Pricing the Isolation of Russia
Bucha, Ukraine: Christmas 2020 and After Russian Invasion
No matter how Russia’s invasion of Ukraine works out things will never be the same for Russia. The pictures of bodies of dead men with their hands tied behind their backs on the streets of Bucha, Ukraine has shocked the world but should come as no surprise considering how Russian forces have acted in Syria and elsewhere. As evidence of atrocities mounts it will become increasingly difficult for nations across the world to deal with Russia for years to come. For options traders an important factor in this will be pricing the isolation of Russia.
Russia As a Big Gas Station
After visiting Ukraine in 2015 Senator John McCain called Russia a big gas station masquerading as a country. Besides being one of the three biggest petroleum producers along with Saudi Arabia and the USA, Russia produces vast amounts of fertilizers, strategic minerals, and grains like wheat and corn. When pricing the isolation of Russia, we will need to consider the full range of what Russia produces and exports and well as what it imports. Countries like Germany will be able, eventually, to find other sources of natural gas and oil but it will take time unless they and many others are willing to plunge themselves into years of recession not to mention freezing winters with no heat.
How Will Germany Wean Itself from Russian Energy?
Germany is Europe’s strongest economy and a good place to start when considering how Europe will stop importing oil, natural gas, and coal from Russia. Thirty-eight percent of electricity production is from wind and solar. Nuclear power makes up a little more than 10%. To make up the difference Germany has imported natural gas, oil, and coal from Russia. Although we can expect Germany to continue to ramp up its renewable energy sources, they will always need fossil fuels.
Countries with Largest Coal Reserves, Percent of Total
- USA, 22.3%
- Russia, 15.5%
- Australia, 14%
- China, 13.1%
- India, 9.5%
Countries with Largest Oil Reserves, Percent of Total
- Venezuela, 18.2%
- Saudi Arabia, 16.2%
- Canada, 10.4%
- Iran, 9.5%
- Iraq, 8.7%
Countries with Largest Natural Gas Reserves, Percent of Total
- Russia, 24.3%
- Iran, 17.3%
- Qatar, 12.5%
- United States, 5.3%
- Saudi Arabia, 4.2%
The Germans can buy coal from the USA or Australia and oil from Canada, Saudis, or Iraq. But the country with the largest natural gas reserves by far is Russia followed by Iran. Qatar, the US, and the Saudis stand to benefit when the Germany look for other sources of natural gas.
Russian Agricultural Exports
The world’s biggest exporters of wheat are Russia, the USA, Canada, and Ukraine. We wrote about the effects of the war on exports from Ukraine of wheat, corn, and sunflower seed products. Once hostilities cease Ukraine will resume being a supplier of agricultural products to the world but what happens when Russia is isolated? Will the world tolerate famine and food riots, political instability across South Asia, the Middle East, and Africa to isolate Russia? How much can American, Canadian, and Ukrainian farmers ramp up wheat production to make up the shortfall of wheat coming out of Russia?
Russian Strategic Mineral Production
Russia is among the top producers of a vast range of strategic minerals including aluminum, arsenic, copper, cement, nitrogen, palladium, magnesium compounds and metals, silicon, nickel, and vanadium. One of the problems facing the US and EU is that China has become the biggest producer of most strategic minerals including rare earth elements. Russia has been an alternative to China’s dominance in this realm. Isolating Russia will include not buying any of Russia’s mineral production. This will involve strategic considerations as the US and EU look for mineral sources anywhere but China as well as Russia.
The point is that cutting off Russia from the world will involve more than McDonald’s pulling out of its franchise agreements. The point of isolating Russia is to cut off its cash flow and thus its ability to make war. The ramifications could include more sales for the US coal industry, revitalization of Minnesota’s Iron Range where there is nickel, and more sales for farmers around the world as Russia is isolated.
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