Trading Ukraine Uncertainty

Removing the politics of the Russia-Ukraine issue and focusing on the economic implications of Russia’s bloodless annexation of the Crimean peninsula puts some trading opportunities on the table as global risk premiums jump. In order to do this, a couple of suppositions must be declared. First and most importantly, the United States will not actively engage Russian troops. In many ways, this is a replay of the Georgian conflict in 2008. Georgia was in revolt against Russia and wanted closer ties to the European Union and the US. Their cause was quickly championed by Western leaders until it became obvious that neither the European Union, The United States nor, NATO would take any military action to defend Georgia against Russia. This episode set the precedent for the current situation.

The current situation in the Crimean peninsula is far more important to Russia economically, militarily and humanitarianly. Therefore, the knee jerk reaction by our government to defend Ukraine’s sovereignty against the oppressive forces of communism is simply hyperbole. In poker terms, Vladimir Putin couldn’t call the Secretary of State, John Kerry’s “All in,” fast enough. Putin knew it was a bluff and now sits as the chip leader in the biggest game of Texas hold ’em since the Cold War. Putin is betting that the European Union, NATO and the US will acquiesce to an unstated and unwritten reclamation of the Crimean Peninsula.

The anticipated inaction should resolve to a business as usual approach going forward. This will allow the Ukraine to continue its exportation of corn and wheat, where globally it ranks second and sixth, respectively to the rest of Europe. Therefore, the recent run-up in prices should be viewed as a selling opportunity because both the fundamentals and the commercial trader position strongly suggested that prices in these two markets were already too high. Here are the corn and wheat commercial trader setups. This situation is very similar to spikes in crude oil during Middle East times of crisis.

Every market has a built in fear based reaction. In the case of crude oil and agriculture, the built in reaction to fear is higher prices. Conversely, the built in fear in the stock and currency markets is downward. The Russian stock market has sold off nearly 10% as a result of Putin’s actions. The decline is based on two primary factors. First of all, the largest companies in the MICEX (Russia’s equivalent of the S&P500) are energy companies who would be hurt tremendously by global sanctions and limiting natural gas shipments through Ukrainian pipelines. Secondly, Russia’s economy has slowed considerably over the last two years with GDP falling from more than 7% to less than 2%, currently. Finally, the Russian Ruble has fallen by more than 10% in the last two months as their escalating costs and declining productivity hamper future growth prospects, anyways.

The media makes money by selling advertising. Hype generates attention. Attention generates advertising dollars. Thus, we are inundated by over hyped speculation of what COULD happen with little regard to what is MOST LIKELY to happen. The most likely thing to happen isn’t dramatic at all, which makes for poor headlines. The most likely thing to happen is that business will continue to operate roughly as usual which is most likely to cause the markets to revert to their means as longer term fundamentals that were already in play continue to work through the system.