How Ukrainian presidential elections affect the markets

Part of what makes it tough to earn consistently good investment returns is to understand the interconnections of events, as well as the importance of seemingly random news. Today’s post is an example of an event whose importance is potentially very large, yet not well covered by U.S. media. I am speaking about the Ukrainian presidential elections.

To understand the importance of this event we need context. In this case the context is the potential for another war in the Middle East that I have been covering on the blog for many months now. Let’s review that only briefly so that the Ukrainian presidential election makes sense to us as investors.

Overview:

• Iran is developing nuclear technologies with Russian support. Supposedly this is for mundane electrical power generation. However, the Iranians get very blustery about their intent to develop nuclear weapons when they feel threatened by the West.
• The West is not too fond of the idea of a nuclear Iran. The states particularly interested in stopping Iran are Israel and the United States.
• Israel is the official enemy of many Muslim states, including Iran. Consequently, Israel is nervous about a nuclear Iran.
• The U.S. is not directly threatened by a nuclear Iran. However, U.S. interest is affected by a more powerful Iran. Principally the U.S. would like to withdraw from Iraq and its sectarian Sunni Muslim vs. Shiite Muslim battles. These two factions will likely fall into civil war unless the Iraqi political process is balanced. Shiite Iran has both the interest and the ability to affect this balance to favor the Shiites. This result would lead to the Sunnis declaring war against the Shiites. Ugh! So the U.S. wants a less strong Iran.
• The reason the U.S. wants out of Iraq is because President Obama wants to keep a campaign promise of drawing down troops in Iraq. Additionally, he wants to redeploy U.S. military resources and attention to Afghanistan also to keep a campaign promise.
• To up the ante in the Afghani war requires that the U.S. be able to supply its troops there. Unfortunately for the U.S., Afghanistan is land locked. So to supply troops requires overflight permissions or overland permissions. The states that surround Afghanistan are beholden to Russia. So the U.S. needs Russian compliance in order to supply its troops.
• Russia is not interested in helping the U.S. because the U.S. under the Bush and Obama administrations has denied what Russia considers to be a geopolitical necessity: a series of buffer states around its periphery. In particular, under President Bush the U.S. openly and (likely) covertly supported revolutions in nearly every Russian periphery state. A weakened Russia had only several options to combat this U.S. incursion into its personal space. Chief among them was to support the development of nuclear power and possibly weapons in Iran.
• Russia has used the Iranian nuclear issue in conjunction with helping the U.S. supply its troops in Afghanistan in order to negotiate for U.S. and NATO recognition of Russia’s need to meddle in the affairs of its near abroad states. Chief among these states is…you guessed it: Ukraine.

Unfortunately for the U.S. and NATO, the pro-Western president of the Ukraine did not win the recent election. In fact, he didn’t even place in the top 6. The candidates who all placed higher are all strongly pro-Russian. The election is not yet decided as neither of the top 2 candidates succeeded in garnering at least 50% of the vote, necessitating a runoff election. But both of these candidates are openly very pro-Russian.

If you pull out a map you will see why Ukraine is essential for calming Russian nerves. In each of the wars in which Russia has been invaded, the invasion has come through Ukraine. So Russia needed the Ukraine, but the Ukrainians have just handed themselves to Russia. Consequently, the U.S. has no leverage now in its negotiations with Russia. What does the U.S. have to offer now? Put another way, why would Russia withdraw support of Iran at this moment? Why would Russia offer its support in Afghanistan? If I were Russia, smelling U.S. blood, I would finish the U.S. off. I would fight for further concessions in my near abroad in exchange for support in Afghanistan.

This means that diplomacy, the preferred tactic of the Obama Administration, just became that much harder. What that means is that the diplomatic option has less of a chance of working. What that means is that two options are left to the Obama Administration with regard to Iran: do nothing or enter into war with Iran. If Obama does nothing, the Israelis will. If Obama declares war the U.S. public, exhausted by nearly 9 years of war (!) is likely to excoriate Obama. Ouch! Either of these two options results in financial market instability. Watch out!

All of the above argues strongly for an investment in oil.

Jason

PS – Obama is rapidly looking like a one-term President.