Russia-Ukraine Crisis Deepens: Key Stocks in Focus - Analyst Blog

The Ukraine crisis followed by the standoff between Russia and the West is definitely far from resolved. The annexation of Crimea last month by Russia has not yet settled nerves; there are more troubles down the road expected.

In recent days, Russia has twice hiked the price for natural gas to Ukraine. The Transdniester region may be the next target of Russia and the NATO chief is alarmed that Russia may be set to move on Ukraine.

Thus, for investors, it is important to know the whereabouts of our holdings that have Russian exposure. The economic and political developments have led to company-specific events, too. For instance, Russia decided to have their own domestic payment system within six months after the U.S. sanctions on Russia led to the suspension of credit purchase payment services by Visa Inc. V and Mastercard Inc. MA in some of their approved banks in Russia.  

Flagging Confidence, Escalating Concerns

Volatility cannot be ruled out. The Bank of America BAC Merrill Lynch fund Manager Survey stated that a lion's share of investors expressed concern over the geopolitical tensions being a threat to financial stability.

An exclusive Reuters report last month noted that the attorneys with the U.S. Securities and Exchange Commission were contacting investment companies that have investments in Russia. The U.S. markets have had a mixed impact so far, with investors escaping to safe-havens on certain days.  

Russia's Economic Impact

Russia's MICEX Index has slumped about 8% since mid-Feb with much of the downward move intensifying since Feb 28. Parliament building in Simferopol, regional capital of Crimea, was seized by pro-Russian forces on Feb 27. Speaking at a news conference on Feb 28, deposed president Viktor Yanukovych said he did not want a Russian military intervention in Ukraine. However, he retreated from this position the very next day, formally writing to President Putin requesting military intervention.

Fitch had chopped Russia's rating outlook to negative from stable. Also, Standard & Poor's has a negative outlook on Russia now and has a BBB rank. The Russian ruble has tanked about 7% so far this year.

Russia Continues Intensifying Fears

As the West condemned the violation of Ukrainian sovereignty and territorial integrity, Russia is continuing its tryst with intensifying political tensions. Germany's finance minister Wolfgang Schauble compared Russia's movements to be at par with that of Adolf Hitler. However, German Chancellor Angela Merkel played down those comments and had reportedly had discussions with Putin.

Russian Troops Not Withdrawn

Merkel's spokesperson commented: “The Russian president informed the chancellor about the partial withdrawal of Russian troops.” The comment was then supported by media reports. However, NATO Secretary General Anders Fogh Rasmussen said that NATO has not noticed any pullout so far from the border.

In a more threatening development, NATO's supreme allied commander Europe General Philip Breedlove said Russian troops may move on Ukraine soon after getting orders. He told CNN that 40,000 troops are waiting at the border for the order and “It's my opinion that they could move within 12 hours of a go,” said General Breedlove.  

Reportedly, Russia has now called back Col. Gen. Valery Yevnevich, the country's ambassador to NATO.

Also, Russia's Federal Security Service (FSB) has detained 25 Ukrainians, charging them of planning terror activities during the Crimean referendum.

Transdniester May Be the Next Target

There are escalating fears of Transdniester, a separatist region in Moldova, being the next target of Russia.  The government of this region is unrecognized by any country. A 2004 consensus notes that almost one-third of the 550,000 Transdniesters are Russians. Incidentally, some officials from Transdniester are in favor of Russia repeating the annexation act with this region.

Gas Price Hiked by 80%

Russia's state-controlled gas exporter Gazprom hiked the price for natural gas to Ukraine twice last week. The first hike by 40% had taken the price to $385.5 per 1,000 cubic meters of gas. Now, the price is set at $485 per 1,000 cubic meters, reflecting a total 80% hike. What bothers Europe is that 30% of Europe's gas is supplied by Russia. Of this, reportedly 80% comes via the pipelines spread through Ukraine.

US Secretary of State John Kerry has urged that energy “should not be used as a weapon.”  However, Kerry offered hope when he commented: “Our new capacities as a gas producer and the approval of seven export licenses is going to help supply gas to global markets, and we look forward to doing that starting in 2015.” European Union and United States officials will now work for diversifying Europe's energy supply.

Corporations to Pull Back Operations?

Senator John McCain stated last week some of the big corporations must suspend their Russian operation. He told Bloomberg Television: “If we declare sanctions of a certain kind with their companies and corporations, obviously it would inhibit their way to do business, their ability to do business there… We don't want to hurt our own economy.” Secretary of State John Kerry had also warned that industrialized countries including the U.S. may “isolate Russia economically.”

Energy Sector

However, we note it is not easy to do so. Talking of the changing dynamics in the European energy sector, BP plc BP is a company under focus. It is among the biggest foreign investors in Russia's oil industry.

BP's total production in Russia in 2013 was a staggering 961,000 barrels of oil equivalents per day. BP holds 14.3 billion barrels of reserves and 48 billion barrels of offshore resource potential in Russia. Moreover, BP holds 20% ownership of Russian oil firm Rosneft.

Rolling back of operations will not be easy for BP. In fact, in its 2014 Investor Update, BP spoke of Russia playing a vital role in shaping its future. The company believes there is a significant long-term opportunity in Russia. However, things have changed a great deal over the past few weeks. Possible sanctions on Russia's energy sector will further change the scenario.

BP announced recently the appointment of former TNK-BP senior manager David Campbell as the BP Russia's president.

Another name to follow closely here is Exxon Mobil Corp. XOM. ExxonMobil and Russian state controlled Rosneft had worked together on an approximately $500 billion deal to explore an oil field in Western Siberia. Exxon has been planning to construct a LNG terminal project in the oil field worth $15 billion. In fact, it also has joint venture projects to explore the Black Sea reserves.

Automakers

Touted to become the biggest car market of Europe by 2016, the Russian market suddenly has led to some jitters among car makers. Ford Motor Co.'s F European chief Stephen Odell spoke of how volatile the situation is owing to Russia-Ukraine crisis and that they are ‘monitoring' the situation. Dan Amman, President of General Motors Co. GM echoed the same as he too said the company is closely watching the situation as Russia happens to be a big market for GM.

Ford sold more than 1 million automobiles in Russia last year and General Motorssold 258,000 cars. Reportedly, 2.78 million vehicles were sold last year in Russia. Following the announcement of tax incentives in 2011, many automakers invested billions to have local production units. Ford and General Motors too had shifted their production plants to Russia.

Aircraft

Data from the Commerce Department valued Russian market at $11.2 billion last year for the US. Automobiles and aircraft were reported to be conducting the largest trade. Thus, moving to the aircraft sector, The Boeing Co. BA is said to have the largest involvement in Russia. Roughly 35% of Boeing's titanium is supplied by Russia's Rostec. It also receives significant portion of steel and aircraft parts from Russian firms. Boeing has sold or leased over 300 jetliners in the nation.

Bloomberg data confirms that $2.1 billion in aircraft was delivered to Russian carriers in 2013. The company has plans to invest $27 billion in Russia. The Boeing Design Center is located in Moscow and the company also inaugurated a new center in Kiev. However, company spokesperson mentioned that Boeing is now closely following the current situation.

What also looks in threat is United Launch Alliance, the Russian joint venture of Boeing with Lockheed Martin Corp. LMT. Official from Boeing's aircraft financing unit, Boeing Capital, said aerospace manufacturers will be bothered about the effects on demand for aircraft.

Here, General Electric Co. GE is another stock to focus on as its aircraft-leasing company General Electric's Capital Aviation Services (GECAS) owns 54 aircraft in Russia. GECAS CEO Norm Liu called the present situation to be “unique”. Situation may be worrisome once the conflict crosses “diplomatic circles”.

What Investors Should Do

Currently, BP, Ford, Exxon Mobil, General Electric and Boeing carry a Zacks Rank #3 (Hold). Thus, investors should consider holding these stocks in their portfolio.

However, we suggest investors should immediately exit from General Motors as it has a Zacks Rank #5 (Strong Sell).

The increasing political tension will influence the outcome of several companies. Thus, it is best to keep a close watch on these companies till the crisis is resolved.