Trade War

Written in early August.
Let’s make no bones about it; the West is now in a trade war with Russia.  The latest round of EU and US sanctions on Russia, instigated by Washington over the Baltic crisis has triggered a retaliatory response from Russia, which is equally designed to strike at the bottom-line of a number of European companies. While, it may be too early yet to estimate accurately the profit damage caused from the fallout of Russia’s retaliatory rounds of sanctions, nonetheless a number of EU companies have been targeted and are likely to bleed.  

First in Russia’s gun site is the banning of European airlines from flying over Siberia on busy Asian routes. The Russian move to restrict air space to European airlines is currently being mulled over by the foreign and transport ministries, according to  a report from an unnamed source in the  Russian business daily Vedomosti.  Banning European airlines over Siberian airspace would force European airlines to make costly detours adding already to their sky-high fuel costs and put them at a disadvantage to Asian airlines. Trans-Siberian route flights benefited primarily Western airlines, particularly European carriers because it is the shortest distance when travelling from Europe to Asian countries such as China, Japan and South Korea.

Currently, 12 European airlines operate 900 flights each week passing over Russian airspace to reach these three Asian countries. Europe’s main carriers which are likely to be hit the hardest are Air France, British Airways and Lufthansa.

A country’s decision to close its airspace is solely a matter for the country in question, according to the Chicago Convention on International Civil Aviation. Indeed, it’s not the first time that Russian has closed its airspace to western nations, during the cold war there was a total ban on European carriers flying over Russian and Siberian airspace.  The news of Siberian flight ban has weighed down heavily on European airline stocks, all are sharply down.   The Russian carrier, Aeroflot shares also tumbled on the news because it reportedly received approximately 225 million Euros a year in fees paid by foreign airlines for the right to fly over Siberian airspace.

Perhaps shorting airlines stocks might offer a short term opportunity for the adventurous traders.

Russian Oligarchs are also beginning to shift their massive liquid wealth to Hong Kong dollars on sanction concerns, which could also be behind the selloff in European equities in recent days.  Russian billionaire Alisher Usmanov, with a net worth of 18.6 billion USD, according to Forbes, is said to be moving his cash holdings into Hong Kong dollars. This move is also being repeated by the world’s largest Nickel and palladium producer, Norilsk Nickel. Additionally, MegaFon, Russia’s second largest mobile operator has decided to keep about 40 percent of its cash in Hong Kong dollars given the global markets disturbances, Chief Financial Officer Gevork Vermishyan said in a phone interview. The Moscow-based carrier has traditionally kept its foreign cash in U.S. dollars and Euros, according to the company.

The Hong Kong dollar has been pegged to the U.S. dollar since 1983, and its fluctuation from the American currency hasn’t exceeded 1 percentage points since then.“Keeping money in Hong Kong dollars is essentially equivalent to keeping it in U.S. dollars because of the currency peg,” said Vladimir Osakovskiy, chief economist of Bank of America Corp.’s Russian unit. “Still, for Russian companies it’s much safer from the standpoint of sanctions.”

In light of this Russian capital flight to Hong Kong dollars it will be interesting to monitor the trajectory of the currency against the Euro.

Russia will also be banning the import of agricultural goods from countries that have imposed sanctions on Russia. This is likely to hit hardest southern Europe, possibly Spain, which is the largest agriculture producer in Europe. Russian government officials have been instructed to draw up a list of western agricultural products and raw materials that will be banned or restricted for up to one year, according to the Kremlin website. The list would include meat, fruit and vegetables, but not wine or baby food. In recent days Russian food safety authorities have banned the import of Polish fruit and vegetables, while McDonald's cheeseburgers and milkshakes are being investigated by a regional branch of consumer protection agency Rospotrebnadzor.  Russia is Europe's second largest market for food and drink. EU exports of foods to Russia rocketed to 12.2bilion Euros in 2013, following several years of double digit growth in Russia.  So EU food stocks, those more exposed to the Russian market are more likely to be affected by the bans.

The ripples are also being felt as far east as Japan. Under Washington cohesion, Japan is also likely to succumb to more sanctions on Russia. Russian foreign minister, Sergey V. Lavrov is calling on Japanese leaders to show more independence from the United States. Nevertheless, analysts reckon that Japan has no choice but to side with the US.

Within the last 48 hours a massive buildup has been reported on the Ukrainian border. Russian troops in the region have doubled in number . The ultimate rat hole for investors to climb into when things look like they’re about to go pear shaped, gold and silver are beginning to move upwards again.

These tit for tat sanctions do appear reckless and irresponsible, particularly at a time when many EU economies are tinkering on the abyss. Where will all this lead to, a war with Russia? Unlikely, since that would be MAD (Mutually Assured Destruction).  Indeed, in a perverse way through the terror of nuclear annihilation most of Europe enjoyed a prolonged period of peace. Surely, there aren’t enough deranged souls in Washington willing to order a military assault on Russia. That would be a chilling prospect.  I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones. ” — Albert Einstein.