5 More Reasons You Should Worry About War in Ukraine
"Curiouser and curiouser!" cried Alice (she was so much surprised, that for the moment she quite forgot how to speak good English)."
-- Lewis Carroll, Alice's Adventures in Wonderland
In Ukraine as in Wonderland, the news out of Crimea just gets curiouser and curiouser. Over the weekend, Russian troops crossed the border out of the breakaway region and into Ukraine proper, seizing control of a natural gas distribution station in the Ukrainian village of Strilkove. Meanwhile, back on the peninsula, regional vice premier Rustam Temirgaliyev finally admitted what everyone has known for weeks -- and which Russian President Vladimir Putin continues to deny -- that "Yes, we have Russian troops in Crimea."
And with those troops still in-country and armed to the teeth, Crimea has reportedly just wrapped up a regionwide referendum. The result of this "free and fair" poll: an 85% turnout, with 93% voting in favor of seceding from Ukraine and joining Russia instead.
In short, far from "de-escalating," the Crisis in Crimea is starting to look permanent -- and indeed, may expand beyond the borders of Crimea. This bad news helped stocks on the S&P 500 and Dow Jones Industrial Average suffer their worst declines in nearly two months -- and this could be only the beginning.
Two weeks ago, at the start of this crisis, we ran down five ways the conflict between Ukraine and Russia could affect your portfolio. Two weeks into the crisis, with new facts in hand, we're back to update that advice with five more predictions. Here goes.
Trade between Russia and the U.S. passed $38 billion in value last year, and much of that could be at risk if the Obama administration follows through on threats to punish Russia's land-grab in Crimea with trade sanctions. Even worse for investors, Russia has promised to retaliate against such sanctions, potentially hurting U.S. companies that have made direct investments in the country.
Major U.S. manufacturers such as Ford and General Motors have invested more than $10 billion directly in Russia. Ford, for example, manufactures Focus and Mondeo automobiles at its plant in St. Petersburg and is in the process of building a new $274 million engine plant in the Russian region of Tatarstan. GM set up its first factory in St. Pete as well -- a $300 million, 98,000-cars-annually assembly plant -- and up until this crisis began, it was expanding its joint venture with AvtoVAZ in Togliatti.
One of the likeliest targets for U.S. trade sanctions would be cutting ties with Russian banks in an attempt to constrict Russia's access to foreign capital. This holds immediate implications for banking giant Citigroup . The U.S. bank with the most exposure to the country, Citigroup serves more than 3,000 institutional customers in Russia, has a retail customer base of 1 million and operates 50 bank branches in a dozen Russian cities. Citigroup earns about $300 million annually in Russia -- for now.
Oil and gas
Closer to Crimea proper, a consortium of companies including Italian energy producer Eni recently signed a $4 billion investment deal with Ukraine to develop underwater gas fields off the western coast of Crimea. A "production sharing agreement," this deal was made with the Ukrainian government as a party, however. If Crimea is leaving Ukraine, the legal validity of the deal could be questioned -- and Eni could lose its 50% stake in the project.
Steel -- again
ArcelorMittal is a bit trickier. Last time we looked at the stock, we mentioned how its operations might be disrupted by conflict in eastern Ukraine, hurting global steel supplies and driving up prices. Instead -- the opposite may happen. Last week, Arcelor warned that while it's still producing plenty of steel, steel usage in Ukraine has dropped like a rock, as companies delay construction projects to see how the conflict with Russia plays out.
Result: Arcelor's steel is being diverted to international markets, potentially increasing supply and driving prices down. (Curiouser and curiouser, indeed.)
Finally, we turn to the defense contractors. This week, Ukrainian leaders made impassioned pleas to the U.S. for military assistance. Asked to supply guns and ammo, the Obama administration agreed only to send food aid, fearing that sending weapons to Ukraine might offend Russia.
But as we saw with Arcelor, this situation is fluid. The U.S. has a history of providing surplus weaponry to bolster the militaries of allied nations -- offering two dozen old F-16 fighter jets to Romania in 2010, for example, and sending 400 used M1A1 Abrams main battle tanks to Greece in 2011 -- all free of charge.
But "free" isn't always what it seems. In the F-16 deal, for example, Romania was expected to spend $1.3 billion upgrading its fighter jets to modern standards. That's money in the bank for Lockheed Martin . Potentially, if Russia fails to back down in Ukraine, we could soon see Congress approve similar sales of military hardware -- to Ukraine, to Georgia (which has had issues with Russia in the past), and to other border states such as Estonia or Latvia, which also wish to strengthen their defenses.
The risk to investors? Shorting defense contractors in the middle of a new cold war.
Conflict is eternal, and defense stocks will never let you down
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The article 5 More Reasons You Should Worry About War in Ukraine originally appeared on Fool.com.Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors and owns shares of Citigroup, Ford, and Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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