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5 Reasons War in Ukraine Should Worry You

By Rich Smith – Mar 2, 2014 at 5:00PM

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War is rarely a good thing anywhere. Here are a few ways conflict in Ukraine could affect U.S. investors.

Three days after Russian diplomats assured the West that Russia will not invade Ukraine, Russia ... invaded Ukraine.

"Trust me. Would I lie to you?" Photo: Wikimedia Commons.

Conflict in Ukraine began Tuesday, with an announcement that Russia would begin war games on the Ukrainian border, involving three Russian armies, 150,000 troops, 200 combat aircraft and helicopters, and more than 2,000 tanks, armored personnel carriers, and other pieces of "military hardware." Over the ensuing days, it evolved rapidly into an armed takeover of crucial military installations, airports, and communications centers around the Russian military base in Sevastopol, leased from Ukraine in the Crimea. Russia's parliament has authorized a full-scale invasion of Ukraine, putatively to protect ethnic Russians living in the country. Ukraine has responded with military mobilization and a warning that further incursions by Russian troops will amount to a declaration of war.

Russian tanks on parade. Photo: Wikimedia Commons

Last week, New York Times columnist Helene Cooper took a look at goings-on in Ukraine and opined on Meet the Press that "at the end of the day it's not the No. 1 priority for the United States."

That's not exactly accurate, though. To investors at least, events in Ukraine could matter very much.

Here are a few ways how.

Oil companies
Largely dry on the oil front, Ukraine is believed to have ample reserves of natural gas, particularly in shale formations, and in offshore regions surrounding the Crimea. Major exploration companies including Royal Dutch Shell (NYSE: RDS-A) and Chevron Corp. (CVX -2.93%) have signed agreements to conduct exploration in the country, while ExxonMobil (XOM -1.77%) is believed to be close to signing an agreement of its own. Bloomberg puts the value of these agreements at upwards of $10 billion -- all now at risk from conflict in the country.

(MT -1.88%), the world's largest steelmaker by revenues, has significant operations in Ukraine, including the Kryvyi Rih steel plant in Dnepropetrovsk. With 8 million tons of annual production capacity, this mill is Ukraine's largest, and one of the biggest steel producing plants in Europe. Its location in the Ukrainian east, however, where pro-Russian rallies have been taking place, puts this production at risk -- potentially disrupting world steel supplies and driving up prices.

Airplane makers
Ukraine is an important market for foreign commercial aircraft. Ukraine International Airlines has four Boeing (BA -0.71%) 737-900s on order for its fleet. UTair-Ukraine (a subsidiary of Russia's UTair Airlines) is an even bigger customer -- one of Boeing's best in the CIS, and has 40 Boeing new 737s on order. As a rule, big sales contracts like this include a clause releasing parties from their obligations in the event of a "force majeure" -- and one big reason for invoking such a clause is the outbreak of war. A war between two countries in which Boeing's buyer operates could be especially disruptive.

As a matter of fact, should the conflict in Ukraine widen, we could see force majeure clauses invoked by a whole host of companies operating in Ukraine, suppliers and buyers alike.

Consumer goods
Any number of consumer goods count Ukraine as an important market. Western purveyors of detergent, toothpaste, food goods, and so on, all operate within Ukraine, and many own subsidiaries in the country. To cite just one example, Mondelez International (MDLZ 0.18%), the snacks business that spun off from Kraft in 2012, produces 6,000 tons of Vedmedik Barni cookies in the country annually. Mondelez has also significant holdings among Ukrainian producers of candy, chocolate, chewing gum, and even coffee.

Military suppliers
There's an old saying in military circles that "generals are always fighting the last war." That's largely because it takes a conflict to expose the gaps in a country's defenses.

Six years ago, Russia's short, victorious war in Georgia in 2008 nevertheless uncovered a glaring deficiency in the Russian armed forces' lack of drones -- which Georgia used to great effect in the early days of the conflict. In recent years, Russia has embarked upon an ambitious program to beef up its drone forces, buying some drones from Israel, and building more of its own. The country claims a drone fleet of 500 aircraft today and says it's investing $9 billion in research and acquisitions to further develop its capabilities.

Flip to the other side of the border, and Ukraine's military boasts some 4,000 main battle tanks and 1 million soldiers in the reserve forces. That sounds good on paper, but it wasn't enough to deter Russia from aggression last week. Why not? Two-thirds of Ukraine's tanks are in mothballs, and its active-duty military comprises only about 160,000 soldiers, mostly ill-equipped with Soviet Army castoffs. The country's air defenses, too, proved incapable of preventing Russia from flying thousands of troops into Crimea to occupy the peninsula last week -- so already deficiencies are showing up in Ukraine, before even a shot has been fired in anger.

It's too late for Ukraine to fix these problems now. But farther down the road, after the conflict reaches its conclusion, there will be a reassessment of military capabilities by both sides, and new markets for defense contractors to begin plugging the gaps.

This Georgian Army T-72 main battle tank illustrates gaps in Georgia's defenses uncovered by the 2008 war with Russia. Photo: Wikimedia Commons.

Conflict is eternal, and defense stocks will never let you down

Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Chevron. 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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