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Investors Pause as Economic Sanctions Against Russia Loom

Since Russia inserted itself into the Ukrainian situation, the world has more questions than answers. Russian goals regarding this unilateral action are still unclear and the international community is growing more concerned.

These concerns have now manifested into solid action on the part of the United States with President Obama poised to unleash economic sanctions. With the Market Vector Russia ETF Trust (NYSEMKT: RSX  ) down almost 8% since the start of the crisis, the Russian economy could be bracing for an economic storm they can hardly afford.

First of all, just how important are exports to the Russian economy? In 2012, according to the CIA factbook, Russian exports totaled $528 billion which is approximately 20% of their overall GDP that year of $2.52 trillion. Main exports are oil, natural gas, metals, military hardware, and grains. Major trade partners are China 16.6%, Germany 12.2%, Ukraine 5.7%, Japan 5%, United States 4.9%, France 4.4%, and Italy 4.3%.

Since most of these export destinations have already expressed support, it looks that sanctions actually stand a good chance at making an economic impact in Russia. Sadly, for the economic sanctions to have the greatest effect, China will have to support the action which many see as unlikely.

While the impacts and duration of sanctions are still yet to be fully quantified since a concrete plan has yet to be put forward and implemented, the smart investor needs to stay one step ahead of diplomats. Selling Russian equities and buying those that appear ready to fill the gap would be a good starting point in preparing for this unfolding situation that doesn't seem to have a quick end in sight. But that's not the only game in town.

US treasuries appear to be gaining traction among investors caught in the crossfire with 10 year note yields to slipping to the 2.68% mark, a level not seen since early February.

The Russian rouble has been losing value compared to the US dollar despite the recent "temporary" hike of its benchmark interest rate to 7% from 5.5%. The Ukrainian hryvnia is also under increasing pressure as Ukrainian government instability is coupled with potential Russian intervention.

But the real winner could be gold. While often touted as a hedge against inflation, many believe (myself included) gold is also a hedge against fear and uncertainty, especially during times of political turmoil. Since Russia's involvement the SPDR gold trust ETF (NYSEMKT: GLD  ) is up approximately 2%. This brings total gains in that ETF since the beginning of 2014 up to 12.5%. However, the severity and duration of the crisis will ultimately be the deciding factors for how far and fast gold can run.

If this crisis plays out over many months the increasing price of gold will have a positive impact on the bottom line of gold miners. The Market Vectors Gold Mining ETF (NYSEMKT: GDX  ) had a horrible 2013, with the significant price declines in gold eating away at slimming profit margins as producers struggled with cost containment. But 2014 could be different as price increases hit gold, those same numeric increases carry over to the profit margins, translating into even larger percentage increases in terms of earnings.

With an overwhelming majority voting for Crimea to secede from the rest of Ukraine this past weekend, and Russia poised to back the dissolution of that nation, things could become far more unstable before they get better. Adding to that is the lack of any Russian guarantee that military force will not be used to back Crimea during its possible annexation. Russia cites Article 61, Section 2 of the constitution  which disregards international laws in this situation. It reads, in English: "The Russian Federation shall guarantee its citizens defense and patronage beyond its boundaries."

Investors are watching this situation carefully and so far they do not like what they see. If this situation continues to spiral out of control it could lead to even more destabilization in the global marketplace of which US investors are increasingly exposed.

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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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