The U.S. responds to Russia's actions...

 Following Russia's controversial decision to annex Crimea, the U.S. snapped back.

 

Yesterday, President Obama imposed sanctions by making a list of people prohibited from entering the U.S. and doing business with any U.S. company.

 

One person included on the list was Gennady Timchenko, a close associate of Russian President Vladimir Putin. Until very recently, Timchenko held a large stake in Gunvor Group, a key distributor of Russian energy, and the world's fourth-largest oil trader.

 

The U.S. Treasury claimed that Putin has a financial interest in Gunvor. As if on cue, just hours later, ratings agency Standard & Poor's downgraded its outlook on Russia from "stable" to "negative," citing rising economic and geopolitical risks.

 

 The U.S. appears to believe that by making life difficult for Putin's closest allies – by making it difficult for them to travel and do business with the U.S. – the Russian president will be pressured away from any further invasions into Ukraine. But while sanctions may alter Putin's plans, they may actually hurt American interests.

 

 As I (Kim Iskyan) mentioned before, Ukraine isn't just a line in the sand for Russia. As the North Atlantic Treaty Organization (NATO) and the European Union (EU) have claimed parts of the former Soviet Union's sphere of influence over the past 25 years, Russia has grown increasingly worried.

 

Russians believe it's just a matter of time before the West comes for Russia – whether it's by encouraging a revolution to overthrow the Kremlin, or by invading Russian territory. Ukraine, which shares a border with Russia, is Russia's last line of defense. If Ukraine is "lost" to the West, it's the beginning of the end for Russia.

 

 Additionally, the people the U.S. added to the sanctions list likely don't have much direct exposure to the U.S. They have preferred to do business in Europe (and London in particular). So the names on the EU blacklist – which is due out shortly – may be a bigger deal in Moscow than the U.S. version was.

 

Put it all together and the Russians on the U.S. sanctions list could not care less. And in Russia, the conflict over Crimea is being compared with the Cold War. Russian citizens are eating it up.

 

 If anything, these sanctions may act as a call to arms for Russia, and further proof that the West has it out for our neighbors to the east. Tens of millions of ordinary Russians will eventually feel the squeeze of a shrinking economy, but unfortunately, the government doesn't think they matter.

 

 Plus, the ripple effect of sanctions could hurt Americans more than the U.S. thinks. Shortly after the sanctions were announced, a friend of mine who works as a broker in Moscow put together a list of the publicly traded companies in which those sanctioned have a significant stake. "Stay away from any stock that has a scent of Putin's close friends," he told me.

 

Shares of Russian gas producer Novatek, Russian media company CTC Media, and a few other Russian stocks fell sharply yesterday. And there may be more to come.

 

 After all, if you're a fund manager with U.S. customers, the last thing you need is to be caught on the wrong side of U.S. sanctions simply by owning the wrong stock. You also don't want questions from your firm's compliance department about your Russian holdings... so it's easier to just sell and not have to deal with it.

 

Brokers and investors today are speculating about who may be added to the U.S. sanctions list next, and trying to figure out what publicly traded Russian companies will be in the crosshairs. What would happen if Russian-owned energy giants Gazprom or Rosneft – two of the most widely held securities in the global emerging-market universe – were added to the list? Their market caps would plunge.

 

That would clobber the Americans who hold Russian stocks in their retirement accounts and mutual funds. In a way, Russian sanctions would wind up being an indirect tax on American investors who own Russian stocks. The world of finance knows no borders... we're all tied together in this way.

 

 The story is far from over. Some attractive opportunities may pop up in the Russian stock market, although I think this dirt-cheap market will remain cheap for a long time...

 

 

 Kim is the editor of the S&A Global Contrarian – our newest advisory, which focuses on cheap, hated markets with tremendous upside. Kim's investment philosophy is similar to that of Baron Rothschild, who famously said to "buy when there's blood in the streets"...

 

Kim travels the world, sharing his stories and searching for great investments... And he relies on his contacts across the globe to provide him with inside, on-the-ground knowledge.

 

Since November, he has traveled to Russia, Kazakhstan, Kyrgyzstan, South Africa, Zimbabwe, Dubai, and Iran... And next week, he's going to Ukraine.

 

To keep up with his travels – and more important, learn about the most compelling investments around the world – click here to learn more about a subscription to the S&A Global Contrarian.

 

 

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 We love receiving letters like the one we share below... You allow us to do the best job in the world. Send your e-mails to feedback@stansberryresearch.com.

 

 "I first discovered Stansberry Research through your True Wealth newsletter while I was living in Jacksonville, FL ten years ago. Since that initial introduction to Stansberry Research, I have become an Alliance Member and subscriber to Phase 1 Investor. I have thoroughly enjoyed your perspective on life (such as sharing your experience in Australia & sharing your memories of your father) and on investments over the past decade. I think your recent DailyWealth article ["Bad Cat John's Big Secret to Success"] was one of the best morsels of wisdom I have ever read. I believe that story encapsulates a lifetime of wisdom very effectively. Please accept my sincere thank you for everything you do for your subscribers." – Paid-up subscriber Dave McLaren

 

Regards,

 

Kim Iskyan and Sean Goldsmith

Fairfax, Virginia and New York, New York

March 21, 2014

 

Editor's note: In the November issue of Stansberry's Investment Advisory, Porter and his research team recommended buying shares of gold explorer NovaGold (NG). It was a speculation... but it paid off. Since that issue, the price of gold has drifted sideways... while shares of NovaGold are up 93%. In today's Digest Premium, Investment Advisory analyst E.B. Tucker discusses the economics behind it.

 

 

 Since we recommended NovaGold (NG), the price of physical gold is up 1%, and NG has nearly doubled.

 

It's important to understand why this has happened... And why it may not happen again.

 

Last year was a terrible year for gold. In fact, it was the worst year for gold since the 1990s. But it was an even worse year for gold stocks. Gold miners got crushed. Companies that planned to mine gold in the future were completely destroyed – some were down more than 90%. When we recommended NG, the gold-mining sector was at a psychological low.

 

 NG is the largest viable undeveloped gold deposit not attached to a larger mining company. In the November issue of Stansberry's Investment Advisory, we discussed the top five candidates – NG was and is the best.

 

Many investors agree with our opinion. Until last year's gold crash, NG was a popular holding of hedge funds and high-net-worth investors. They, like us, wanted to own lots of gold in the ground.

 

 The abrupt decline in gold and gold stocks was so intense that some of those funds actually closed.

 

For example, hedge fund Vinik Asset Management, which manages $8 billion in assets, owned a huge position in NG. In February 2013, Vinik owned 30,588,712 shares – more than 5% of the company, and about 13% of the freely traded shares today. When the fund closed, Vinik's holdings of NG dropped to zero.

 

And Vinik wasn't the only seller. Lots of institutional investors dumped NG in the fourth quarter of 2013 for a loss. The S&P 500 had a record year last year, and many people opted to take the loss on shares of NG that were down as much as 60%.

 

 We recommended buying shares of NG in November when we realized that shares were unusually depressed. Since then, NG shares have nearly doubled, while gold has been essentially flat. It's now safe to say that NG shares have returned to "fair value."

 

 

 From this point on, shares should move at a multiple of the gold price's move. You see, the company has 50% ownership in the Donlin Gold project located in Alaska. Based on the economics of the project, every $100-per-ounce increase in the price of gold is an additional $100 per ounce in projected gross profit for the company. NG still needs to complete feasibility testing and then enter the financing phase of development.

 

There's a long way to go. That's why we like the company. We get the benefit of owning gold in the ground today without bothering with the capital-intensive business of actually mining gold.

 

 We also get the benefit of share-price appreciation at a greater percentage than we would by simply owning gold. That's because the projected profits of the future mine increase at a greater percentage than the increase in the gold price alone.

 

We have NG shares rated a buy up to $3.50, and we recommend placing a 50% stop loss on the position. If the gold market cools off, shares are a great buy. If gold moves higher, we will reassess our buy-up-to price by recalculating the projected profits of the company's project.

 

– E.B. Tucker