Hasty Reaction by Russia Puts Investors on Notice

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Unilateral action by Russia regarding Ukrainian instability has put investors on notice. It is unclear as to what Russia's end game is in Ukraine but this action spooked investors and caused a great deal of uncertainty as evidenced by a 7% midday drop on Monday of the Market Vector Russia ETF Trust (NYSEMKT: RSX  ) .

Vladimir Putin's tenure as Russia's President has been marked by swift actions highlighting the lack of checks and balances in that country's political structure. Sometimes this can be beneficial as seen during the State's mindful development in basic materials and energy sectors, which created numerous jobs, increased export opportunities, and created many new millionaires and billionaires. However, Putin's strong hand is actually a double-edged sword where actions in question by the business and international community can often result in billions in lost market cap overnight and possibly lead to sanctions, like those being discussed now.

Of course, since the energy and materials sectors have been so important to the development of that state it would be among the first sectors targeted for sanctions. Bad news for the Market Vector Russia ETF, which has 42% of its holdings in the energy sector alone. Its next largest sector is basic materials at 16%.

Gazprom and LUKOIL, both hit hard in yesterday's trading, are traded on the OTC markets domestically. They are the two largest energy holdings in the Market Vector Russia ETF and stand to suffer with the adoption of international actions against Russia. Looking to pick up the slack would be companies like Statoil (NYSE: STO  ) , a Norwegian company with significant oil and gas interests abroad, which was up 3% midday on Monday.

Another affected stock is Mechel (NYSE: MTL  ) , a Russia-based mining and steel company. Over the last few years it has seen some rough times, down over 94% since the beginning of 2011. Currently it trades under $2 and looks to be in further trouble with some of the worst numbers in the industry. Negative sales growth, negative EPS growth, mounting losses, and decreasing capital investment are all taking their toll. Couple this with the possibility of sanctions by the European Union as well as the United States and this is a recipe for disaster. Continued projections for massive earnings losses loom and may be increased soon if this situation spirals further.

Finally, Russia is a large global supplier of potash. Companies such as Potash Corp (NYSE: POT  ) and Agrium (NYSE: AGU  ) stand to benefit from any sort of actions against Russian potash companies. This is good news for investors in those companies who are still suffering after the Belarus cartel breakup. Both Potash Corp and Agrium were in positive territory on Monday while the majority of the market was in deep red.

Foolish conclusions
Opportunity abounds in Russia but tapping that potential remains difficult due to some misguided political agendas and decisions. Concentrated power can often result in unpopular unilateral decisions from a global standpoint, which can have economic consequences. That highlights the danger of investing in Russia, where a policy decision that meets with no checks or balances can often result in negative impacts for investors.

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James Catlin

James Catlin has degrees in both Political Science and Economics. He is the owner of a small orchid nursery and manager of a private portfolio that includes stocks and investment real estate.

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