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Over the weekend Russia has begun to invade Crimea and parts of the Ukraine.  Violence had steadily increased last week with their President more or less abdicating and fleeing to Russia.  Putin has used as cover “we are stepping in to protect Russians from the violence and harm.”  Plausible?  Yes of course but this is surely not the primary concern.

First off one must understand that Russia is an “oil and gas” nation, huge in production and that the Ukraine is a “choke point” for their distribution to Europe.  Primarily natural gas enters through the east and north of Ukraine and travels mostly west to end users in Europe.  This delivery system is absolutely key to Russian cash flow and “leverage” in the region.  They can somewhat “manage” pricing by threatening to slow or even cut supply, the “leverage” part comes in because these threats can also be used to political advantage.

Over the last 2 years, because of new fracking technology it looks like western Ukraine, Romania, Poland and Moldova all have supplies of gas that can be recovered.  This is obviously a potential problem for Russia’s Gazprom because it could offer new supply into Europe which would lower prices somewhat (bad for Russia) and lessen Russia’s “leverage” in threatening to slow or shut off supply (even worse for Russia).  Add into this mix the fact that Chevron has cut many deals in the region to explore and produce hydrocarbons, you have the makings here for an “East vs. West” showdown.

The moving parts are many because of alliances known and yet unknown (China has already sided with Russia).  Is it any coincidence that last Friday China officially lashed out at the U.S. over our “human rights” issues?  China has basically called us out for acting as hypocritical “judges” to over 200 other nations.  In question is PRISM spying, drones, domestic gun violence, homelessness and unemployment.  Please keep in mind that this statement was issued by and from “our banker.”

Unanswered questions are many and the answers may end up shocking (and changing views) the world.  Will the U.S. step up militarily if Russia extends their occupation?  What went on during the Putin/Obama phone call?  Did it go something like …you better not…who’s going to stop me?  The U.S. is not even talking tough if you listen to John Kerry’s statements and please remember that it was just last week that the trial balloon of shrinking our military to pre WWII levels was floated.  Coincidental timing or something else?  From a financial standpoint the Russian banking system looks to be the ones on the hook were the Ukraine to default but not for huge money.  The Russian ruble is in freefall as is their stock market; their central bank has hiked interest rates in an effort to stem fleeing capital.  I just wonder what credit default contracts are outstanding and if there are any “chain” links that reach into the bowels of the western banking and financial systems?

This is very bad from the standpoint that it is a step further than the Syrian situation last fall because “boots are on the ground.”  The boots are Russian as the Chinese look on with a high degree of interest (and support) I am sure.  If we “let this stand” without any military reaction, could this possibly embolden the Chinese in their island disputes with Japan?  Could a U.S. response cause the Chinese to hit the “sell” button for their Treasury holdings and dollars?  Or worse, could it cause them to hit the “buy” button in the gold market?  Do they have “opaque” accounts set up with COMEX where buy orders with “instructions to deliver” are ready?  I have no idea but common sense tells me that if “we” know the COMEX is vulnerable to a delivery default then they surely know…the only difference is that they can do something about it whereas “we” are just mosquitoes.

Other questions in my mind are “why” or “why now?”  I have read reports that place blame on the west for stirring up the unrest; I would as usual ask “what is the upside?”  Yes I understand there is gas in the ground which can be sold for a profit and yes this would be a thorn (if not a knife) in Mr. Putin’s side but did anyone not expect him to act?  A very brief read of history tells you that the Ukraine is thought of as “Russian” by Russians.  Kiev was Russia’s first capital and the Ukraine was (is, by Russians) always considered a Russian “state.”  Though not a perfect analogy, this would be like New Jersey claiming Long Island from N.Y. after Jed Clampett discovered oil…and after pipelines had been built to export N.Y.’s biggest product.

I am not taking any sides as to who is right or wrong because as with anything there is always “your side, the other side…and the truth.”  The “truth” is that this is a highly flammable proposition.  “Flammable” because it has already moved quickly and we do not know what actions that anyone on any of the sides will take.  The only thing that does know for sure is that Vladimir Putin is willing to fight.  He waited until the Olympics were over (why didn’t this flare up “during” the Olympics?) and has moved swiftly since then.  We also do not know how big the financial “shifts” will be when they open the markets Monday morning.  I say this because leverage and gearing has never been higher than it is now.  Will carry trades unwind?  If the U.S. does not “step up” will the dollar see instead of safe haven inflows…the opposite and a panic out of dollars because of perceived weakness?  I guess the biggest question and one that hasn’t even been asked yet is the most obvious one, if Russia decides to move forward in an occupation effort, who is going to stop them?

I surely do not have many if any answers to the above questions.  The only thing that I do know from history is that as wars approach and begin, “money” is a good thing to have.  The question is, “What is money?”  If the Ukraine situation does escalate I think that it’s a safe bet that we will soon find out exactly what “money is and what it isn’t!”