Russia’s deepening economic woes have lead the emerging market to play gas politics with neighboring Ukraine, cutting off all natural gas deliveries.  What impact will this have on the exchange traded funds that track this energy market?

With the tumble in oil prices and the drastic decline in the ruble, Russia is playing every card that it holds to spike revenues. Unfortunately, the political gas card that Russia is relying on has lost much of its potency.  The recessionary drop in demand for natural gas has lead to ample supplies throughout Europe and Ukraine says that it has enough gas in reserves to get through the entire winter, states Andrew E. Kraemer of The New York Times.

Gazprom, the Russian natural gas monopoly, was the main player behind this decision. The company wanted to increase the price of natural gas sent to Ukraine by $50 per 1,000 cubic meters.  When Ukraine refused, the natural gas company decided to cut off delivery.  This increase in price would enable Gazprom to earn about $14 billion a year more from Ukraine and help the struggling company pay off some of its debt.

It appears that Russia’s decision will not have much of an immediate effect on gas supplies and this is just the beginning of a steep mountain to climb for the Kremlin.

Some ETFs that may eventually be influenced by this decision are:

  •  United States Natural Gas Fund LP (UNG): down 36.1% in 2008

  • Market Vectors Russia (RSX): down 73.6% in 2008; Gazprom makes up 7.6%

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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