Words are flying in diplomatic circles right now.Over what? What else… The 100,000 Russian troops parked at the eastern Ukrainian border.A meeting of the United Nations Security Council last week provided the latest venue for speeches. Of course, these were little more than propaganda aimed at domestic audiences.The U.S. Ambassador to the United Nations warned “the consequences will be horrific” if Russia invades.The Russian Ambassador countered that “hysteria hyped up by Washington is causing hysteria in Ukraine, almost to the point that people are packing their bags for the front.”I’m hoping the battlefield remains confined to diplomatic circles. After all, sticks and stones break bones, but name-calling never hurts.If Russia does invade, loud statements by the U.S. could force action. The first of those actions would likely be sanctions.But a look at the history of the Nixon era shows that sanctions may not have the desired impact…

Sanctions Will Do More Harm Than Good

In October 1973, oil-producing countries in the Middle East cut off oil exports to the United States, the Netherlands, Portugal, Rhodesia, and South Africa in retaliation for their support of Israel during the Yom Kippur War. Oil prices quickly doubled:

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Source: US Energy Information Administration

At the time, a cutoff seemed unimaginable. Why would producers hurt themselves by cutting off their best customers?In hindsight, the embargo was a stepping-stone to riches for the oil-rich countries in the Middle East. Permanently higher prices led to improvements in the standard of living in the region.In 1973, the Nixon White House wasn’t thinking about long-term consequences. Inflation was rising before the embargo. Political divisions were splitting the country. Watergate was a growing concern that would soon end Nixon’s presidency.Today, Russia could inflict significant harm to Europe with a natural gas embargo.

If Russia cuts off natural gas to Europe, it could halt 18% of Germany’s natural gas imports and 38% of Italy’s, according to experts. The Czech Republic, Finland, and Hungary get almost all of their natural gas from Ukraine and Russia. Finland, Poland, and Hungary get more than half of their oil from Russia.As we all know, it’s winter in Europe. If Russia wanted leverage, now is an ideal time to cut energy exports to Europe. Russian history shows that the country could accept short-term pain for long-term gains. Foregone export revenue is a trivial cost to Russia compared to previous burdens its population has borne.

Even though the Biden White House and other governments are scrambling to address inflation, COVID-19, and other problems, they seem focused on Ukraine. Sanctions seem like the only option. But sanctions could be crippling for Europe.This brings me to my conclusion…

How to Trade a Russian Invasion

As traders, we can safely ignore the prospect of serious sanctions. Expect some financial restrictions on Russian billionaires and threats of more severe consequences.If the U.S. does much more than that, NATO allies will suffer — and NATO is relatively weak.As traders, we need to prepare. If Russia invades, I expect oil prices to fall when sanctions prove to be ineffective. I also expect U.S. stocks and Treasurys to rally on a flight to safety. The dip in Europe will be a buying opportunity.If Russia doesn’t invade, I expect diplomats to continue shouting at each other.Regards,Amber HestlaSenior Analyst, True Options Masters

Chart of the Day:What’s the Buck Up To?

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Today I want to take another look at the U.S. Dollar Index (DXY), and its somewhat perilous performance this week.Last week, I called out the dollar’s recent drop and how it’s coming up against a key support line. So far this week, dollar bulls and bears haven’t been able to gain ground in either direction. It’s a tight, choppy market.If I had to lean one way or the other, though, it’s bearish. Here’s why…Check out our trust momentum indicators on the chart above. The RSI and MACD are both making lower lows as the dollar price has made higher highs on the weekly time frame. That’s a pretty dependable bearish sign. The momentum is waning.What does this mean? Well, the dollar’s performance doesn’t perfectly correlate with many assets, to my knowledge. But generally speaking, it means hard assets like gold and bitcoin and capital assets like stocks, are poised to perform well.A break of the white support line above could signal a true end to the recent volatility and stocks resuming their uptrend. Position accordingly and even consider playing the downside in USD by trading an inverse ETF like the Invesco DB US Dollar Index Bearish Fund (UDN).Regards,Mike MersonManaging Editor, True Options Masters