Why Europe Just Can’t Afford to Punish Putin

Just before Malaysia Airlines Flight MH17 was shot down and all 298 persons aboard lost their lives, the U.S. imposed sanctions on Russian energy, defense and banking companies.

At the time Germany, France and the United Kingdom — the major powers within the European Union — agreed it was time to put more economic pressure on Russian President Vladimir Putin and his $2 trillion economy.

Yet, the EU doesn’t seem to be in any hurry to back up any of its “tough talk” with equally tough action.

Although evidence is mounting against Ukrainian separatists and other pro-Russian forces in the Flight MH17 tragedy, Europe has been reluctant to be more aggressive toward Russia.

Will Europe do the right thing and impose tougher sanctions against Russia, or will it continue to try to protect its workers and economy from high-energy prices and supply disruptions?

The Cost to Punish Putin

Putin has said that the tighter U.S. sanctions have inflicted permanent damage on the two nations’ economic and political relationships.

We’ll know Europe is serious if France cancels plans to deliver two navy ships it is building for Russia. The Obama administration is putting serious pressure on the French government to do exactly that.

Yet, many anticipate France won’t chance losing that $1.6 billion deal. After all, Putin can more effectively retaliate against the EU by swiftly cutting off its energy exports.

Consider the fact that Russia is the third-largest oil producer in the world …

The top three producers (including Saudi Arabia and the U.S.) provide the world with over 10 million barrels a day.

If there were sanctions against Russian oil, global oil producers would have a difficult time replacing that oil.

Guess Who Buys a Lot Of Russian Oil?

Most of Russia’s oil goes to eastern and European countries.

The Baltic nations are most vulnerable to Russian reprisals, followed by some of the other former Warsaw Pact nations. Ukraine, Austria and Greece all import 60% or more of their natural gas supplies from Russia.

In Europe, Germany is the biggest customer of Russian oil.

No wonder Germany has not agreed to tougher sanctions.

Tough energy sanctions would likely hurt Russia the most. But we could see a global ripple effect.

If oil sanctions are tough, oil prices could spike. In addition, if tougher sanctions are imposed against oil and natural gas, then the chances rise for Europe to slip back into a recession.

If that happens, then the rest of the global economy, including the U.S., could likely follow.

Squeeze Russia, and It Will Squeeze Back

Europe’s economy has been in a recession since 2008 and is just now starting to recover. Take a look at its newest GDP data …

In the first three months of 2014, GDP rose by just 0.3% across the 28 European Union countries and an anemic 0.2% across the 18-state euro (currency) area, according to Eurostat.

On top of that, the unemployment rate in Europe is high, and could go higher …

Risks are rising for the global economy and Russia.

However, in my Gold and Energy Investor service, I’ve sought to help my subscribers to lower their risks over the last few years by recommending stocks that have less debt, low valuations, good dividends and lower betas.

In fact, our risk investment is currently the lowest it has been in the last 10 years.

That’s because, here in the short term, we are hedging more of our recommendations. When we have a gain, we will normally take it.

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It is hard to predict the outcome of the troubles in Russia and the Middle East, or just how far the effects will be felt. But we don’t have to feel powerless as investors. We can monitor events, lower our risks and adjust as events develop.

Good gold and energy investing,

Dan Hassey

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