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Ukraine crisis: Time to get out of Russia?

The crisis in the Ukraine rumbles on. The name calling continues. Rebels based in the East are called “terrorists” by the interim government. Government members are called “fascists” by the rebels. Politicians from the US and EU wring their hands, even though they remain mostly tied. Worst of all, people on the ground are getting hurt. So is it time to get out of Russia?

The situation in the Ukraine remains highly uncertain and unstable. A power struggle is going on. Presidential elections are set for 25th May. But separatists in the East, who want to join with Russia, plan a referendum on 11th May.

The Ukrainian military, controlled from Kiev, is attempting to suppress the uprising, but is apparently aware that it needs to tread carefully. If the body count becomes too high then Russia may decide to send troops over the border, in support of Russian sympathisers.

In the meantime, the US and EU keep threatening meaningful economic sanctions against Russia if there is another military intervention. But sanctions have been weak so far.

The US authorities would probably like to be more heavy handed with sanctions. The country has few trade links with Russia, and thus little to lose. Plus it’s always on the lookout for opportunities to expand its influence in the “Great Game” of geopolitical hypocrisy.

(Bad idea, by the way. The strategy of marginalising post-Soviet Russia, which is nothing new, is just driving it closer to China. The USA’s loss is China’s gain.)

On the other hand, many EU countries rely on Russia for natural gas and oil, and their companies sell plenty of goods in Russia. Commercial links between Russia and Germany, the dominant power within the EU, are especially close. Overall, Europe imports about 30% of its gas from Russia, and half of that goes through the Ukraine.

So there is no united front against Russia. In fact, just a week ago Austria struck a deal for the new “south stream” gas pipeline from Russia to end there. Previously, Italy had hoped to be chosen. The first gas deliveries are planned for 2017, and will bypass the Ukraine (making it less important to Europe).

This was a bilateral deal between Austria and Russia that didn’t involve the European Commission, the EU’s central authority. The timing was ironic, having happened just as EU officials in Brussels were calling for less reliance on Russian gas.

But that’s a side show. In the meantime the immediate and dangerous game continues in the Ukrainian East. And Russia knows that it holds one of the biggest trump cards: control over the gas that is much needed in the Ukraine and EU.

I can’t guess how this political crisis will be resolved. It remains a highly delicate situation, where one hot headed decision could result in massive escalation.

But I do know one or two things.

Russia may be a player in this game, but it’s an away fixture: the crisis is not taking place on the home field.

And Russian stocks remain incredibly cheap. The MSCI Russia index had a trailing P/E of 5 at the end of March. By comparison, the MSCI Germany had a P/E of 15.8, over three times as much.

So if the Ukrainian crisis gets worse, heavier sanctions are imposed on Russia, and Russia retaliates with sanctions of its own, which stock market is likely to be the better medium to long term investment?

Can you imagine German industry going without power for long? Neither can I.

I feel sorry for the ordinary people stuck in the middle of this situation. But when it comes to investing, this crisis will most likely have been forgotten in a few years’ time.

If you already own cheap Russian stocks, fellow OfWealther, then I suggest you stay invested. And if things calm down in the coming weeks and months – which seems likely, but not certain – then stand ready to pile in and buy.

Stay tuned OfWealthers,

Rob Marstrand

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.

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