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This Dow Stock Could Be Hardest Hit by a Trade War With Russia

By Dan Dzombak - Mar 13, 2014 at 4:39PM

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While a trade war would affect many companies, one Dow stock could be hit hardest.

The Dow Jones Industrial Average ( ^DJI -1.34% ) is down today as fears rise over tensions with Russia, and a slowing Chinese economy. Specifically, tensions are rising between the West and Russia about Crimea, which is currently less than three days away from voting on seceding from Ukraine. Russia is preparing for sanctions from the West, and the possibility of sanctions of its own against Western companies, i.e., a trade war. While a trade war would affect many companies, one Dow stock could be hit hardest. Read on to find out more.

Dow Jones today
The fears over a confrontation with Russia combined with two poor economic reports on the Chinese economy was enough to send fear rising and stock markets tumbling. The Dow finished the day down 231 points, to 16,108. The S&P 500 ( ^GSPC -1.18% ) finished down 32 points, to 1,806. The CBOE Volatility Index ( ^VIX 0.00% ), also known as the "fear index," was up 14%, to 16.51.

Volatility is rising as Russia moves closer to annexing Crimea. The West argues that the referendum to secede, scheduled for three days from now, should be postponed a month, and that it's not valid while Russian troops are occupying Crimea.

Fear of a trade war rose as Senator Kerry said before Congress that sanctions against Russia "could get ugly fast" if Russia doesn't change course. Bloomberg came out with a report that says Russian business leaders are preparing for a worst-case scenario of Iran-style sanctions from the West against Russian businesses and leaders. This would likely mean frozen foreign assets, restrictions on exports, restrictions on insurance and shipping, and restrictions on lending and other banking activities. If Russia responds with its own trade sanctions, not only would it hurt the Russian economy, as 40% of consumer goods are imported, but it would hurt Europe if Russia slowed or stopped natural gas exports. It could potentially hurt U.S. companies operating in Russia, as well.

Perhaps Putin summed it up best earlier this month when he said about sanctions, "In the modern world, when everything is interconnected and everybody depends on each other one way or another, of course it's possible to damage each other -- but this would be mutual damage." Russian stocks continue downwards as investors worry about the sanctions. Notable large caps leading the Russian stock market's decline since the start of tensions earlier this month are: Sberbank, down 21%; Gazprom, down 15%; Mechel, down 13%; and Yandex, down 22%.

The U.S. Dow stocks with the largest operations in Russia are in the oil and gas sector. ExxonMobil ( XOM -0.08% ) could be the hardest hit of the Dow stocks as it has the largest operations in Russia, and also has operations in Ukraine. Exxon operates Sakhalin 1 with Russian partner Rosneft, and separately has started to invest billions with Rosneft to explore the Arctic regions surrounding Russia. While Exxon appears to have largely had a good relationship with Russia, other Western companies, namely BP with TNK-BP and Shell with Gazprom, have been forced to sell their Russian operations to their Russian partners at low prices when tensions arose between them and partners.

As tensions continue, expect oil prices to rise. We will have to wait and see how the West will respond to Russia's actions, and how the situation unfolds. I could speculate for hours as to what might happen, but the question to ask yourself is, "Does this change my investing strategy?" The answer should be no.

I hope that cooler minds will prevail, and that the tensions in Ukraine will de-escalate. Until then, who knows where the stock market will go. The stock market has looked overvalued for some time, leading me to suggest that it's a good time to build up some cash so you are able to invest when opportunities arise.

The Motley Fool has always taught that Foolish (capital "F") investors invest in great companies at good prices, continue to educate ourselves, and hold on to our great companies over the long term. The market will fluctuate (sometimes massively), but great companies will win out in the long run.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$34,022.04 (-1.34%) $-461.68
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$4,513.04 (-1.18%) $-53.96
CBOE S&P 500 Volatility Index Stock Quote
CBOE S&P 500 Volatility Index
$27.19 (0.00%) $0.00
Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
$59.79 (-0.08%) $0.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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