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New Cold War? Cold Facts

Commodities fuel a resurgent Russia. So what will "sanctions" mean...?
 
THERE is talk of a new cold war, pitting the United States against the Russian Federation, with Europe being a main battleground where both adversaries' grievances are playing out, writes Amine Bouchentouf – author of Commodities for Dummies, a partner at Parador Capital LLC, and founder of Commodities Investors LLC – at Hard Assets Investor
 
This was the state of affairs between America and Russia for decades, following the end of World War II up until the collapse of the Soviet Union. Many of the battles that were played out in the 1970s and 1980s are now repeating themselves, characterized by periods of "détente" and "escalation" of tensions.
 
We are currently in one of those phases of "escalation," where both adversaries are digging in their heels and firing "testing shots" to see the reaction of the other. The stakes are high, especially for the commodities markets, particularly the oil and natural gas markets.
 
Vladimir Putin claims that the greatest tragedy of the 20th century was undoubtedly the collapse of the Soviet Union. Ever since Putin came to power, his laserlike focus has been on creating a stronger Russia, flexing its muscles and spreading its influence regionally and globally. Ironically, one of the main factors that allowed him to do this has been the global boom in commodities.
 
Russia is undeniably a resource-rich country and has ridden the commodities boom to the fullest extent, benefiting from the sale of key raw materials such as crude oil, natural gas, aluminum, iron ore, coal and nickel.
 
This natural resource powerhouse saw its cash coffers grow exponentially as countries such as India, China and even Europe consumed and purchased its raw materials. As its commodities sales increased, so did Russia's influence in world affairs including in military technology, espionage and industry.
 
Russia's influence kept increasing as the months and years went on. First, Russia's influence on the crucial Middle East was felt in Syria as Russia supported and backed Bashar Assad with weapons and military intelligence against American-backed insurgents. Assad remains in power while the insurgency is weak, fragmented and uncoordinated.
 
Russia scored another major coup when it lured Edward Snowden, the former NSA employee responsible for the greatest intelligence leak in American history. More than the symbolism of the act (that America's most-wanted former intelligence officer is living in Russia), the treasure trove of information Snowden is suspected of giving to Russia could be game changing.
 
The Kremlin's most in-your-face move came on the heels of the Sochi Winter Olympic Games, when Russia unilaterally annexed Crimea, a region under the territorial jurisdiction of Ukraine. And to add insult to injury, Russia is sending military personnel and equipment into Ukraine to arm pro-Russian separatists.
 
These same separatists are now suspected of downing a commercial civilian Malaysian Airlines Flight flying from Amsterdam to Kuala Lumpur last month. This event seems to have been the last straw for the United States and its allies, and has resulted in the US and EU imposing economic sanctions on Russia.
 
Recently, President Obama announced sanctions aimed mostly at Russia's oil industry. The thinking at the White House and with its allies is that the administration would like to target the source of wealth that is expanding the Kremlin's influence: natural resources, primarily crude oil.
 
While the logic is sound, in reality, these new sanctions are going to have very little impact on the Russian economy and therefore Russian behavior in the international scene. When you examine the sanctions closely as released by the Commerce Department, you quickly realize that the sanctions are targeted at future projects aimed at increasing Russian production of unconventional crude supplies, primarily located in the Arctic.
 
The sanctions are aimed at preventing Western-based technology from making its way into Russian hands to develop these fields. In practice, these fields are several years from reaching production (in most cases, five to seven years out) and so will not have any immediate impact on current Russian production.
 
Russia produces about 10 million barrels of oil per day (greater than Saudi Arabia) and exports a vast majority of that. The sanctions do not target this current production; the Brent crude benchmark was little changed as these sanctions were announced.
 
In addition, it's very relevant to note that Russian gas production was completely left out of the sanctions list – not a coincidence since a material amount of Europe's gas supplies come from Russia.
 
Russia Oil Production (mmbbl/d)
 
Russia Oil Production (mmbbl/d)
 
The bottom line is that these sanctions will do very little to influence Russian behavior on the world stage. When looked at through the prism of the last two years, these sanctions amount to very little more than a slap on the wrist.
 
For investors and traders, this means that production of Russian commodities (an important factor in the marketplace) will remain intact. Therefore, I would not advise going long crude oil or commodities thinking that the latest sanctions are going to take away critical supply from the market – it won't.

Hardassetsinvestor.com is a research-oriented website devoted to sharing ideas about investing in the natural resources sector. Published by Van Eck Associates Corporation, the site offers an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures, and gold – the three major components of the hard assets marketplace.

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