Dear member, Russia is home to some of the world's largest reserves of natural resources. Those resources are the sole reason Russia is an economic and military Superpower. If economic sanctions against Russia, led by the US, continue to escalate, the impact on the global commodity market will be significant.

Russian oil production in West Siberia

The most immediate beneficiaries, from a price standpoint, will be commodities such as oil, refined petroleum, natural gas, uranium and select precious metals - all of which Russia leads the world in production for, or has massive stockpiles of. Given the tensions between Russia and the West, these commodities look attractive, from an investment standpoint, over the long-term...

Anticipating More Conflict

As fears escalate concerning the potential that Russia may seize more territory from Ukraine, which would be followed by more US-led sanctions, WTI crude oil increased to a 5-week high Friday, trading up to $104 per barrel. Palladium soared to its highest level since 2011; Russia is the world's largest producer of the precious metal.

Imagine, for a second, if a country such as Canada was cut off from exporting natural resources to much of the Western World. What would that do to the price of oil, uranium and natural gas? Without question, prices for many key commodities would skyrocket. This is what we could see if further sanctions are imposed on Russia.

If the US tries to play hardball with Russia, it, along with much of the world, will have to start paying massive premiums for key commodities, specifically those in the energy sector. Believe it or not, Putin's bravado and ambitions to restore some of the former Soviet Union could single-handedly reignite a major commodity bull.

Global Ramifications

Russia has transformed itself over the past 20 years into a globally-integrated economy. In the process of achieving this it has made many nations and economies dependent upon it, specifically those across Europe.

If Obama and his motley crew believe they can slap sanctions on Russia until they comply, they've got another thing coming. Russia is not Iran. Russia is not North Korea. Russia is a natural resource Superpower that has strong economic ties to much of Europe, the two largest economies in Asia, and is a much more independent economy than it was prior to 1989.

Putin has been dealing from a position of strength for the last two years and knows exactly how to utilize the leverage he has.

Since the financial crisis Russia has been the most outspoken critic on US monetary policy and has made alliances with emerging economic Superpowers, most importantly China. And, just this past week, Russia announced that it was close to signing a massive natural gas deal with China. This would be one of the biggest natural gas deals between two nations in the world's history. Talks have been in the works on this deal for nearly a decade.

Reuters reported that,

"The deal is the Holy Grail for Russia after at least 10 years of talks and Moscow hopes it can be signed when Putin visits China next month."

This is a slap in the face to the US... if such a deal is signed, it could offset much of Russia's potential lost revenue from EU sanctions. If the deal is signed, the only countries that would suffer from US-led sanctions would be European ones as they would face rapidly rising energy costs. This would weaken the United States' relationships with some of its key allies in Europe.

Russian Influence is Stronger than America's in Much of the World

Russia has grown mightily over the last ten years; and countries that depend on its economy and natural resources have grown with it. No country is more important or divided on the topic of economic sanctions against Russia than Germany.

Germany has dubbed many of its Social-Democrats as 'Russia understanders'. Many Germans, including two former chancellors, Gerhard Schroeder and Helmut Schmidt, have voiced understanding for Putin's annexation of Crimea.

source: http://www.spiegel.de/international/germany/prominent-germans-have-understanding-for-russian-annexation-of-crimea-a-961711.html

The EU observer recently reported that,

The event called "East Forum Berlin - opportunities for an economic area from Lisbon to Vladivostok" - was sponsored by Italian bank UniCredit, whose boss, Giuseppe Vita, cited Lenin in his opening speech and received scattered applause when he said no economic sanctions should be imposed on Russia.

source: http://euobserver.com/foreign/123809

On April 11th, Ingo Kramer, president of the Confederation of the German Employers' Associations (BDA), in an interview with Germany's daily Die Welt (The World), commented that,

"Our enterprises are really worried about their relations with Russia. Some of them can already feel the consequences of the current crisis, but this has not affected the general state of the economy yet." And that, "Russia has always been a reliable economic partner."

source: http://en.itar-tass.com/world/727431

The ITAR-TASS News Agency reported that trade turnover between Russia and Germany reached €76 billion last year and about 6,000 German companies cooperate with Russian enterprises, with total investments reaching €20 billion.

source: http://en.itar-tass.com/world/727431

The agency also reported that some 300,000 jobs in Germany are at risk from economic sanctions against Russia.

Without even mentioning the threat of rising energy costs, this clarifies quite succinctly how and why Germany is divided on this issue. And without Germany's support, the US-led sanctions will fall short of their intentions. All the sanctions will do is increase commodity prices out of fear, and weaken America's global standing.

According to the Observatory of Economic Complexity's latest data, the top 5 import origins of Russia include: China (8.5%), Netherlands (7.7%), Germany (7.1%), Belarus (6.8%), and Italy (6.6%).

It's no wonder Italy and Germany are split when it comes to sanctions against Russia.

Below are two images which highlight the weighting (from a percentage standpoint) of Russia's import and export partners:

Russia Imports from these Nations

source: Observatory of Economic Complexity






Russia's Export Destinations

source: Observatory of Economic Complexity

http://atlas.media.mit.edu/profile/country/rus/

Many of the nations listed above, which are fighting to keep their economies out of recession, are dependent on materials from Russia. The purple boxes represent European-based trading partners.

Europe in a Position of Weakness

Eurostat, the EU's leading statistics company, reported seasonally-adjusted unemployment of 11.9% across the euro zone in the month of February, 2014. On April 1st the Euro area reported annual inflation had declined to 0.5% in March from 0.7% in February. With the EU fighting off deflation, high unemployment and an economy threatening to contract at any moment, sanctions on one of its largest trading partners is the last thing it needs.

unemployment source:

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-01042014-AP/EN/3-01042014-AP-EN.PDF

monthly inflation data source:

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-31032014-AP/EN/2-31032014-AP-EN.PDF

Russia's Military Build-Up

US-led sanctions on Russia are the last thing many EU nations want. Russia knows this and is undeterred from recent threats by the US government.

In an article titled, US, Germany urge Russia to move troops back from Ukrainian border, Business Standard wrote that,

"The White House said Obama spoke with Merkel about the concerning situation in eastern Ukraine, where pro-Russian separatists, apparently with support from Moscow, continue an orchestrated campaign of incitement and sabotage to undermine and destabilise the Ukrainian state."

NATO released some unsettling photos that reveal a clear buildup of troops along Ukraine's border.

Zerohedge.com commented that the above photo is purported to be a Russian military airborne or Spetznaz (special forces) brigade at Yeysk, near the Sea of Azov in southern Russia (picture: Digital Globe).

On April 10th Reuters reported that,

President Vladimir Putin has told European leaders a dispute over Ukraine's gas debt to Russia could affect supplies of Russian gas to Europe and proposed urgent discussions on the matter, his spokesman said on Thursday.

The remarks were the strongest sign yet that Russia could curtail supplies of gas to Ukraine, which could increase tension between Moscow and Kiev and aggravate the worst crisis in East-West ties since the Cold War.

Secretary of State, John Kerry, spoke at a congressional hearing earlier this week and got into a spirited conversation with Senator John McCain. Kerry stated,

"And we now have announced the possibility of using sector sanctions. Now that's serious business. Serious business. It's banking, it's energy, it's mining, it's arms. It's other things. If you start going down that road, it's not just them who feel it. We'll feel it too."

U.S. Treasury Secretary Jacob J. Lew released a statement yesterday, reported by Bloomberg, that,

"The United States is prepared to impose additional significant sanctions on Russia if it continues to escalate the situation in Ukraine."

Aside from resource-rich Canada, it is hard to imagine a more significant country than Russia, from a natural resource standpoint, being cut off from the Western World.

Russia is one of the world's leading producers of oil and natural gas and is also a top exporter of metals such as steel, primary aluminum and palladium. Car manufacturers throughout the world depend on palladium used in pollution-control devices for automobiles.

Escalating tensions in Russia have the potential to be a huge and immediate catalyst for commodities, primarily: oil, natural gas, uranium, platinum and palladium.

Trying to strong-arm Russia into submission, via sanctions, won't work. The only people who will suffer from such political decisions will be the everyday citizens in Europe who will see their gas prices spike, car prices rise and general cost of living increase further.

Russia Can't Be Stopped - Its Time has Come

Bloomberg reported in late March that China has already agreed to buy more than $350 billion of Russian crude in coming years.

Data from Russia's Energy Ministry reported oil output reached 10.59 million bpd (barrels per day) in October of 2013, setting the record for the country's post-Soviet period.

In a revised March 12, 2014 report from the EIA (Energy Information Administration), it stated,

"Russia is the second-largest producer of dry natural gas and third-largest liquid fuels producer in the world.

Russia's economy is highly dependent on its hydrocarbons, and oil and gas revenues account for more than 50% of the federal budget revenues."

source: http://www.eia.gov/countries/cab.cfm?fips=rs

So long as Russia is making new deals for its energy products with China, the world's largest consumer, US-led sanctions will be in vain.

Europe, which pays top dollar in comparison to North American natural gas prices, receives roughly 30% of its natural gas from Russia and has limited alternatives at the moment.

So What Does all This Mean for North American Commodity Investors?

It's unfortunate that there is such global hostility and the potential for prolonged geopolitical tension, but this is reality. And as such, oil and gas producers, as well as certain mining companies, are going to see their share prices emerge back into bull market territory.

The Russia/Ukraine confrontation is very significant from a geopolitical standpoint. It has opened the door for what will likely be a new era of geopolitical tension across the globe. And America's status as world referee has faded to a point where other world powers are no longer afraid to test its leadership.

Back in the 1980's and early 90's, Ukraine, after the Soviet Union broke apart, was a nuclear weapons Superpower - the third largest, to be exact (behind only the US and Russia). But, in an effort to disarm much of the world of nuclear weapons, the US, in partnership with Russia, signed a deal with Ukraine back in the 90's which guaranteed it territorial integrity if it disarmed. This was a legal document of the highest regard. Essentially, the US convinced a nation to get rid of all nuclear weapons (viewed by many nations to be a security system that deters invasions) for military protection.

When Russia invaded Crimea and the US provided no protection, what kind of message did that send to the rest of the world?

Without question it showed the submissive foreign policy America has adopted after years of war. It is our view that Russia is not yet finished seizing land in Ukraine and other nations for that matter. Putin wants to restore much of the Soviet Union; this is obvious. However, what is not so obvious is the message America is sending to the rest of the world... will this embolden China to take Tibet? How about Vietnam?

There's a reason China has been increasing its military assertiveness in the Pacific Ocean. There is a treasure trove of oil in the South China Sea. Currently it is largely controlled by Vietnam, but China disputes that ownership. Business Insider reported in an article titled Why A War Between China and Vietnam Is Inevitable that,

"The fragile Vietnamese economy hugely depends on the South China Sea oil production, which accounts for 30% of its GDP. Vietnamese economy will collapse if it loses its oil assets in the region."

From China's perspective, given all the geopolitical distractions the West is dealing with, there may never be a better time to test its strength and push the boundaries. The effectiveness of the US putting significant sanctions in place against China, if it were to attempt similar annexations as Russia, would be limited. Additionally, any potential sanctions against the world's second largest economy would hurt the US as much, if not more, than China.

What is very clear in all of this is that the world is on the brink of global economic war between its Superpowers. China will likely use Russia's invasion of Ukraine to increase its influence in the East and look to control resource-rich regions. Russia is not yet finished in its quest to redraw its territory on the world map and the US is losing influence on the global stage. This type of environment, where global Superpowers are posturing up to assert their dominance, has a lasting impact, and takes years to settle down. We are in the very beginning of this story.

Every time geopolitical tensions increase, commodity prices rise, sometimes to levels we never imagined. It is our belief that this geopolitical tension, and the threat of economic war, will be the new normal for the next decade. Certain commodity prices are set to experience exponential increases in value, particularly oil and natural gas. Russia's invasion of Ukraine has made it inevitable, in our view, that oil will hit $200 per barrel within the next 5 years.

In recent days, Canadian oil and gas companies trading on the TSX have hit 52-week highs on rising oil prices and fears Russia will discontinue exporting oil to many of its 'western' trading partners. The bright side in all of this is that it could be a boon for Canadian oil and gas producers.

At the very least, escalating tensions with Russia will highlight the importance of domestic and politically friendly natural resources. The Russian bravado, combined with the Fed's ongoing quest to devalue the USD, will continue to favor commodities - particularly those much of the world has become accustomed to relying on from Russia.

All the best with your investments,

PINNACLEDIGEST.COM