How will the United States react if Russia invades Ukraine? Implications for Gold, Oil and Stocks

Russia has gathered more than 100,000 troops near Ukraine. In response, the United States is increasing its presence in the region, with the Pentagon deploying around 3,000 troops to Eastern Europe in the coming days; 1,000 of them will move from Germany to Romania while 2,000 will head to Germany and Poland from the United States

Michelle Makori, editor of Kitco News, discussed the likelihood of a Russian invasion of Ukraine and the implications for markets, as well as the most likely US response with Harold Kempfer, CEO of Global Risk Intelligence & Planning and former Lieutenant Colonel of the US Marine Corps, and Robert Ryan, Chief Strategist of Commodity & Energy Strategy at BCA Research.

Kempfer, who has served several missions in the Middle East, said Russia had the manpower to launch an invasion into Ukraine, but logistical challenges remained.

“Russia could come in. They certainly have enough troops, they have enough armour, air, certainly all the support weapons they need in terms of missiles, artillery, so they can certainly launch an invasion. One of the things I’ve looked at is if they have fuel deployed forward,” Kempfer said. “That’s the only thing that hasn’t been flagged…their fuel supply. That said, recent satellite photos show that they’ve been pushing a lot of new material to the base camps they have along the border, so it looks like they’re getting ready.

Kempfer noted that direct military action by the United States against Russia inside Ukraine is unlikely, but that Ukraine already receives intelligence and strategic planning assistance from the United States and of his allies.

“What we would answer is probably push a lot of weapons and stuff to Ukraine… I don’t see a scenario where any of the NATO partners would put military forces in Ukraine. That said, we currently have military trainers in Ukraine. One of the things that eludes us is that it’s not only about the forces, but also about the other elements that we bring to Ukraine. We can provide them with intelligence, surveillance, reconnaissance, we can provide them with a level of situational awareness and understanding that they wouldn’t have. The other thing, and I don’t know if we do, I guess we do, is we’re probably helping them come up with Ukraine’s defensive plan. I imagine that somewhere there is at least a joint planning group, maybe several joint planning groups going through maps, looking at the latest satellite photos…and coming up with a detailed plan with counter-mechanized kill zones,” did he declare.

Moscow would therefore face Ukrainian forces trained and briefed by US military forces, with US-backed Ukrainian defenses likely to “cause attrition of Russian forces”, Kempfer said.

The likely action against Russia from the West would be sanctions, Kempfer said, adding that Russian President Vladimir Putin was likely only looking for concessions at the moment.

“I think [Putin] will try to get as many concessions as possible and might start trading territories for concessions. But if he crosses this line, which enters Ukrainian territory, there will be heavy penalties,” he said.

The sanctions would lead to a slowdown in Russian oil production, Ryan said.

“Recently, we had to lower our estimate of Russia’s contribution to restoring OPEC supplies, as it does not appear to be able to meet its quotas every month. They’re about flat at 18 million barrels a day now. If they are subjected to a new round of sanctions, again on technology and capital, they will most likely find it increasingly difficult to restore production and develop it, which is their long-term objective,” said said Ryan.

A direct attack on a NATO member is what the United States needs to act, militarily, against Russia.

“That would require a Russian strike either on NATO territory or on a NATO country,” Kempfer said.

However, military escalations between Russia and NATO forces could occur in the Black Sea, in the worst case, Kempfer said.

“We’re looking at something there in the maritime realm where we could possibly see marines getting into some sort of confrontation,” he said. “So I think Turkey could actually play a big role. And if there’s a Turkish naval confrontation with Russian forces, somewhere in the Black Sea, I don’t know where that would lead.

Other than a direct attack on Turkey or any other NATO member, it is highly unlikely that the United States and its allies will intervene with direct military action against Russian forces.

“I also don’t see that any of the NATO partners would want to do this, especially Germany,” Kempfer said.

Germany is heavily dependent on Russia for natural gas, as well as key minerals.

“There is a huge amount of nickel that Russia exports. One of the reasons why Germany is so dependent on Russian natural gas is that they got rid of coal-fired power plants and after Fukushima they said that for political reasons we were going to get rid of nuclear power plants said Kempfer. “They want to switch to renewable energy. Renewable energy means you need lots of batteries. Batteries require things like lithium and nickel, cobalt and stuff like that. Russia has a corner in the nickel market, especially in Europe. I think it’s around 80% or something, they supply nickel to Europe. It’s enormous.”

Ryan added that a direct, open-field military confrontation with the US military and its NATO allies is a scenario the Kremlin wants to avoid at all costs.

However, in the event that tensions escalate between the United States and Russia, the conflict would primarily take place in cyberspace, Ryan said.

“The United States and NATO are great as a military force, so if it came down to that, I think it would be over very quickly. You would have a big spike in oil prices and then it would come back exactly like that happened during the Iraq war of 1990. The caveat is that we live in the age of cyber warfare, so it wouldn’t be at all surprising if Russian submarines started cutting all the cables leading to Europe, so the internet is shut down. You have a big cyberattack that destroys the power grid. NATO and the United States should respond,” he said.

Markets would see an immediate response if Russia did invade Ukraine, with crude oil taking the lead, Ryan noted.

“I think when you have 100,000 troops at the border, primed…and if you see the [supply] the fuel is starting to arrive, the market will take notice. The only pure response to this type of provocative action will likely cost upwards of $100 gross,” he said.

The current supply situation is “extremely tight” for oil, Ryan said, and it wouldn’t take much to move the price at this point.

“If we get the slightest disruption in strength, so to speak, you see these markets go up,” Ryan said. “A lot of that is due to very low stocks globally, very high demand globally and very limited supply globally. Something that makes it look like they roll the tanks more than likely would just make the markets jump.

Ryan said that in the event of an escalation, safe-haven assets would rally.

“I think gold would grab a bid, there would be a scramble to get it. At some point, depending on how bad it was, you would see the strength of the dollar limit the rally. We would go through $2,000 [on gold] but I don’t know how far the $2,000 overshoot goes,” he said.


For more insight into the market’s reactions to the escalating tensions in Eastern Europe, watch the video above.

Follow Michelle Makori on Twitter: @MichelleMakori (https://twitter.com/MichelleMakori)

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