real scenario as we go into the long holiday weekend.
I’d keep my oil and natural gas hedges in place: ConocoPhillips (COP), Pioneer Natural Resources (PXD), Cheniere Energy (LNG), and Equinor (EQNR).
And in my next post and today’s video I’m going to add yet another hedge to my portfolios.
